FM proposes easier credit access for MSMEs, doubles Mudra loan limit
July 23, 2024
Synopsis
A slew of measures announced in the Budget will encourage banks to give term loans to small businesses without collateral and top up loans to businesses during stress.
Credit flow is likely to get a further boost to the micro, small and medium enterprises (MSMEs) sector, which is considered as the backbone of the economy with about 30% contribution to the nation's GDP and 48% to exports.
Finance minister Nirmala Sitharaman announced a slew of measures to encourage banks to give term loans to small businesses without collateral and top up loans to businesses during stress.
Notwithstanding a 14% credit expansion to the sector in 2023-24, the small business units face an estimated credit gap of Rs 20-25 lakh crore.
"For MSMEs, the guarantee schemes, encouraging of new credit assessment models and credit support during stress periods are going to be key enablers to one of the largest providers of employment in the country," said Zarin Daruwala, chief executive of Standard Chartered Bank for India and South Asia.
The finance minister has proposed a new credit guarantee scheme for MSMEs in the manufacturing sector to encourage banks to give term loans for purchasing machinery and equipment without collateral or third-party guarantee. A separately constituted self-financing guarantee fund will provide, to each applicant, a 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.
"We are particularly encouraged by the government’s proposals to give priority to MSMEs, women entrepreneurs and the agricultural sector. The credit guarantee scheme is going to significantly enhance credit access for MSMEs," said George Alexander Muthoot, managing director at Muthoot Finance, a gold-loan non-bank lender.
The finance minister also proposed a new MSME credit assessment model for public sector banks. They will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment. "This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system," Sitharaman said while presenting the Budget.
The credit support programme for continuation of bank credit to MSMEs during their stress period would ensure that they can continue their business with the top-up loans and avoid loan default. Meanwhile, the limit of Mudra loans would also be doubled to Rs 20 lakh for entrepreneurs who successfully repaid previous loans.
The finance minister announced that Small Industries Development Bank of India will open 24 branches in MSME clusters across the country this year to facilitate direct lending by it. With this, Sidbi's service coverage will expand to 168 out of 242 major clusters while the rest will be covered in the next two years.
The plan to provide financial support for setting up 50 multi-product food irradiation units in the MSME sector, 100 food quality and safety testing labs, and e-commerce export hubs in public-private-partnership for enabling MSMEs to sell their products in international markets would also encourage banks to lend.
[The Economic Times]
