5 Ways MSMEs can benefit from a Business Loan during COVID-19

Countries across the globe have been battling the COVID-19 pandemic over the last 7-8 months. The Coronavirus has had a huge impact on the economies of many countries including India. To negate the effects, the Government of India has come up with a financial measure called ‘Atmanirbhar Bharat’. The major objective of this plan is to make India self-reliant while re-stabilizing the economy. The government has even come up with a relief package of around ₹20 lakh crore for bringing back the industries on track.

Under this relief package, 6 measures are dedicated towards the empowerment of the MSME (Micro, Small and Medium Enterprises) sector. This is when companies of all scales can look at improving their operations and even expanding by availing a business loan at highly competitive interest rates along with other benefits.

Following are some of the ways in which MSMEs can benefit from a business loan during the COVID-19 pandemic:

1. Collateral-Free Loans for the MSME Sector

The Government has come up with a plan to offer collateral-free loans to the MSME sector. These loans are even guaranteed by the Central Government. In these loans, the interest rate will be capped while offering a moratorium period of 12 months for principal repayment. These loans don’t even require any guarantee fee.

All MSMEs having a turnover of around ₹100 crores and having an outstanding credit of ₹25 crore are eligible to borrow around 20% of the total outstanding credit as of Feb 29^th, 2020. All these loans will be having a tenure period of 4 years and this scheme is open for MSMEs till Oct 31^st.

2. Relief to MSMEs via NPAs

Approximately 2 lakh MSMEs possess non-performing assets (NPAs) and these are hugely impacted by the economic stress arising due to COVID-19. The government has decided to allot around ₹2,000 crores to assist all these entities in the form of subordinated debt.

In their businesses, the MSME units can now infuse the money which is delivered in the form of equities. All the lending institutions will receive around ₹4,000 crores from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This would act as a partial guarantee for the amount lent.

3. Restricting the involvement of Foreign Companies

A majority of the companies in the MSME sector faced huge competition from foreign companies. This usually turned out as a big disadvantage for the local companies. In order to restrict this, the government of India has banned all global tenders for government-related projects of up to ₹200 crores.

The major impact of such a move will be on the increased representation of local companies in the Indian economy. This also serves and boosts the ‘Make in India’ initiative taken up by the government to increase the number of Indian products in the local market.

4. Release of Payments to MSMEs

The Indian government has also planned to release any pending payments to all MSMEs. This in turn, will help them to sustain as a majority of these entities are facing a huge drop in their domestic sales by 92%. They are also facing a 100% drop in their exports when compared to the last fiscal year. The government has decided to allocate a fund of ₹1 trillion in this regard.  This allotted fund will facilitate the pending payment to MSMEs.

5. A Corpus of ₹50,000 Crore

The Indian government is of a firm belief that the representation of MSMEs on the Indian stock exchanges can help sustain them through the equities. The government is aiming to achieve the same by infusing equities in the MSMEs sector through a fund of funds. A main fund of ₹10,000 crores will be set up and that will be expanded further to a corpus of ₹50,000 crores. This main fund will in turn be linked to other funds named the daughter funds. Companies in the MSME sector can generate equities through such daughter funds.