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Prime Minister Narendra Modi has promised up to ₹1 crore MSME loan in 59 minutes. Photo: HT
Prime Minister Narendra Modi has promised up to ₹1 crore MSME loan in 59 minutes. Photo: HT

What Modi govt’s new sops mean for MSME sector

An analysis of the impact of government sops announced for the MSME sector

Prime Minister Narendra Modi on Friday announced a slew of measures to make it easier for micro, small and medium enterprises (MSMEs) to access credit. Mint examines the impact of the measures announced on the sector.

What is the nature of the sops?

The sops aim to make access to credit easier for MSMEs and reduces their cost of funds. They outline steps to smoothen cash flows of MSMEs by raising their chances of getting funds, based on trade receivables. The move comes amid a liquidity crunch being faced by non-banking financial companies (NBFCs) after a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) and a pile of bad loans hampering banks’ ability to lend. Relief from environment and labour regulations are also part of the sops. The implementation of the steps will be monitored rigorously over the next 100 days.

What are the key measures?

The measures include sanction of loans of up to 1 crore under an hour, a 2% interest subsidy on loan payments by MSMEs and a 5% rebate on interest on loan payments by exporters. Businesses with sales above 500 crore have to be on the trade receivables e-discounting system platform. This will let small vendors access funds from lenders, based on receivables reflected on the platform. Businesses sourcing supplies from MSMEs and making payments after 45 days have to file returns every six months. Compulsory purchases made by state-run firms from MSMEs were raised to 25% of their total procurement.

Why are MSMEs important?

They are India’s second-largest job creators. About 65 million MSMEs account for about 120 million jobs. About 30% of the country’s economic output comes from MSMEs.

What prompted the launch of the MSME sops?

Small businesses had a tough time in the past two years due to the cash crunch caused by the demonetization of high-value currencies in November 2016 and the business disruption caused by the July 2017 launch of the goods and service tax (GST). The fund crunch faced by non-banking financial companies after the failure of IL&FS is feared to have dried up a key source of funds for MSMEs. Stress in the sector has a huge socio-economic impact. They are also an important support base for the ruling Bharatiya Janata Party.

Are the measures effective?

Representatives of the MSME sector said a lot more needed to be done to mitigate their distress. For example, a loan of 1 crore might be a big deal for a start-up, not so for an MSME. The limit for 59-minute sanction of loans should be raised to 25 crore, said SME Chamber of India founder and president Chandrakant Salunkhe. Small businesses also demand access to land at competitive rates, lower power tariff, easier rules for inter-state business and direct and indirect tax breaks.

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