MSME sops can turn toxic
Govt should learn from Mudra scheme
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.