The Union Budget has given a leg-up to MSMEs (micro, small and medium enterprises) via proposals to introduce a credit guarantee scheme for facilitating term loans for purchase of machinery and equipment without collateral or third-party guarantee and a guarantee from a government-promoted fund to provide credit support during stress period.
Further, public sector banks will be required to build in-house capability to assess MSMEs credit needs, instead of relying on external assessment. Also, the Mudra loan limit under the “Tarun” category has been doubled to ₹20 lakh.
“This Budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing. We have formulated a package covering financing, regulatory changes and technology support for MSMEs to help them grow and also compete globally, as mentioned in the interim Budget,” Finance Minister Nirmala Sitharaman said.
The credit guarantee scheme for MSMEs in the manufacturing sector will operate on pooling of credit risks of such enterprises.
“A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to ₹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 Minister said.
Sitharaman announced a new mechanism for facilitating continuation of bank credit to MSMEs during their stress period.
“While being in the ‘special mention account’ (SMA) stage (accounts showing signs of incipient stress) for reasons beyond their control, MSMEs need credit to continue their business and to avoid getting into the NPA (non-performing asset) stage.
“Credit availability will be supported through a guarantee from a government promoted fund,” she said.
The Finance Minister wants public sector banks to take a lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy.
“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,” she said.
Mudra loans
The limit of Mudra loans will be doubled to ₹20 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category.
Debadatta Chand, MD & CEO of Bank of Baroda, observed that the banking sector has substantial positive takeaways from the Budget which goes beyond the neutral impact on liquidity.
“There is a focus on MSMEs with a credit guarantee scheme being brought in. Any support to the MSMEs will be positive for growth of not just GDP but also employment,” he said.
KV Srinivasan, Executive Director and CEO, Profectus Capital Pvt Ltd, said: “This Budget is a bonanza for MSMEs. Measures like vastly enhanced credit guarantees up to ₹100 crore and an increase in Mudra limits should facilitate capital expenditure for the expansion and modernisation of MSMEs in the manufacturing sector. “
TReDS platform
For facilitating MSMEs to unlock their working capital by converting their trade receivables into cash, the Budget has proposed reduction in the turnover threshold of buyers for mandatory onboarding on the TReDS (Trade Receivables Discounting System) platform from ₹500 crore to ₹250 crore.
This measure will bring 22 more CPSEs (central public sector undertakings) and 7,000 more companies onto the platform. Medium enterprises will also be included in the scope of the suppliers.
Srinivasan said wider coverage of TReDS and credit for MSMEs in the early stage of stress should help them manage working capital and cut cash flow cycles.
SIDBI branches
Government-owned SIDBI will open new branches to expand its reach to serve all major MSME clusters within three years, and provide direct credit to them. With the opening of 24 such branches this year, the service coverage will expand to 168 out of 242 major clusters, the FM said.