1. Centre set to provide up to 100% credit guarantees for MSME loans

  • What are credit guarantees?

  • How actually the credit guarantees work?

  • What are the need for credit guarantees?

  • So, what is the quantum of credit guarantee provided to MSMEs?

UPSC Can list these Questions under

GS paper 3 ( Indian Economy)

What is the context about?

  • In the latest tranche of Atmanirbhar Bharat Abhiyan package, the key thrust is a huge increase in credit guarantees to MSMEs.
  • This is the second tranche of the package that includes past actions by the Reserve Bank of India as well as the first Covid-19 relief package announced during March and April.
  • The main thrust was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them.

What are credit guarantees?

  • Loans to MSMEs are mostly given against property (as collateral) because often there isn’t a robust cash flow analysis available.
  • But in times of crisis, like the one currently playing out, property prices fall and this inhibits the ability of MSMEs to seek loans. It also means that banks are less willing to extend loans.
  • A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.

How actually the credit guarantees work?

  • For instance, if the government provides say a 100% credit guarantee up to an amount of Rs 1 crore to a firm, it means that a bank can lend Rs 1 crore to that firm; in case the firm fails to pay back, the government will make good all of Rs 1 crore.
  • If this guarantee was for the first 20% of the loan, then the government would guarantee to pay back only Rs 20 lakh.

What are the need for credit guarantees?

  • Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure.
  • For instance, experts are already talking of a GDP contraction of 5% to 10% in the current financial year. That will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
  • And yet, this is also the year when employees and firms want the government to help them out financially.

So, what is the quantum of credit guarantee provided to MSMEs?

  • There are three proposals but the main one is for standard MSMEs — that is, those MSMEs which were running fine until the Covid-19-induced lockdown disrupted their work.
  • For these, the government has provided a credit guarantee of Rs 3 lakh crore. This is like an emergency credit line and it is for MSMEs that have an already outstanding loan of Rs 25 crore or those with a turnover less than Rs 100 crore.
  • The loans will have a tenure of 4 years and they will have a moratorium of 12 months (that is, the payback starts only after 12 months). The loan should be taken before October 31, 2020.