Govt may guarantee MSME loans

NEWDELHI:India is considering a proposal to guarantee as much as ₹3 lakh crore of loans to small businesses as part of a plan to restart Asia’s third-largest economy, which is reeling under the impact of a 40-day lockdown, people with knowledge of the matter said.

Under the proposal, small firms will be eligible to borrow an additional 20% of their credit limit, the people said, asking not to be identified as the discussions are private. The extra debt will be fully backed by the central government, the people said. The government will set up a special fund to pay for any defaults, they said.

The Centre and regulators are slowly coming out with programmes as everyone, from companies to fund managers, struggle under the world’s biggest lockdown, which has halted manufacturing and wiped out consumption.

With the economy set to contract for the first time in four decades, Prime Minister Narendra Modi’s endorsement is the only way to make it attractive for banks, which are concerned about rising delinquencies, to lend to small businesses.

“A large part of the fiscal package of developed countries such as the US and UK have involved loan guarantees,” said Teresa John, an economist at Nirmal Bang. “If targets are set for banks and shadow banks for availing refinancing under such a scheme, along with credit guarantees this will, to an extent, ensure credit flow to MSMEs and ultimately help in reviving growth,” she said.

A finance ministry spokesman was not immediately available for comment.

Small businesses, which form the bedrock of the $2.7 trillion economy, have been the worst hit by the lockdown with their activity coming to a halt.

AS PER THE PROPOSAL, SMALL FIRMS WILL BE ELIGIBLE TO BORROW AN ADDITIONAL 20% OF THEIR CREDIT LIMIT