Too Little Too Late

With elections around the corner, it isn’t surprising that Prime Minister Narendra Modi wants to make nice with the voters. So he dropped a Diwali surprise for MSMEs who were the worst hit by demonetisation in 2016 and implementation of GST in 2017. On November 2,  he announced that MSMEs can readily get a loan up to Rs. 10 million approved in around 59 minutes, following which the amount would be sanctioned within seven to eight days.

Part of his 12-point support and outreach programme for MSMEs, the loans come at a rate of interest starting from 8% and without any requirement for collateral, thanks to the Credit Guarantee Fund Trust for Micro and Small Enterprises scheme.  And those who have registered for GST can claim a 2% interest subvention on incremental loans up to Rs.10 million.

As on March 2018, MSMEs account for 23% of the total commercial credit outstanding with large corporates accounting for the balance 67%.  Over the years public sector banks (PSBs) have reduced direct lending to the micro, small-scale and medium-scale industrial units. According to MSME Pulse, their share has declined from 60.4% in March 2016 to 50.4% in March 2018. On the other hand, NBFCs managed to increase their share in overall MSME pie from 8.2% to 10.7% during the same period. Banks in turn, increased their lending to NBFCs who were seen as better equipped at handling the credit risk arising from these loans given their low NPA levels ( 5% versus 15.2% for PSBs as on June 2018). However, this was until the IL&FS crisis unfounded and NBFCs were hit by the liquidity crisis as bank funding dried up. In an attempt to keep credit lines open for MSMEs, the government has launched the online portal where they avail loans in less than an hour.

The MSMEs are already asking for the limit to be increased from Rs.10 million to Rs.250 million for the scheme to have any material impact. Given their struggle for survival over the past two years, the announcement maybe too little too late.