NEW DELHI: The credit guarantee scheme for MSMEs, announced in July, will take form in the upcoming Budget, with a focus on facilitating capital investments by the manufacturing sector units. The scheme will be largely modelled on the successful Emergency Credit Line Guarantee Scheme (ECLGS) for small businesses that was unveiled in 2020 amid the pandemic, but will cover larger loans, with guarantee up to Rs 100 crore.
It will be structured in a way that beneficiary units can use the credit for scaling up, sources said. The upper threshold for loan eligibility would be higher.
The scheme, designed to provide guarantee to MSME loans for capital equipment purchase without collateral or third-party guarantee, will let pooling of credit risks of the firms. While the guarantee will be limited to Rs 100 crore, the loan amounts could be even higher. The scheme is expected to address the issue of tepid investments by MSMEs in recent years, even as public capex has been robust, and to a certain extent, investments by large corporate groups too have picked up. The intent is to raise the investment rate to a higher level.
While the ECGLS format will be used, the government may also tweak norms to facilitate MSMEs to scale up, the sources said.
The ECLGS was introduced in May 2020 with a guarantee corpus of Rs 3 lakh crore, to support the MSME sector. Over the years, the scheme has been extended to more sectors like hospitality, civil aviation and healthcare. The guarantee corpus was also enhanced to Rs 5 lakh crore. The scheme was valid till March 31, 2023. Under the scheme, 11.9 million guarantees worth Rs 3.68 lakh crore were issued to MSMEs and other businesses.
ECLGS provided collateral-free loans to existing eligible borrowers with a 100% guarantee in respect of the eligible amount as per the Scheme guidelines. As per the State Bank of India’s research report on ECLGS, almost 14.6 lakh MSME accounts, of which about 93.8% of the accounts were in MSE categories, were saved. “MSMEs will be a big focus area in the budget to boost job creation,” an official said.
Finance minister Nirmala Sitharaman had said in FY25 Budget speech. “A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to Rs 100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance.”
The credit outstanding of scheduled commercial banks (SCBs) and non-banking financial companies (NBFCs) to the MSME sector has increased from Rs 18.48 lakh crore as of March 31, 2020, to Rs 31.7 lakh crore as of March 31, 2024.
According to an EY report, MSME credit penetration is just 14% in India compared with 50% in the US and 37% in China. There is a credit gap of Rs 25 trillion for the Indian MSME sector, reflecting the large untapped credit market.
MSMEs contribute 27% of India’s GDP, account for 38.4% of the total manufacturing output and contribute 45% of the country’s total exports.
The government may also tweak the incentive structure for MSMEs which is linked to the turnover of entities, thereby limiting them to a certain size threshold set in a different era to keep getting official incentives instead of growing big.
Currently, firms with investments less than Rs 1 crore and turnover less than Rs 5 crore are termed ‘micro’, investments less than Rs 10 crore and turnover less than Rs 50 crore are ‘small’ and investments less than Rs 50 crore and turnover less than Rs 250 crore are known as ‘medium’ enterprises.
Source: The Financial Express