Liquidity Measures for Medium, Small and Micro Enterprises (MSMEs)
New Definition of MSMEs:
o The definition of an MSMEs has been expanded to allow for higher investment limits and the introduction of turnover-based criteria.
• Earlier MSMEs were defined on the basis of the limit of investment in machinery or equipment.
• The ‘turnover’ is the more efficient way to identify an MSME as it allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centres to be eligible for benefits as an MSME.
o There will be no difference between a manufacturing MSME and a services MSMEs.
Infusion of Liquidity:
o Instead of directly infusing money into the economy or giving it directly to MSMEs,the government will offer credit guarantees for MSMEs.
o Emergency Credit Line: The collateral free loans of worth Rs. 3 lakh crores will be available for MSMEs. It will ensure access to working capital to resume business activity and safeguard jobs for 45 lakh MSMEs.
• The above measure is available for MSMEs that have an already outstanding loan of Rs. 25 crore or those with a turnover less than Rs 100 crore.
• The loans will have a tenure of 4 years and they will have a moratorium of 12 months
(that is, the payback starts only after 12 months).
o Subordinate Debt Scheme : The loans of amount Rs 20,000 crore will be provided to MSMEs that were already categorised as “stressed”, or struggling to pay back.
• In this case, the government provides partial guarantee.
o Equity Infusion: Fund of Funds with corpus of Rs 10,000 crores will be set up which will provide equity funding for MSMEs with growth potential and viability.
Credit Guarantees to MSMEs
o A Credit Guarantee Schemes (CGS) by the government assures the bank that its loan will be repaid by the government in case the MSME falters.
Reasons for Introduction of CGS:
o Though, there was an option to pump liquidity via the banks but banks suspect any new loans due to rising Non-Performing Assets (NPAs).
o Thus, the government faced a dual problem where banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.
o The credit guarantees solve dual issues faced by the government.
o Such CGS creates moral hazards as borrowers remain assured of paying back and the lender remains assured of receiving credit amounts. Subsequently, the government is forced to pay the amount.
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