The government’s rescue scheme for Micro, Small and Medium Enterprises (MSME) amidst the COVID-19 crisis is not performing up to the expectations. Small businesses contribute around 25% to the Indian GDP, therefore working on their health is the government’s top priority. To cope with the aftermath effects of the pan-India lockdown on the MSMEs, the government’s credit scheme is an attempt to encourage lenders to increase cheaper credit to the MSMEs.
Under the Emergency Credit Line Guarantee Scheme (ECLGS), the government issues a 100% credit guarantee to small businesses. Despite the emergency credit guarantee scheme, there is a contraction in the bank credit of MSMEs. Up to August 2020, around ₹1.1 trillion of credit disbursals to MSMEs has been made, and still, the credit flow is downhill (Government data). ECLGS is not proving to be impactful. Loans provided to MSMEs have decreased by 4.96% year-on-year (RBI data). Contraction of 10.5% is expected for FY21 on a year-to-date basis.
If this persists, the recovery of the Indian economy will be difficult. To quote the Bank of America, “Declining credit flows continue to point to a GDP contraction of 11% in the September quarter and 7.5% in FY21 due to the Covid-19 shock”.
A major reason for this shock is that approximately 65% of MSME loans were under the temporary prohibition on the repayments since April 2020. Though the share of loans has reduced post that, MSMEs continue to hold a higher proportion in the overall loan book covered by repayment.
The shrinkage in the loans reveals that MSMEs do not have convenient or cheap access to credit. Another reason is that many small businesses are not willing to borrow due to their lack of clarity on the forecasted revenues or cash flows. The pandemic has impacted the growth of these businesses. Taking support from the government seems like the best option in dealing with these unprecedented circumstances.
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