Major Announcements for the MSMEs

Prime Minister Narendra Modi, on May 12’ 2020, announced his vision of Aatmanirbhar Bharat and gave a stimulus package of 20 Lakhs CR in support of this vision. On the onset of this, the Finance Minister on Wednesday i.e., May 13’ 2020, announced various measures allocating 20 Lakhs CR economic packages to multiple sectors. These measures aimed to focus on land, labor, liquidity, and law. As a result, six significant announcements were made for the benefit of the MSME sector. And help provide the necessary push for survival and growth of this sector as the MSME sector has been critical for employment preservation and growth. The key measures were as follows:

1) Collateral free Automatic Loan for SMEs up to 3 Lakhs CR

MSME unit, which falls within limits given, will not have to pay any collateral or guarantee for the loans availed under this scheme. Limits for MSME eligible under this is as follows: MSME unit with up to Rs 25 CR outstanding credit and Rs 100 CR turnover

  • They will also not be required to pay any principal component of the loan for the first year. The tenure of the loan will be for four years.
  • The MSME can get up to 20 percent of all outstanding credit as on February 29, 2020, which will be offered by Banks and NBFCs, and this scheme can be availed until October 31, 2020.
  • The government will provide complete credit guarantee cover to lenders on the principal and interest amount.

Benefit: This will benefit 45 lakh units to resume business activities and safeguard jobs and help provide liquidity.

2) Rs 20,000 CR Subordinated Debt for stressed MSMEs

  • MSMEs declared NPAs or those stressed would be eligible for equity support.
  • The government will provide Rs 4,000 CR partial credit guarantee support to banks. Banks will give debt to promoters of the MSMEs in the form of equity infusion.
  • Banks are expected to provide the subordinate-debt to promoters of such MSMEs equal to 15% of his existing stake in the unit subject to a maximum of Rs 75 lakhs.

Benefit: Around Rs 2 lakh MSMEs will benefit and help them solve the problem of equity.

3) Rs.50,000 CR equity infusion through Fund of Funds

  • The government will infuse this amount through a Fund of Funds that will be operated through a Mother fund and a few daughter fund. The Fund of Funds will be set-up with a corpus of Rs 10,000 CR.
  • It will provide funding to MSMEs that are performing very well and can use the opportunity to expand.

Benefits: This will benefit MSMEs with potential and viability by providing them greater support in capacity expansion and market-listing.

4) Revised MSME definition

  • The definition is being changed wherein the investment limit is revised upwards along with the addition of turnover as criteria.
  • Differentiation between manufacturing and service MSMEs is removed.
  • The below table summarizes the changes:

Existing Classification
(Only Investment)
Revised Classification
(Manufacturing and Services Combined)
Micro< Rs.25 lakh< Rs.10 lakh
< Rs.1 cr
< Rs.5 cr
Small< Rs.5 cr< Rs.2 cr
< Rs.10 cr
< Rs.50 cr
Medium< Rs.10 cr< Rs.5 cr< Rs.20 cr
< Rs.100 cr

Benefits: This will encourage MSMEs to grow bigger without losing on the benefits availed by MSMEs.

5) Global tenders disallowed

  • Addressing MSMEs issue of unfair competition from foreign companies in government procurement tenders due to the size and strength differ. However, the government said it will not allow global tenders in such schemes up to Rs 200 CR.
  • The government said it will make necessary amendments to General Financial Rules to enable this provision.

Benefit: It will help small units participate in government purchases and protect them from foreign competition and help compete with them. It is also a significant step towards creating a self-reliant India.

6) Other Measures

  • The government and central public sector enterprises will release all pending MSME payments in 45 days.
  • Post covid-19, trade fairs would become difficult; hence Fintech enterprises will be used to boost transaction-based lending using the data by the e-marketplace. This e-market for developing linkages for MSMEs will be promoted to replace trade fairs and exhibitions.

Benefit: This will help the enterprises to strengthen their network and also help clear the dues and provide necessary cash flows for running the businesses.
It is important to note that the amount allocated for collateral-free automatic loans, subordinate debt for MSMEs, and equity infusion through MSME Fund of Funds (i.e., the first three measures) amounts to 76 percent of the credit disbursed to MSMEs. This indicates that the government has taken many steps to provide adequate liquidity and provide relief to this sector on an immediate basis to reduce the effect of lockdown due to COVID-19.
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