The government’s 100% sovereign guarantee for uncollateralised Micro, Small and Medium Enterprises (MSME) loans during the lockdown will encourage borrowers to never pay back. It is a relief that the first tranche of Narendra Modi government’s Rs 20 lack crore economic package to kickstart the Indian economy has a very small impact on the fiscal deficit and government borrowing.
It is a very smart move to make MSMEs self-reliant and remove the problem of liquidity being faced by the MSMEs. Rs 3 lakh crore will be provided to MSMEs as collateral-free loans for a period of four years and do not have to be repaid in the first 12 months. The banks have been given a 100% government guarantee to avoid them from chasing the borrower.
Small businesses should be given uncollateralised loans to become more self-reliant, along with a policy to ensure that good borrowers’ loans are not given to wilful defaulters. With limited resources and credit, available money must go to firms that are going to use it well. The textile industry in India is the most self-reliant industry, 80% of which constitutes MSMEs. This sector provides employment to many employed in agriculture.
Unless the demand situation improves, MSMEs would not be in a position to garner enough revenue to pay back these loans to lenders. The point is, instead of forcing these companies to borrow more loans, the government should have given them cash stimulus to deal with the present crisis.
Unless you generate demand on the ground, how will companies generate cash flows to run their operations and repay banks? If the government can provide cash stimulus to MSMEs, it’d indirectly help migrant workers return to their work and earn daily wages. The Centre is providing sops to MSMEs in the form of wage support to be able to retain workers and their salaries. However, the schemes must be made to generate demand, so that the migrant workers can get their jobs back.
This initiative by the government to grant loans to MSMEs will help towards their ‘Make in India’ scheme. It will boost the economy if the cash stimulus is given at the basic level to companies.