Finance Minister announces credit guarantee scheme, other measures for MSMEs

New Delhi, July 23

Finance Minister Nirmala Sitharaman on Tuesday announced a credit guarantee scheme for facilitating term loans for Micro, Small and Medium Enterprises (MSMEs) to purchase machinery and equipment without collateral or third-party guarantee.

In her speech in the Lok Sabha, she said the Budget provides special attention to MSMEs and manufacturing, particularly labour-intensive units.

“We have formulated a package, covering financing, regulatory changes and technology support for MSMEs to help them grow and also compete globally, as mentioned in the interim budget,” she said.

The credit guarantee scheme for MSMEs in manufacturing will operate on the pooling of credit risks of such entities.

“A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to Rs 100 crore, while the loan amount may be larger,” the minister announced in the Budget.

The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reduced loan balance.

She also announced a new mechanism for facilitating the continuation of bank credit to MSMEs during their stress period.

Sitharaman said that while being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and avoid getting into the NPA stage.

“Credit availability will be supported through a guarantee from a government-promoted fund,” she added.

In another move to help MSMEs, the minister announced a new assessment model for credit to the sector.

She said public sector banks will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment.

“They will also take a lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy,” she added.

The new assessment model, she said, is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria.

It will also cover MSMEs without a formal accounting system.

Mohammad Athar (Saif), partner and leader capital projects and infrastructure development, PwC India, said the credit guarantee scheme and e-commerce export hubs for MSMEs will enable demand creation and boost India’s aspiration of achieving USD 1 trillion in exports by 2030, driven by MSMEs.

Sitharaman also announced that to enable MSMEs and traditional artisans to sell their products in international markets, e-commerce export hubs will be set up in public-private-partnership (PPP) mode.

These hubs, under a seamless regulatory and logistic framework, will facilitate trade and export-related services under one roof.

Vivek Jalan, Partner, Tax Connect, a multi-disciplinary firm, said, as requested by the trade and industry bodies and laid down by the Economic Survey, for MSME businesses, the compliance burden is also sought to be relaxed.

Litigations will be reduced in the new Vivaad Se Vishwas Scheme, he added.

Rumki Majumdar, Economist, Deloitte India, said the credit guarantee schemes for MSMEs in the manufacturing sector, facilitating term loans for the purchase of machinery, and formulating packages to finance technology support to them will go a long way to providing access to finance and increasing investments, which have been key challenges in the sector.