The importance of MSMEs in the Indian economic scenario is humungous. Employing 11 crore Indians (6 crore in urban areas and 5 crore in rural areas), MSMEs account for 30% of India’s GDP and 50% of India’s exports. The percentage of micro industries in the MSME sector is about 99.4%. Thus, if the MSME sector as a whole gets disrupted then it means that it affects a large number of micro industries.

The COVID-19 pandemic has really shaken up the very foundations of the MSMEs resulting in the closure of 43% of industries. The effect is catastrophic and it can be seen in the state of the Indian economy as various estimates for FY19-20 pegged GDP between 2 and 4% and for FY20-21 GDP is projected between 1.8 to 2.8%.

Recognizing the importance of the MSME sector, the Indian Finance Minister (FM) announced six measures for the sector out of which the most important one is the allocation of Rs 3 lakh crore for collateral free automatic loans for MSMEs. How will this measure benefit the MSMEs?

Additional Read – Updates from Finance Minister Press Conference on COVID-19 Relief Package

Here’s a look at the way the measure is going to benefit the MSMEs.

Features of the automatic loan

The governments offer to MSMEs comprises the following features:

  • Collateral-free loans with cap on interest rate and zero guarantee fee
  • Tenure of the loan is for four years with moratorium of 12 months for principal repayment
  • Scheme is open up to 31 October 2020
  • Fully guaranteed by the Central Government
  • All MSMEs with outstanding credit of up to Rs 25 crore and turnover up to Rs 100 crore will be eligible for automatic loan to the extent of 20% of loan outstanding as on 29 February 2020.

This measure is expected to revitalize the sector as it will benefit more than 45 lakh MSMEs.

Timely working capital

The COVID-19 lockdown has brought the economy to a standstill and the MSMEs suffered badly with absolutely no cash flow during the past couple of months. The automatic loan will provide working capital for the MSMEs to pay wages to their workers, pay bills to essential service providers and buy raw materials to restart operations once the lockdown is lifted. 

This measure is timely because the liquidity had dried up on account of the lockdown. Most of the banks had funds to lend but would not do so without adequate security to back the loans. Most of the MSMEs had already reached their credit limits and could not find suitable assets to provide collateral. With this important measure banks are likely to come to the rescue of the MSMEs and start lending as the loans are guaranteed by the Central Government.

MSMEs to reboot

MSMEs are expected to utilize the facility to reboot and pick up their business from where they had left off prior to the lockdown. The government has been sympathetic to their requirement as it has allowed a moratorium of 12 months and 4-year tenure to repay the loan. MSMEs should be able to take advantage of the automatic loan scheme and get back on their tracks quickly.    

In respect of startups, there is no specific measure to help the startup separately. However, those startups who have registered as an MSME would be eligible for this automatic loan scheme. In fact, more startups are likely to register under the MSME umbrella and avail benefits. It is possible that the there will be significant addition to the startup family comprising 50,000 entities.

Besides the automatic loan scheme the government has announced five other measures specifically aimed at the MSME sector which include infusing equity for units that are doing well as well as stressed units, change in the definition of MSMEs, removal of distinction between manufacturing and services, disallowance of global tenders up to Rs 200 crore contract value and clearing payments of government contracts within 45 days.

All these measures are expected to revitalize the MSME sector and help recover India’s economy.

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