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Government to guarantee Rs 3 lakh crore of collateral free loans to MSMEs: 10 key questions answered

Union Finance Minister, Nirmala Sitharaman on May 13 announced Rs 3 lakh crore worth of collateral free loans to micro, small and medium enterprises (MSMEs). The government will full guarantee these loans, Sitharaman said.

May 13, 2020 / 06:06 PM IST
Finance Minister Nirmala Sitharaman (File image: Reuters)

Finance Minister Nirmala Sitharaman (File image: Reuters)


On May 12, Prime Minister Narendra Modi announced his government’s plan to launch a mammoth Rs 20 lakh crore economic stimulus package. Announcing the details of this package, Union Finance Minister, Nirmala Sitharaman on May 13 announced Rs 3 lakh crore worth of collateral free loans to micro, small and medium enterprises (MSMEs). The government will full guarantee these loans, Sitharaman said.

Here are some key questions answered on the scheme:

What is a credit guarantee scheme?

As the name suggests, under the credit guarantee scheme, loans issued by banks to targeted companies are guaranteed by the government. In other words, government will act as a guarantor to compensate banks a percentage of the potential losses if the money isn’t repaid.

So, what are the specifics of the scheme this time, who can avail this?

Companies with a turnover up to Rs 100 crore can avail this benefit, Sitharaman said. These loans will carry a tenure of four years and have full credit guarantee from the government. Also, these loans will offer a moratorium of 12 months on interest payments. Approximately 45 lakhs units will benefit from this scheme.

Why was it necessary?

MSMEs are still struggling for funds. As part of the COVID-19 relief measures, the Reserve Bank of India unveiled liquidity easing measures in two rounds to the tune of over Rs 5 lakh crore. The hope was that banks will use this money and lend to MSMEs. But, this didn’t happen.

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COVID-19 Vaccine

Frequently Asked Questions

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A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

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Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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Why didn’t banks lend to MSMEs?

Banks preferred to play safe by lending to AAA rated top companies. Banks are worried that if money lent to MSMEs become non-performing assets (NPAs) it will result in losses. In other words, risk aversion by banks laid hurdles to the Reserve Bank of India’s (RBI) plan to help small firms.

Will this credit guarantee scheme address this problem?

It should. Since the government is providing a guarantee to these loans, banks will have the added comfort now to lend to small companies. Even if payments are missed, government will compensate losses to some extent.

Will this scheme be a burden on the state exchequer?

No. The government doesn’t have any cash outgo since it is only providing a guarantee. In fact, the government decided to borrow an additional Rs 4.2 lakh crore from the market to cover its revenue losses on account of the coronavirus impact.

How crucial is the support to MSME?

The MSME sector contributes over 28 percent of GDP and more than 40 percent of exports, while creating employment for about 11 crore people. In other words, MSMEs are one of the major employers in the Indian economy. This is the reason why it is critical for the government to ensure that the MSMEs survive the pandemic. Ensuring adequate fund support is crucial for this goal.

What did RBI do?

In the first round, RBI offered Rs 1 lakh crore worth targeted long term repo operation (TLTRO). This money largely went to large top rated companies. In the second round, the central bank further announced an additional Rs 50,000 crore stipulating that half of this should be lent to small companies. But banks chose not to participate in the process. This apart, MSMEs have also availed the loan moratorium offer announced by RBI.

How much money have banks lent so far?

According to the government data, till date banks have sanctioned Rs 27,426 crore worth of loans to MSMEs, as per data collated by the government. In terms of numbers, about 10 lakh MSMEs and 6,428 corporates have availed this benefit so far.

Now that the scheme is here. Will banks lend at least now?Banks have more than adequate liquidity at this point since the credit demand is almost nil and many investors have moved their money to bank deposits from high risk assets. So, liquidity is not a problem. Since the government guarantee is in place, they should start lending now. MSMEs can approach their respective lenders to seek details of the scheme and avail the benefit.
Dinesh Unnikrishnan
first published: May 13, 2020 06:05 pm

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