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Business News/ Economy / Centre looking at strengthening underwriting model to help MSMEs get bank loans
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Centre looking at strengthening underwriting model to help MSMEs get bank loans

Unorganized MSMEs have a problem getting loans due to a lack of collaterals. Recently, a sub-group was created for strengthening the underwriting model for MSMEs.

The development is aimed at lowering delinquencies of MSMEs and increasing financing towards these smaller businesses. (Photo: Mint)Premium
The development is aimed at lowering delinquencies of MSMEs and increasing financing towards these smaller businesses. (Photo: Mint)

 

New Delhi: The government is looking to strengthen the underwriting model for micro, small and medium enterprises (MSMEs) in order to make it easier for them to access loans.

Underwriting is the process of evaluating risks to protect the interests of banks and other lenders. The development is aimed at lowering defaults by MSMEs and increasing financing for these smaller businesses.

A person aware of the developments said that recently a sub-group was created for strengthening the underwriting model and expanding of digital public infrastructure usage for MSMEs and self-help groups. It falls under the working group related to enhancing responsible lending for MSMEs, formed by the department of expenditure under the finance ministry.

"There is no collateral as such in terms of lending towards smaller businesses. This is what the group is looking at – how the risk can be assessed and covered," the person said.

Another person said micro enterprises which are largely in the unorganized sectors have poblems getting credit due to a lack of collaterals. The sub-group would specifically look at ways for underwriting these businesses in the unorganized sector.

Reaching help to MSMEs

Banks and non banking financial corportions have traditionally been averse to financing MSMEs. However, with the government's directive to all commercial banks to lend to small businesses, financing for MSMEs has improved. 

According to this person, sovereign guarantees provided by the government under schemes like the emergency credit line guarantee scheme (ECLGS) have supported covid-hit MSMEs get loans. Additionally, a credit guarantee fund is there to ensure funds for small businesses for loans of up to 1 crore.

On 23 April, Mint reported that the government is looking at the need for a new credit guarantee for the scheme and also to standardize the process across different schemes.

Vinod Kumar, President, India SME Forum said: "For the unorganized sector there is no way to get loans from financial institutions other than the MUDRA scheme. So, there is a need to look at ways to help small businesses in the informal space get more financing from banks and NBFCs."

Under the Pradhan Mantri MUDRA Yojana (PMMY) launched in 2015, collateral-free loans of up to 10 lakh is provided to non-corporate, non-farm small and micro enterprises. These loans are given by commercial banks, regional rural banks, small finance banks, micro finance institutions and NBFCs.

As of March, bank credit for micro and small businesses stood at 6.33 trillion and that for medium enterprises at 2.68 trillion.

In a recent webinar, Icra experts said that there are signs of rising delinquencies, especially in credit card, unsecured and MSME loans.

Also Read | Supreme Court declines to hear MSMEs' plea challenging 45-day payment rule

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Published: 16 May 2024, 07:15 PM IST
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