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SIDBI wants emergency credit for MSMEs, but bankers want government guarantee for it

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The Small Industries Development Bank of India (SIDBI) has sent a plan to the union finance ministry that seeks to help MSMEs with an emergency credit line, which will be guaranteed by the government.

SIDBI wants emergency credit for MSMEs, but bankers want government guarantee for it
The Small Industries Development Bank of India (SIDBI) has sent a plan to the union finance ministry that seeks to help micro, small and medium enterprises (MSMEs) with an emergency credit line, which will be guaranteed by the central governement.
The Plan:
To give 15 percent of working capital to MSMEs with loans less than Rs 1 crore and 10 percent of working capital to MSMEs with loans from Rs 1-5 crore. The money is to be used to pay six months salaries to their workers
The Financing: The total amount of loans to MSMEs from banks, NBFCs and other lending institutions is Rs 16 lakh crore, according to this plan. 10 percent would work out to Rs 1.6 lakh crore. Government needs to give Rs 16,000 crore to SIDBI or any special purpose vehicle (SPV), which can then leverage it 10 times to get a Rs 1.6 lakh crore corpus. All banks, non-banking finance companies (NBFCs), micro-finance institutions (MFIs) may apply to the SPV with documentation. Almost 90 percent of all MSMEs would be covered.
Government's Burden: Assuming there is a 10 percent default rate, that would still mean non-performing assets (NPAs) of Rs 16,000 crore - the government will face no additional expenditure. Also this corpus will earn interest, so the cost to the government will not increase even if NPAs are slightly higher than 10 percent.
Bankers, when asked about this plan, had two objections. A cap of Rs 5 crore in working capital would refer to very small companies. They would prefer a government guarantee for all loans to entities under Rs 300-500 crore turnover. The principle could be the same: government gives a corpus of Rs 30,000 crore to SIDBI or create a fund or house an SPV in the DFS (Department of financial services) which can issue bonds and increase the corpus to Rs 3 lakh crores. Bankers, however, want a government guarantee of 25 percent.
They opine that average banking sector NPAs are anyways running at 10 percent and in the post COVID world, NPAs could double especially at the bottom of the pyramid. Hence, if the Rs 7.5 lakh crore that banks dump with the RBI everyday for 3.75 percent, is to be used to lend, bankers want a reasonable assurance that the first loss of 20-25 percent will be borne by the government.
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