Government supports small business loans to help businesses survive Covid-19 upheaval
MUMBAI: As businesses halt during the extended Covid-19 lockdown, banks and industry have asked for government guarantee on the loans. Small businesses, with limited cash flow, have been hit the hardest, unable to handle disruptions like their larger counterparts. Mint is examining how the program, if approved, will work.
What is the scheme proposed by the banks?
The lenders, through their lobbying body, the Association of Indian Banks (IBA), have suggested that the government guarantee any additional loans to small businesses. Bankers estimate that the sector needs additional loans of at least ₹50,000 crore and if guaranteed by the government, will allow risk averse banks to start lending. Data from the Reserve Bank of India (RBI) showed that total bank loans to small businesses amounted to ₹4.78 billion for the fortnight ended February 28. Although the MSME sector contributed 30.3% to India’s gross domestic product (GDP) in FY2019, small business credit flows have been slow for some time now. Loans to micro and small industries fell 1.1% between March 2019 and February this year.
How is it proposed to implement it?
The banks have suggested that these loans could be disbursed through a portal like psbloansin59minutes.com, which generates immediate approval in principle for borrowers. The portal uses algorithms to analyze data from the Goods and Services Tax (GST) database, income tax returns (TI), and bank statements to decide eligibility. It has been suggested that once the loan support proposal is accepted by the government, banks would open their purse strings to lend to the sector and then apply for collateral coverage. Currently, the Micro and Small Business Credit Guarantee Trust Fund (CGTMSE) guarantees between 50% and 85% of loans up to ₹2 crores.
Where else are governments looking to guarantee small business loans?
The United States has announced $ 359 billion in loans and repayable guarantees for the administration of small businesses to help small businesses that are holding their workers under its $ 2 trillion covid-19 program. Even in the UK, there is talk of offering 100% government guaranteed loans to small businesses to ensure those businesses go bankrupt, the Guardian reported on April 19.
Who will benefit and who will be excluded from the Indian plan?
Since banks are in favor of an online portal that uses GST data to process loan applications, part of Indian small businesses will be left out. According to Chandrakant Salunkhe, founder and chairman of the SME Chamber of India, there are over 6 million small businesses in India, of which only 91 lakh are registered on Udyog Aadhaar, a government portal for MSME registration based on Aadhaar. Salunkhe said more than 70% of Indian small businesses do not have access to bank credit at the moment and even if the government guarantees additional loans, these entities will be excluded because they operate in the informal sector. Loans through the online portal will only help registered MSMEs, with TPS registrations, he said.
How will RBI’s recent announcement of a refinancing facility help the industry?
The central bank recently announced that it would provide ₹50,000 crore in liquidity to three Indian financial institutions (AIFI) such as the National Bank for Agriculture and Rural Development (Nabard), the Small Industries Development Bank of India (Sidbi) and the National Housing Bank (NHB). While Nabard and Sidbi finance the agricultural sector and small businesses respectively, NHB refinances housing finance companies. Money collected from the RBI at the repo rate can be used to lend it to small private credit companies.
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