MSME sops can turn toxic

Govt should learn from Mu­dra scheme

Business Standard - - OPINION -

In the run-up to the gen­eral elec­tion next year, the Cen­tre has an­nounced an im­por­tant credit stim­u­lus pack­age for mi­cro, small, and medium en­ter­prises (MSMEs). Among the many sops doled out un­der the new scheme, Prime Min­is­ter Naren­dra Modi has promised the sanction of busi­ness loans of up to ~10 mil­lion within a time frame of 59 min­utes, in or­der to en­cour­age faster credit flow to MSMEs. Th­ese com­pa­nies will also re­ceive an in­ter­est sub­ven­tion of two per cent un­der the scheme and sup­port from pub­lic sec­tor units, which will now be man­dated to make at least 25 per cent of their over­all pur­chases from MSMEs.

The scheme has signs of state-led eco­nomic plan­ning writ­ten all over it. Pump­ing ex­tra credit into MSMEs now may well lead to a tem­po­rary boom and en­able a feel-good at­mos­phere in the run-up to elec­tions, but it can lead to a painful bust when the stim­u­lus ends some day. An­other un­in­tended con­se­quence is the likely de­te­ri­o­ra­tion in credit stan­dards as fi­nan­cial in­sti­tu­tions are pushed to lend ag­gres­sively to MSMEs. In Septem­ber, for­mer RBI Gov­er­nor Raghu­ram Ra­jan had warned that loans extended un­der the Mu­dra scheme could turn out to be the source of the next fi­nan­cial cri­sis. Care needs to be taken to see that the new MSME loan scheme does not pose a sim­i­lar risk in the fu­ture.

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