First dose is liquidity: MSMEs get mega guarantee

While the package is unlikely to create much stress for the fiscal exchequer as most of the measures are focused on off-balance sheet support through credit guarantees and tax deferment, the success of the scheme is predicated on these measures working as a multiplier to improve the risk appetite of lenders and catalyse fresh funding of distressed smaller firms.

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Sitharaman’s announcement followed up on Prime Minister Narendra Modi’s Tuesday of a Rs 20-lakh-crore plan, almost 10 per cent of the GDP, to cushion the impact of Covid-19 and to be unveiled in a staggered manner.
Sitharaman said banks and NBFCs can provide emergency credit lines to MSMEs up to 20 per cent of their outstanding credit as on February 2, 2020, with these loans having a 4-year tenor, a 12-month moratorium on principal payments, and a cap on interest costs.

A total of Rs 3 lakh crore is projected to be disbursed under this scheme that will be open until October 31, 2020. Sitharaman said this measure could help nearly 45 lakh units to resume business activity. Borrowers will not be required to provide any fresh collateral and guarantee fee against these loans. The measures are targeted at avoiding large-scale business closures, which could impact the financial system systemically and disrupt supply chains in the coming days.

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MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP and operate across the value chain – including cycle parts, auto parts, textiles products, toys, hand tools – are stressed due to depleting internal reserves and low visibility of demand. Availability of funds through the banking channel, along with a moratorium on repayment, would help them tide over the lockdown slump.

Efforts to make liquidity available to MSMEs, NBFCs, Housing Finance Companies (HFCs) and Micro Finance Institutions (MFI) also build upon recent measures by the Reserve Bank of India aiming to inject liquidity.

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Bankers are much more comfortable to lend when loans are backed by government guarantees, and these measures will encourage them to kickstart credit deployment. “The policy bouquet unveiled by the government is well-structured, suitably targeted, within reasonable fiscal limits but still having the maximum impact.

The measures for MSME through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as provide crucial support to stressed entities in the current situation,” said State Bank of India Chairman Rajnish Kumar.

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While full credit guarantee is being provided to MSME whose loans are standard, stressed small companies whose loans have been classified as NPA (non performing assets) will be given subordinate debt by banks against a partial credit guarantee provided by the government.

The Centre will provide Rs 4,000 crore as funding support to CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) — which will help in facilitating Rs 20,000 crore of subordinate debt to nearly 2 lakh enterprises. While a partial credit guarantee reduces the credit risk for the lenders, the effectiveness of this measure will depend upon their appraisal.

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Sitharaman Wednesday said these are the first set of measures and more steps will be announced in coming days. “In each of these tranches we will not forget that we have a responsibility towards the poor of this country, towards the needy of the country, towards the migrant workers of this country, the divyang and the aged,” she said.

“Today’s announcements by FM @nsitharaman will go a long way in addressing issues faced by businesses, especially MSMEs. The steps announced will boost liquidity, empower the entrepreneurs and strengthen their competitive spirit,” Modi said in a tweet.

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Analysts struck a note of caution too. “The Rs 3 lakh crore guarantee will provide a much-needed push to credit disbursement to cash-starved MSMEs. However, (there is) a risk of credit culture deteriorating…bankers would have no skin in the game and hence adhoc disbursement may increase risk,” said Isha Chaudhary, Director, CRISIL Research.
The government has also decided to expand the definition of MSMEs, which will enable a larger number of enterprises to be classified as such and, therefore, be able to avail of these benefits. Setting up of a Fund of Funds with corpus of Rs 10,000 crore that can be leveraged up to Rs 50,000 crore and provide equity support to MSMEs that show growth potential was among the other announcements. Analysts, however, said this measure will take time to be implemented and may not provide immediate support.

Besides the funding boost, the government and central public sector enterprises will release all funds due to MSMEs within 45 days, while global tenders for government procurement orders up to Rs 200 crore will not be allowed. This will be a step towards Self-Reliant India and also help MSMEs grow their business, Sitharaman said.

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NBFCs, HFCs and MFIs are all facing stress, as banks have turned extremely risk- averse in lending to them. Since many NBFCs do not have access to low cost deposits that banks have, their liquidity position and repayment capacity comes under threat when borrowers start defaulting or delaying repayments.

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

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The government also extended the partial credit guarantee scheme — under which it guarantees 20 per cent of the first loss to the lenders — NBFCs, HFCs and MFIs with low credit rating. This scheme is estimated to result in liquidity injection of Rs 45,000 crore in debt papers that are rated AA or lower and even unrated securities issued by such entities, including the MFIs. However, industry executives argue that banks may still not be forthcoming to lend to lower-rated companies, given the current risk aversion in markets.