Steps taken by government to enhance credit flow to the MSME sector

The Reserve Bank of India (RBI) has allowed Scheduled Commercial Banks (SCBs) to deduct the amount equivalent to credit disbursed to New Micro Small and Medium Enterprises (MSMEs) who had not availed of any credit facilities from the banking system as of 01.01.2021, from their Net Demand and Time Liabilities (NDTL) for calculation of the Cash Reserve Ratio in circulars dated 05.02.2021 and 05.05.2021. (CRR). Dr Bhagwat Kisanrao Karad, Union Minister of State for Finance, declared this in a written reply to a Rajya Sabha question.

According to the Minister, this exemption is applicable up to Rs 25 lakh per borrower, disbursed up to the fortnight ending 31.12.2021, for a duration of one year from the date of loan origination or the loan’s tenure, whichever is earlier.

The Minister outlined the steps taken by the government to improve the flow of credit to the MSME sector:

• The Emergency Credit Line Guarantee Scheme (ECLGS) was announced as part of the Aatma Nirbhar Bharat Package with the goal of assisting MSMEs and business enterprises in meeting their operational liabilities and resuming operations in the aftermath of the COVID-19 crisis by providing Lending Institutions with a 100 percent guarantee against any losses suffered by them due to non-repayment by borrowers. According to National Credit Guarantee Trustee Company Limited, as of December 10, 2021, loans totaling Rs. 3.09 lakh crore had been sanctioned under the Scheme.
• The psbloansin59minutes Portal was launched on November 2nd, 2018 to enable in-principle approval of loans of up to Rs 1 crore (subsequently increased to Rs 5 crore) to MSMEs without the need for human participation. According to SIDBI, loans of 79,285 crore were sanctioned on the platform as on 30.11.2021.
• TReDS was launched by the RBI in 2017 to address the issue of delayed payments to MSMEs. TReDS is an electronic platform where MSMEs’ receivables drawn against buyers (big corporations, PSUs, Government Departments, etc.) are financed at competitive rates by various financiers via an auction system. As of 03.12.2021, the three organisations on the TReDS platform had discounted 26.64 lakh invoices totaling Rs 56,694.14 crore since its establishment.
• TReDS-facilitated factoring transactions are eligible for Priority Sector Lending categorization (PSL). Loans sanctioned by banks to NBFC-MFls and other MFls (Societies, trusts, etc.) that are members of an RBI-recognized SRO for the sector for on-lending to MSMEs, loans to registered NBFCs (other than MFls) for on-lending to MSMEs, and bank finance to start-ups up to 50 crore are also included in PSL. The RBI has also allowed banks and non-bank financial companies (NBFCs) to co-lend to the priority sector.
• On June 1, 2020, the Subordinate Debt Scheme for Stressed MSMEs was approved. Under the scheme, banks give stressed MSMEs’ promoters with subordinate loans of up to 15% of the promoter’s interest or Rs. 75 lakh, whichever is less, to be infused as equity/quasi-equity in the business.
• The Pradhan Mantri Mudra Yojana (PMMY) scheme was launched on April 8, 2015, to provide unfunded Micro/Small business units with collateral-free loans of up to Rs.10 lakh for manufacturing, processing, trading, services, and agricultural-related activities, and to aid in the creation of income-generating activities and employment.
• In circulars dated 01.01.2019, 11.02.2020, and 06.08.2020, the RBI allowed for one-time restructuring of MSME accounts. Given the need to assist viable MSME entities as a result of the COVID-19 fallout, it was decided to extend the facility for restructuring existing loans to MSMEs up to 50 crore classified as ‘standard’ without a downgrade in asset classification subject to the conditions issued in circulars dated 05.05.2021 and 04.06.2021 on ‘Resolution Framework 2.0.
• To improve monetary policy transmission, the RBI has encouraged banks to link all new floating rate loans to external benchmarks for MSEs beginning October 1, 2019, and Medium businesses beginning April 1, 2020.
• The Regulatory Retail Portfolio threshold for a single counterparty was raised from 5 crore to 7.5 crore, allowing banks to allocate a risk weight of 75% to such exposure to MSME businesses.