Covid-19 package: definition of MSMEs changed, loans worth Rs 3,000,000 announced


On Wednesday, industry bodies representing Micro, Small and Medium Enterprises (MSMEs) and India Inc as a whole hailed the government’s move to provide the sector with a new investment-friendly definition, a host of loans, a massive fund and the attempt to push the sector towards formalization.

One of the sectors most affected by the Covid-19 pandemic, MSMEs have found a prominent place in the government’s economic package to deal with the crisis.

In a surprise move, Finance Minister Nirmala Sitharaman on Wednesday announced a change in the definition of MSMEs, a proposal that has languished with a parliamentary standing committee since July 2018.

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Apart from increasing the investment limits for MSME classification, the government has also introduced annual turnover as an additional characteristic to define these units. The current definition is based solely on self-reported investments in plant and machinery and has wide variations depending on the type of business.

However, the government needs parliamentary approval to change the definition, as it needs to amend the Micro, Small and Medium Enterprises Development (MSMED) Act 2006. With parliament not in session, it will need to pass an order to implement the announcement, the elder finance secretary SC Garg told a news channel.

The Laghu Udyog Bharati-affiliated Rashtriya Swayamsevak Sangh (RSS), which had opposed the government’s earlier stance of basing the definition solely on turnover, welcomed the move. The investment limit for MSMEs has been revised upwards, so that companies with more capital can still claim the benefits of being small businesses, he said. In another crucial move, the new definition will not distinguish between manufacturing MSMEs and service-based MSMEs.

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Sweep Loans

Amid national reports of cash-strapped MSMEs since last year, the government also announced loans worth Rs 3 trillion for 4.5 million units. Automatic unsecured loans will be available until October 31, but only MSMEs with an outstanding loan of up to Rs 25 crore or with a turnover of up to Rs 100 crore will be eligible, Sitharaman said.

“This would have a significant multiplier impact and generate economic activity of at least Rs 10 trillion, not only retaining jobs but also creating jobs,” said Assocham General Secretary Deepak Sood.

The loans will have a duration of 4 years, with a moratorium on repayment for 12 months. The government will provide 100% guaranteed credit cover to banks and non-bank financial companies on both principal and interest. While product details are yet to be announced, the interest rate is likely to be capped.

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In addition, the bankers said the first year’s interest will accrue and the repayment will be spread over the life of the loan. Seeking the full accrued interest immediately after the first year will put undue pressure on businesses, bankers said.

Furthermore, Sitharaman again pledged that all government agencies and central public sector enterprises would settle all dues for MSMEs within 45 days. “We had suggested that credit should be given to MSMEs with no collateral requirement and with a government guarantee. The proposal to make government and PSE deferred payments to MSMEs was a long-standing demand from industry,” said Chandrajit Banerjee, Chief Executive of the Confederation of Indian Industry.

The decision to withdraw struggling MSMEs found support from exporters. “Provisioning Rs 20,000 crore as subordinated debt for struggling MSMEs will benefit 200,000 units and not only make them competitive but also help them become global brands,” said Sharad Kumar Saraf, Chairman of the Federation of Indian Export Organizations.

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Targeted support

The government will provide Rs 4,000 crore to the Ministry of MSMEs Credit Guarantee Fund for Micro and Small Enterprises (CGFTMSE), which will provide partial credit guarantee support to banks. But the Federation of Micro, Small and Medium Enterprises of India warned that the government must ensure the transmission.

“Credit guarantees would be useful, as obtaining loans remains even more difficult for service companies because they do not have assets as collateral. There are around 20,000 IT-ITES SMEs out of which around 16,000 are below INR 100 crore,” said Ashish Aggarwal, Senior Director and Head of Public Policy at Nasscom.

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The Center will also establish a mega fund of funds with a corpus of Rs 10,000 crore, to help MSMEs increase their capacity and eventually get listed on the markets of their choice. While more details are awaited, MSME Minister Nitin Gadkari previously hinted that the government would buy stakes in MSMEs that choose to be listed as public entities.

“Measures such as supporting e-marketplace linkages for MSMEs to promote as a replacement for trade fairs and exhibitions are a well-thought-out relief for exporters. Exhibitions were a regular and important part of export promotion,” said Ravi Sehgal, Chairman of the Engineering Export Promotion Council, the majority of whose members are MSMEs.


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