Interest subvention and fund of funds scheme may help MSMEs stay afloat

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To help micro, small and medium enterprises (MSMEs) tide over the current crisis, the government plans to continue with the interest subvention and fund of funds schemes for MSMEs.

MSME representatives support the extension of new credit lines. However, they remain wary of business picking up anytime soon.

"Demand has taken a beating due to the lockdown. It may take several months to a year to receive the same level of demand," says Anil Bhardwaj, Secretary General, Federation of Indian Micro, Small and Medium Enterprises (FISME).

The fund of funds scheme of Rs 10,000 crore proposed to buy up to 15 percent equity in MSMEs, with high credit rating, has been approved by the Finance Ministry and now awaits the final approval of Cabinet.

Based on the recommendations of UK Sinha Committee, the Fund of Funds scheme was originally announced in the Union Budget on February 1.

The fund is meant to address the problem of shortage in growth capital for MSMEs, helping those companies in nascent and initial stages as there are no prospects for such units to raise funds through venture capitalists and professional corporations.

Chamber of Micro, Small and Medium Enterprises (CIMSME) suggested the government waive off interest on all loans during the lockdown period.

"MSMEs have a small working capital cycle of 90 to 120 days, which will make it difficult for them to honour their interest payments. Extension of the interest subvention scheme may help small businesses to resume operations," says Mukesh Mohan Gupta, President, CIMSME.

The interest subvention scheme offers 2 percent interest subvention for all GST registered MSMEs on fresh or incremental loans. Due to expire on March 31, Union Minister for MSME Nitin Gadkari announced on April 17 that the interest subvention scheme may be extended for a longer period to provide relief to MSMEs.

The interest subvention scheme aims at encouraging both manufacturing and service enterprises to increase productivity and provides incentives to MSMEs for on boarding on GST platform, which helps in formalisation of economy, while reducing the cost of credit.