Government relieves MSME from stressed accounts to an extent, what does it mean for banks?

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With the announcement of a special package allocation for MSMEs, industry bodies have been lauding the government. To start with, FM Nirmala Sitharaman proposed to change the definition of the sector by raising its investment limits for certain MSMEs and introducing a new feature of annual turnover for them. By increasing the investment limits, companies with significantly more capital can still avail the provisions which small businesses get. Another good tiding that the government brought with it for the sector is the proposal of collateral-free loans of over Rs 3 trillion till October 31, provided that criteria are met. The loans’ tenure will be four years long with a moratorium period of 12 months.

While it had been rather challenging for banks while lending to MSMEs earlier, the 100 percent credit guarantee offered by the government will undoubtedly address this. Finance experts anticipate that the move will make lending activities more seamless which can in turn lead to increased growth rate of banks. However, private banks still be selective while lending to MSMEs in order to utilise their capital wisely and conserve it as much. Another positive thing that the recent announcement has brought for the banks is the provision of relief package even for sectors like power and real estate which can help in further improving the asset quality.

So far, the measures have been received well by the banks as well however, some bankers are considering to keep credit cost the same which is slightly on the higher side as a safety measure since the it is not yet certain as to how effective the government’s new move will be.

In addition to banks, exporters have also been lauding the recent announcement. By providing a substantial money to stressed MSMEs and uplifting the entire industry as a whole, they believe that the sector has more prospect of expanding their reach at global level.

Last modified: May 25, 2020

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