Govt to back MSMEs with up to 100% credit guarantees
According to sources in the government and the banking sector, the government is set to guarantee loans – between 25% and 100% – given to small businesses by financial institutions. This guarantee will be given depending on the size of the company or the risks undertaken.
The move comes at a time when the government seeks to kick-start business when the coronavirus lockdown starts to ease. The coronavirus pandemic induced nationwide lockdown has led to the expectations of a drop in economic growth. This is crucial because as per the government estimates, small businesses account for nearly a quarter of India’s $2.9 trillion economy and employ more than 500 million workers.
“Up to 100% of loans given to MSMEs (micro, small and medium enterprises) would be sovereign-backed under the new scheme so that national credit pours into MSMEs,” a top government official stated. This would be a major breather for the industry since banks are unwilling to lend to small businesses without a government guarantee due to the rising fears of defaults. The banking sector is already stressed with bad loans to MSMEs, which accounted for around 12.6% of total loans as of December 2019.