India’s economy took a hit during the Coronavirus pandemic, and so did the small and medium enterprises (SMEs) sector. According to Fitch Ratings, India’s economy, expected to shrink by 10.5% in FY-21, can bounce back to a growth of 11% in FY 22 if the MSME sector recovers.
The government offered the Credit Guarantee Scheme to revive the SMEs financially. Small and medium-sized businesses usually rely on business loans to finance their working capital needs, purchase equipment, or breathe additional funds into their varied requirements.
What is the credit guarantee scheme?
- The Ministry of Micro, Small and Medium Enterprises, (M/o MSME) and the Small Industries Development Bank of India (SIDBI) provide the Credit Guarantee Scheme.
- It offers unsecured credit facilities to all the MSME businesses.
- It is acting as a dependable constant source of funding for the SMEs in need.
- Under the scheme, MSME loans are collateral-free; businesses don’t have to pledge security to avail the funds.
- MSMEs don’t require a third party guarantee to access the credit.
- An MSME that avails loan under the Credit Guarantee Scheme, ailing on account of causes beyond the organisation’s control, will receive access to rehabilitation facilities. The Credit Guarantee Scheme covers this assistance.
- Individuals can apply for finances up to Rs 50 lakh.
Here are the few positive aspects of the Credit Guarantee Scheme in the SME sector:
- Since its origin in 2000-01, the scheme has now over 1 lakh credit facilities.
- As per the Finance Ministry in December 2020, banks sanctioned loans valued Rs 2,05,563 crore under the Emergency Credit Line Guarantee Scheme (ECLGS).
- The credits reached roughly 81 lakh accounts.
- These acted like safety nets for the pandemic-hit MSME sector whose business loan eligibility suffered too.
Now, the negative impact of the Credit Guarantee Scheme in the SME sector:
- A Financial Express report indicates that April –August period of FY21 witnessed a significant reduction of 7.1% in the loan outstanding of the non-priority sector from micro and small enterprises.
- Banking sector’s credit-deposit ratio dwindled from 76% to 72% in March-September 2020.
- The relief scheme stated that the credit is available to companies with annual turnover up to Rs 100 crore and outstanding loans worth Rs 25 crore. As per a later clarification from the government, the assistance was meant for dues from 60 days before the February 29,2020.
- But this means the SMEs hit by the initial months of lockdown cannot avail the finances.
- The FE report, authored by CMD of SIDBI, suggests that Credit Guarantee Schemes’ overall impact is limited due to their restrained size compared to the GDP. These schemes may promote lending during unfavourable financial times; they cannot replace direct business loans from financial institutions.
In conclusion, government data indicates that the Credit Guarantee Scheme for Covid-19, offering 100% of credit guarantee, has had disbursals up to Rs 1.1 trillion by August. These figures are 63% of what was envisioned. Despite the number of disbursals, overall credit has dropped. In times of economic crises, SMEs with good business health come out as winners. They can avail business finance from lenders at lower business loan interest rates, and sustain their organisation by paying their workers on-time.
