The first dose is liquidity: MSMEs obtain a mega guarantee

Nirmala Sitharaman at the press conference. Anil Sharma

UNION Minister of Finance Nirmala Sitharaman announced on Wednesday the first tranche of a financial aid plan whose main objective was to alleviate radical distress in the Micro, small and medium-sized companies sector That lies at the heart of the industrial ecosystem and employs approximately 11 million people, including much of the country’s migrant workforce.

While the 16 specific announcements announced in the first tranche span sectors ranging from MSMEs and non-bank financial corporations (NBFCs) to real estate and energy distribution and employees, the overall theme was to instill liquidity. And design a transfer effect that ultimately puts more available funds in the hands of employers and employees.

While the package is unlikely to create much stress for the tax treasury, as most measures focus on off-balance sheet support through credit guarantees and tax deferral, the success of the scheme is based on the fact that These measures work as a multiplier to improve the risk to the appetite of lenders and catalyze new financing for struggling smaller companies.

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Sitharaman’s announcement followed Prime Minister Narendra Modi’s Tuesday of a plan of Rs 20 lakh-crore, nearly 10 percent of GDP, to cushion the impact of Covid-19 and be phased in.
Sitharaman said banks and NBFCs can provide MSMEs with emergency lines of credit up to 20 percent of their outstanding credit as of February 2, 2020, with these loans with a maturity of 4 years, a moratorium 12 months on principal payments and a ceiling on interest costs.

A total of Rs 3 lakh crore is projected to be disbursed under this scheme, which will be open until October 31, 2020. Sitharaman said this measure could help almost 45 lakh units resume business activity. Borrowers will not be required to provide any new collateral and collateral fee against these loans. The measures aim to prevent the closure of large-scale businesses, which could systematically affect the financial system and disrupt supply chains in the coming days.

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MSMEs, which represent around 45 percent of the country’s total manufacturing production, 40 percent of exports, almost 30 percent of national GDP, and operate throughout the value chain, including cycle parts, auto parts, Textile products, toys, hand tools: they are stressed due to the exhaustion of internal reserves and the low visibility of demand. The availability of funds through the banking channel, along with a moratorium on repayment, would help them overcome the depression.

Efforts to make liquidity available to MSMEs, NBFCs, Housing Finance Companies (HFCs) and Microfinance Institutions (MFIs) are also building on recent actions by the Reserve Bank of India to inject liquidity.

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Banks are much more comfortable lending when loans are backed by government guarantees, and these measures will encourage them to start rolling out credit. “The branch of policies presented by the government is well structured, adequately oriented, within reasonable fiscal limits but still having the maximum impact.

Measures for MSMEs through guarantees, capital infusion and debt support will incentivize bank loans to MSMEs and provide crucial support to entities stressed in the current situation, “said the President of the State Bank of India, Rajnish Kumar.

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While the full credit guarantee is provided to MSMEs whose loans are standard, prominent small businesses whose loans have been classified as NPAs (non-performing assets) will receive subordinated debt from banks against a partial credit guarantee provided by the government.

The Center will provide Rs 4 billion in financial support to CGTMSE (Micro and Small Business Credit Guarantee Fund), which will help facilitate Rs 20 billion of subordinated debt to almost 2 lakh companies. While a partial credit guarantee reduces the credit risk for lenders, the effectiveness of this measure will depend on your evaluation.

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Sitharaman said on Wednesday that these are the first steps and that more steps will be announced in the coming days. “In each of these sections we will not forget that we have a responsibility to the poor of this country, to the needy of the country, to the migrant workers of this country, the divyang and the elderly,” he said.

Today’s announcements from FM @nsitharaman will go a long way in addressing the issues facing companies, especially MSMEs. The announced steps will increase liquidity, empower entrepreneurs and strengthen their competitive spirit, ”Modi said in a tweet.

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Analysts also took note of caution. “The guarantee of Rs 3 lakh crore will provide a much-needed boost for the disbursement of credit to MSMEs that lack cash. However, (there is) a risk of deterioration of the credit culture … bankers would have no skin in the game and therefore ad hoc disbursement could increase the risk, “said Isha Chaudhary, director of CRISIL Research.
The government also decided to broaden the definition of MSMEs, which will allow a greater number of companies to be classified as such and, therefore, to take advantage of these benefits. The creation of a Fund of Funds with a corpus of Rs 10 billion rupees that can be leveraged up to Rs 50 billion rupees and provide capital support to MSMEs that show growth potential was one of the other announcements. Analysts, however, said this measure will take time to implement and may not provide immediate support.

In addition to the increased funds, the government and central public sector companies will release all funds due to MSMEs within 45 days, while global tenders for government purchase orders of up to Rs 200 million will not be allowed. This will be a step towards Self-Reliant India and will also help MSMEs grow their businesses, Sitharaman said.

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NBFCs, HFCs, and MFIs face stress as banks have become extremely risk-averse to lending to them. Since many NBFCs do not have access to banks’ low-cost deposits, their liquidity position and ability to pay is threatened when borrowers begin to default or delay payments.

The government announced Rs 30,000 crore from a special liquidity scheme, under which the investment will be made in investment grade debt papers of these institutions. The contours of this scheme have yet to be announced. If a government entity directly purchases debt documents from these entities, then it would provide significant relief.

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The government also extended the partial credit guarantee scheme, under which it guarantees 20 percent of the first loss to lenders, NBFCs, HFCs and MFIs with low credit ratings. This scheme is estimated to result in a liquidity injection of Rs 45 billion in debt papers rated AA or below and even unrated securities issued by such entities, including MFIs. However, industry executives argue that banks are still unable to lend to companies with lower ratings, given the current risk aversion in the markets.

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