Will the credit guarantees provided recently under Atmanirbhar abhiyan help overcome the constraints in MSME sector? Critically examine (200 Words)
Refer - The Indian Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs should they want to remain in business.
· 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.
Why credit guarantees?
· Efforts to pump liquidity via the banks have been a non-starter because banks simply do not want to lend any new money. Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
· Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.
What are the other measures?
· There is a subordinate debt scheme, worth Rs 20,000 crore, which will allow loans to MSMEs that were already categorised as “stressed”, or struggling to pay back. In this case, the government’s guarantee is not full, but partial.
· The third measure is the creation of a fund with a corpus of Rs 50,000 crore to infuse equity into “viable” MSMEs, thus helping them to expand and grow.
· The government intends to put in Rs 10,000 crore and get others, possibly institutions like LIC and SBI, to fund the remaining amount.
Are there any downsides to resorting to credit guarantees?
There are, especially if it is a 100% credit guarantee. That’s because such a guarantee leaves no incentive for either borrower to pay back, he/she has nothing to lose or for the lender the banker is assured of payback from the government so why should he bother to check if the borrower is deserving or not.
Deepika 5 years
Please give feedback.
IAS Parliament 5 years
For "Critically Examine" directive you need to include the criticism part, mention about credit guarantees, their criticisms etc. Keep Writing.
Aradhana Tiwari 5 years
To provide relief to millions of small businesses reeling under the impact of the Covid-19 lockdown, recently govt under "Atmanirbhar abhiyan" has announced a slew of liquidity measures, which include collateral-free automatic loan worth Rs 3-lakh crores for MSME sector.
The MSME sector contributes in a significant way to the growth of the Indian economy and is considered as the backbone of the nation. It contribute "nearly 30 percent of India’s gross domestic product and close to half of the country’s total exports". Thus, it deserves urgent financial stimulus and a safety net.
>>> Benefits of credit gurantees for MSME sector :
- In times of crisis, like the one currently playing out, this credit guarantee is like an emergency credit line for MSMEs, which is expected to benefit 45 lakh units.
- should help the formal banking system meet the credit demand of the MSME sector as it assures the bank that its loan will be repaid by the government in case the MSME falters.
- This in turn, will help MSMEs to take out another loan and recover. Thus, helping them to expand and grow in capacity as well as in size.
- will also help MSMEs to pay salaries to their workers and keep their heads above the water even as the economy slows down.
>>> Various challenges :
- There are concerns that such loans may morph into NPAs for banks.
- Despite these measures, however, there are fears that MSMEs are unsure of paying salaries and creditors given the current freeze on production and supply coupled with slowing demand.
- As a part of credit gurantees, the government assures to pay back only 80% of the new loan. This circumvents the problem of a moral hazard.
>>> Way forward :
- e-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions.
- Govt. would ensure that employers will pay salaries and other statutory dues to daily wage workers, especially in such units.
>>> Conclusion :
Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk-management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.
IAS Parliament 5 years
Good attempt. Keep Writing.
