MSMEs may get working capital boost with ‘overdraft guarantee’

Shishir Sinha New Delhi | Updated on May 10, 2020 Published on May 09, 2020

About 92 per cent of MSMEs indicated raw material unavailability as another major concern when the lockdown ends   -  Kamal Narang

Government readying ordinances for likely legislative changes

The Modi government is likely to announce the much-awaited stimulus package with focus on micro, small and medium enterprises (MSMEs) in the next couple of days.

Multiple sources confirmed that the package will be composite. “On the one hand, it will have guaranteed higher working-capital limit for MSMEs, while on the other, more reform programmes will be initiated to attract investment and ease the way for doing business,” a source said.

The package comes as the third phase of the lockdown is set to end on May 17. Despite several relaxations during this phase, industries, especially MSMEs, are having a tough time.

According to sources, the broad contours of the package was finalised in the meeting called by Prime Minister Narendra Modi on May 2, which was attended by senior ministers and bureaucrats. While details of the package are being worked out, work is in progress for any legislative change through ordinances.

Discussions have been held with the Reserve Bank of India for monetary action, sources said.

In fact, to mobilise additional resources, the government, in consultation with the RBI, has decided to raise the total borrowings to ₹12-lakh crore from the budgeted ₹7.8-lakh crore during the current fiscal.

To help MSMEs regain strength, one of the key proposals is to provide guarantee for overdraft up to 20 per cent of the working-capital limit. This issue is also listed for discussion at the Finance Minister’s meeting with bankers on May 11, according to sources.

One of the items on the agenda reads ‘Credit Support to MSMEs’, while another says the meeting will discuss ‘Covid-19 related sanctioned/pre-approved emergency credit and reassessment-based additional working capital.’ The meeting will also discuss the status of the moratorium. It may be recalled that on March 27, the RBI announced moratorium for three months on all types of term loans. It was also decided to provide deferment of interest on working-capital facilities.

Deferring interest payment

In respect of working-capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow deferment of three months on interest payment in respect of all such facilities outstanding as on March 1, 2020.

The accumulated interest for the period will be paid after the expiry of the deferment period. The moratorium/deferment was provided mainly to enable the borrowers to tide over the Covid-19 fallout. Hence, the same will not be treated as change in terms and conditions of loan agreement due to the financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.

The MSME package assumes importance in the light of the fact that the sector provides employment to nearly eleven crore people, while its share in gross value added (GVA) is over 31 per cent. The share of MSME-related products in total exports during 2018-19 was over 48 per cent.

Published on May 09, 2020

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