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New Delhi / Mumbai: Government of India has put forward a proposal to guarantee loans to small businesses by financial institutions as it seeks to boost business when the coronavirus blockade begins to ease, a government source and two said bank officials.
“Up to 100% of the loans granted to MSMEs (micro, small and medium-sized enterprises) would be backed by the sovereign under the new scheme so that national credit is poured into MSMEs,” said a senior government official familiar with the plan.
The size of the fund is likely to be based on immediate needs, and the guarantee could be between 25% and 100%, depending on the size of the company or the risks assumed, two bankers said.
None of the officials wanted to be identified since the discussions are still private.
It was not immediately clear what the total loans could be. The plan will be implemented “soon,” the government official said, without elaborating.
The finance ministry did not immediately respond to an email seeking comment.
The government is considering various measures to boost the economy, with a drop in economic growth due to the coronavirus pandemic and a national blockade.
Small businesses account for almost a quarter of India’s $ 2.9 trillion economy and employ more than 500 million workers, according to government estimates. To ensure that growth in the sector resumes, New Delhi has been pushing banks to lend more to MSMEs, a government official said.
But banks have made it clear to the government that they are unwilling to lend to small businesses without a government guarantee, as fear of default grows.
Banks had a total exposure of more than Rs 4.91 trillion at the end of March, according to central bank data.
Bad loans in the MSMEs sector have been on the rise and represented around 12.6% of total loans as of December 2019.
“The risk of lending to small companies is very high because the future is uncertain and, therefore, we have asked for a guarantee of up to 100% in new loans to MSMEs. We believe that the incremental demand may be up to 10% of the existing loan amount, “said a senior public sector banker.
Shadow banks have also asked the government to guarantee the loans they receive from banks, according to a letter sent by an association of shadow banks to the government and reviewed by Reuters. The letter argues that it will further encourage loans to MSMEs.
This story has been published from a cable agency source without modification to the text. Only the owner has been changed.
