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Why are MSMEs Reluctant to Avail the Atma Nirbhar Bharat Loan Guarantee Scheme?

Jul 13, 2020 2:17 PM 3 min read

It’s now been exactly two months since the Government announced relief measures for the COVID-hit Micro, Small and Medium Enterprises (MSMEs), the economy’s proverbial “backbone”.

The last time we spoke about MSMEs, we discussed what exactly they are and how the Government plans to provide them with much-sought relief on account of the pandemic and the nationwide lockdown.

(You might be wondering why we’re repeatedly dwelling on MSMEs, but that just shows how indispensable they are. Under the new definition, MSMEs account for 99% of India’s registered companies and nearly 70% of all listed entities!)


First, a brief refresher.

MSME relief was the centrepiece of the Atma Nirbhar Bharat package. Measures included ₹50,000cr ($6.6bn) in equity infusion, ₹20,000cr ($2.6bn) subordinated debt for stressed enterprises and a long-pending revamp of the definition of MSMEs. 

Most significantly, a massive ₹3Lcr ($39.9bn) collateral-free loan facility.


Now, let’s talk about caveats.

First and Foremost: The much-talked-about loan facility for MSMEs doesn’t actually involve handouts or direct fiscal aid to ailing companies. In reality, it involves credit guarantees given to banks by the Government. So the onus is on the banks, who would need to underwrite.

Secondly: Not all MSMEs are eligible. Only those accounts with up to ₹25cr ($3.3m) in outstanding credit as on February 29th 2020 can avail this loan facility. This is important to note because only a small pool of MSMEs can even think of availing this facility in the first place - by the Government’s own admission, this includes only about 7% of enterprises.

Thirdly: Let’s say you’re the owner of an eligible MSME and are desperate for some loans to keep your business afloat. You will still be confronted by two major obstacles.

One - many banks are reluctant to lend in general, fearing that money handed to enterprises that are likely to fail or would take a long time to recover would add to their bad loan books.

And two - say you find an accommodating bank, even then there’s the threat of long waiting periods - sometimes 30-45 days long - just to get the loan. And when you’re heading a business on the verge of failure, time is money.


Uncertainties abound.

Now if you’re the owner of a micro or small enterprise, and you’re facing all these ifs and buts, you might be forced to slash expenses, lay off workers or shut shop altogether in the absence of emergency aid.

As a Meerut-based steel furniture-maker told Reuters: “It would be better for me to close the unit than to run from pillar to post to get a loan.”

The numerous conditions and constraints aside, there’s also the delivery challenge. The MSME sector is heavily fragmented and dependent on informal lines of credit. Many likely never even approached banks or NBFCs for aid before the lockdown. For these businesses, the promises of the Atma Nirbhar Bharat package don’t amount to much.


The data is damning. 

Two whole months since the scheme was announced, only a little more than 20% of the sum earmarked has been availed. That is, ₹61,987.9cr ($8.28bn). The total amount sanctioned, meanwhile, is ₹1,20,099cr ($12bn).


A survey by market research firm Kantar found that while 68% of small and medium businesses were aware of at least one of the Government’s relief schemes, only 32% were considering availing of at least one of the benefits.

And it’s not like MSMEs aren’t rushing to avail loans because they’re financially secure right now. An earlier survey - by the All India Manufacturers’ Organisation (AIMO) and involving 46,525 MSMEs - found that 35% of MSMEs said their enterprises were “beyond recovery”, 32% expected recovery to take six months and only 3% said they would be unaffected.


What would MSMEs have preferred instead?

A common lament among business owners is that the credit guarantee scheme is just that - a guarantee. Not actual fiscal aid. MSMEs were rather hoping for cash handouts, payment of employee wages or tax waivers.

Instead, they were given the option to pile on more debt. Which they would be hesitant to do even during “normal” times, without a pandemic or without the many hoops you have to jump through to overcome the many caveats of the relief measures announced. 

But these are hardly normal times. Not only because we have no idea when businesses can open their shutters with certainty, but also because we have no idea when consumer demand will pick up again.


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