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World Bank approves $750-million loan to support Covid-hit MSMEs

Our Bureau New Delhi | Updated on July 01, 2020 Published on July 01, 2020

Covid-19 has placed the MSME sector, contributing to 30 per cent of India’s GDP and 40 per cent of exports, under severe stress

This programme will address the immediate liquidity needs and credit needs of some 1.5 million viable MSMEs and help them combat the pandemic

The World Bank’s Board of Executive Directors has approved a $750-million MSME Emergency Response programme to support increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the Covid-19 crisis.

The $750-million loan from the International Bank for Reconstruction and Development (IBRD) has a maturity of 19 years, including a 5-year grace period.

This programme will address the immediate liquidity and credit needs of some 1.5 million viable MSMEs to help them withstand the impact of the current shock, and protect millions of jobs. This is the first step among a broader set of reforms that are needed to propel the MSME sector over time, a statement issued by the World Bank said.

The World Bank has to date committed $2.75 billion to support India’s emergency Covid-19 response, including the new MSME project. The first $1-billion emergency support was announced in April this year for immediate support to India’s health sector. Another $1-billion project was approved in May to increase cash transfers and food benefits to the poor and vulnerable, including a more consolidated delivery platform – accessible to both rural and urban populations across State boundaries.

The Covid-19 has put the MSME sector — the backbone of India’s economy and contributing to 30 per cent of India’s GDP and 40 per cent of exports — under severe stress. The sector, which employs about 150-180 million people, is today burdened with cancelled orders, loss of customers and supply chain disruptions, causing a sharp fall in revenues.

Severe cash crunch

This cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector, the statement added.

“The MSME sector is central to India’s growth and job creation and will be key to the pace of India’s economic recovery, post Covid-19. The immediate need is to ensure that the liquidity infused into the system by the government is accessed by MSMEs. Equally important is to strengthen the overall financing ecosystem for MSMEs,” said Junaid Ahmad, World Bank Country Director in India. “This operation seeks to achieve both these objectives by furthering the role of NBFCs and SCBs as effective financial intermediaries and leveraging fintech to broaden the reach of finance into the MSME sector.”

The World Bank Group, including its private sector arm, the International Finance Corporation (IFC), will support government’s initiatives to protect the MSME sector by: unlocking liquidity; strengthening NBFCs and SFBs; and enabling financial innovations.

Unlocking liquidity

This programme will support government’s efforts to channel that liquidity to the MSME sector by de-risking lending from banks and non-banking financial companies (NBFCs) to MSMEs through a range of instruments, including credit guarantees.

Strengthening NBFCs and SFBs

Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and small finance bank (SFBs), will help them respond to the urgent and varied needs of MSMEs. This will include supporting government’s refinance facility for NBFCs. In parallel, the IFC is also providing direct support to SFBs through loans and equity.

Enabling financial innovations

Today, only about 8 per cent of MSMEs are served by formal credit channels. The programme will incentivise and mainstream the use of fintech and digital financial services in MSME lending and payments. Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost, especially small enterprises who currently may not have access to the formal channels.

Published on July 01, 2020
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