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MSME credit scheme: Industry experts welcome fresh stimulus package, calls for more direct support over bank loans

Microfinance lenders and sector analysts welcomed the move to increase the outlay for credit guarantee schemes and facilitate lending to bottom-of-the-pyramid borrowers. However, there still remains room to do more, they said.


The fresh round of economic stimulus measures announced on 28 June by Union finance minister Nirmala Sitharaman to support micro, small and medium enterprises (MSMEs) and bottom-of-the-pyramid borrowers are important, but these measures rely excessively on bank loans, industry players and sector experts said.

In a poor demand scenario, these loans could add to the indebtedness of the borrowers, they added.

The Finance Minister on Monday announced a stimulus package worth Rs 6.29 lakh crore to give relief to the struggling segments of the industry from the second wave of the Covid-19 pandemic. Among the measures announced was a decision to increase the scope of the emergency credit line guarantee scheme (ECLGS) to Rs 4.5 lakh crore from Rs three lakh crore earlier. The package also included a credit guarantee for bank loans to microfinance institutions (MFIs) for on lending upto Rs 1.25 lakh to 25 lakh small borrowers. Out of the Rs 3 lakh crore, banks have already sanctioned around Rs 2.7 lakh crore and disbursed around Rs 2.1 lakh crore under the ECLGS scheme, according to the latest available data.

The ECLGS scheme, under which MSMEs are entitled to an additional 20 percent of loans backed by a sovereign guarantee, was earlier extended up to 30 September, 2021.

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Experts said that while the schemes announced on 28 June are aimed at sectors affected the most by the pandemic, they depend more on credit than on direct stimulus measures. ““While the measures are welcome and target Covid sensitive sectors , most of the fiscal support is still below the line and in the form of loan guarantees, and not direct stimulus,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

Read: Government’s ECLGS push sends banks’ exposure to MSMEs soaring

Similarly, industry players also harped on the need for more direct means of support to sectors of the economy.

“The fresh economic relief measures announced today indicate that Finance Minister continues to rely upon the credit-led growth of the economy with expansion of the guarantee scheme,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.

Gadia added that although a still bolder approach towards fiscal measures with major direct expenditure was expected, the government has relied more on the subsidy route for fertilisers and the Atma Nirbhar Rojgar Yojna.

Microfinance lenders welcomed the scheme for on-lending, but said there was scope to cover a larger number of borrowers under it. The measure will help restore the disbursements by MFIs and the marginalised borrowers who are in search of emergency loans to resume their business operations hit by the pandemic, said Kuldip Maity, MD & CEO of MFI Village Financial Services. “We believe there is room for more as the MFI industry caters to around six crore borrowers across the nation and are hopeful that the Government will expand this facility to cover a large number of borrowers,” Maity added.

At the same time, some representatives from the microfinance sector said that the move to offer cheaply priced loans was a useful one. "Sa-Dhan is glad that Finance Minister has taken a favourable view on our request to her in our last memorandum of 28th April 2021 for various relief measures for the MFIs affected by the second wave of the pandemic," said P Satish, Executive Director of industry body Sa-Dhan.

Due to the credit guarantee, banks will have the comfort to lend to MFIs at reasonable rates and microfinance borrowers will have immediate access to loans once livelihood activities pick up, Satish said.

In May, public sector banks had said that they have designed three sets of products to build a “Covid book” under the Reserve Bank of India’s (RBI) scheme of liquidity and the expanded ECLGS 4.0 for healthcare institutions, including a healthcare business loan for setting up oxygen plants, business loans for healthcare facilities and unsecured personal loans for Covid treatment.

On 5 May, the RBI had also opened an on-tap liquidity window of Rs 50,000 crore with tenors of up to three years at the repo rate for ramping up Covid-related healthcare infrastructure and services in the country. It had announced special three-year long-term repo operations of Rs 10,000 crore at the repo rate for small finance banks, to be deployed for fresh lending of up to Rs 10 lakh per borrower.