COVID-19 Pandemic – Government of India’s Initiatives for facilitating credit flow to MSMEs
The Micro, Small and Medium Enterprise (MSME) sector is an essential element of the Indian economy. MSMEs play a key role in regimes and initiatives such as Made-in-India, Self-reliant-India etc., as they are amongst the most significant drivers of economic development in our country. However, in the present scenario of the COVID-19 pandemic, resulting in all round chaos in the economy, MSME sector has also been severely impacted and it is crippled with the hovering liquidity constraint, which is a real crisis for all the stakeholders involved with the MSME sector, be it the entrepreneurs, professionals, employees, workmen, suppliers, customers, service providers etc. To revive the MSME sector, government of India has taken several initiatives apparently to provide a boost to this sector. In this write up, the major reforms brought about by the Government of India to mitigate the economic distress being faced by the MSMEs have been discussed.
Revised criteria for classification of MSMEs
Ministry of Micro, Small and Medium Enterprises on 01.06.2020 has revised the criteria for classification of MSMEs, provided in Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). The notification shall be effective from 01.07.2020. The revised classification is set out in the following table for ease of understanding :
Revised classification for MSME Sector
|Investment in Plant and Machinery or Equipment||Upto 1 crore||Upto 10 crore||Upto 50 crore|
|Turnover||Upto 5 crore||Upto 50 crore||Upto 250 crore|
|Previous classification (Investment in Plant and Machinery or Equipment)|
|Manufacturing Enterprise||Upto 25 lac||Upto 5 crore||Upto 10 crore|
|Service Enterprise||Upto 10 lac||Upto 2 crore||Upto 5 crore|
An increase in the investment and turnover limits in the criteria will enable the MSME Sector to grow at a faster pace, since lower threshold was acting as an obstacle, resulting in fear of losing all the benefits available and being extended to the MSMEs by the government. With the revised limits and the qualification criteria, MSMEs will not have to worry about growth, and they can still avail all the entitled benefits as the new limits are much higher. Moreover, due to such an increase, a vast number of enterprises will now be covered under the scope of MSMEs and would be eligible to the appurtenant benefits.
Emergency Credit Line Guarantee Scheme (ECLGS) of Rupees 3 lakh crore
ECLG Scheme provides for 100% guarantee by National Credit Guarantee Trustee Company (NCGTC) to Member Lending Institutions (MLIs) which will be extended in the form of additional working capital term loan facility (in case of Scheduled Commercial Banks (SCBs) and Financial Institutions (FIs)) and additional term loan facility (in case of NBFCs) to eligible MSMEs and interested MUDRA borrowers.
Credit shall be up to 20% of the borrower’s total outstanding credit up to Rs. 25 crore, as on 29th February, 2020, i.e., additional credit which will be made available shall be up to Rs. 5 crore. Hopefully, on the ground, the concerned MLIs, SCBs, FIs and NBFCs shall support the government initiative as their additional loans to the MSME sector would now be guaranteed by NCGTC.
Subordinate debt for stressed MSMEs
Government of India has agreed to facilitate provision of additional Rs. 20,000 crores as subordinate debt. MSMEs that are NPAs or stressed shall also be eligible for this facility, which is an interesting development. The Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) will provide partial Credit Guarantee support to Banks and the promoters of the MSME will be given debts by banks, which will then be infused by promoters as equity in their respective Units.
Equity infusion for MSMEs through Fund of Funds
A Fund of Funds with a corpus of Rs. 10,000 crores will also be set up, which will provide an equity infusion of Rs. 50,000 crores to MSMEs. The fund will operate through a Mother Fund and few daughter funds model.
Insolvency related measures
Earlier, the Ministry of Corporate Affairs, through its notification dated 24.03.2020 has notified that the minimum amount of default to commence insolvency proceedings under Insolvency and bankruptcy Code, 2016 (IBC Code) will be enhanced to Rupees one crore from the existing Rupees one lakh, which mainly insulates MSMEs from IBC actions. A special insolvency resolution framework for MSMEs under Section 204A of the IBC Code is also being notified.
Further, amongst the various schemes introduced in the economic stimulus package for self-reliant India, the Hon’ble Finance Minister Mrs. Nirmala Sitharaman has also announced suspension of fresh initiation of insolvency proceedings upto one year depending upon the pandemic situation. Also, Central government has been empowered to exclude COVID-19 related debts from the definition of “default” under the Code for the purpose of triggering insolvency proceedings.
The Finance Minister has also announced numerous other measures as a part of the economic stimulus package for self-reliant India which has been briefly discussed below:
- General Financial Rules (GFR) of the Government will be amended to disallow global tender enquiries in procurement of Goods and Services of value of less than Rs 200 crores.
- E-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions.
- Another important intervention is making it mandatory for the Departments of Government of India and the CPSEs to pay the receivables to MSMEs within next 45 days.
The aforementioned initiatives by the Government are definitely commendable. This comes as a fresh air for the MSME sector. However, we will have to wait and see whether the aforesaid initiatives announced by the government with much fan0fare are also implemented both in letter and spirit. Therefore, the implementation of the initiatives on ground zero would be the real test. In case if things go as expected, the MSME sector can brace for respite from the looming liquidity crisis. It is to be noted that the Government is not handing over money to this sector, it has only taken the credit risk on itself for any default in repayment by the MSMEs.
However, MSMEs continue to face challenges in terms of the availability of man-power, access to timely funding and latest technology etc. The government and Reserve Bank of India have taken a number of measures from time to time to support this sector. We can brace for further reforms in favour of MSME sector, which is the backbone of our economy. Let us also hope that all the past, present and future measures are successfully implemented by all concerned, so that the elephant can take on the dragon in the new normal world.