The credit lifeline (Giving support to MSMEs in the Rs.20 trillion package)

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 The credit lifeline (Giving support to MSMEs in the Rs.20 trillion package)

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• A long battle ahead: The battle aginst COVID-19 is not getting over in a hurry. So social distancing will cut many economic activities. The pain will be felt most by the small businesses. If India is to maintain its economic growth rate, then support to these is a must.
• Two big packages so far: In March 2020 came the first package (Garib Kalyan) and in May 2020 came the second (Rs.20 trillion overall). First was focused on the poor, and second on the smaller enterprises.
• Right measures during a lockdown: A govt. may try to stimulate new activity, but in a lockdown it has limited value. Two things -

1. Flow of funds slows with economic activity
2. Lack of liquidity (access to funds) makes firms go insolvent

• Hence, governments worldwide are trying to ensure flow of credit continues. In the May 2020 package, monetary and financial interventions by RBI and govt. make up 90% of package.
• RBI measures ineffective: The March-April measures by the RBI failed to impact. The amount that banks deposit in the RBI (via reverse repo method) every night was what was offered by the RBI as cheap funds. Banks are credit-averse now. So overall amount and cost of credit (by Banks) has remained the same.
• Addressing this trouble: Hence the govt. wanted to solve this problem by giving credit to MSMEs.

1. The largest of these schemes may be the best one - For standard MSMEs, new loans are now possible with upto 20 % (of current outstanding credit) guaranteed by the government.  (Standard - those who have regularly paid their instalments; "guaranteed" - govt. will pay if they default in new loans)
2. Expectation - Experts feel this may instantly create new credit in next 6 months, as guarantees are possible only for this period.
3. Lenders have zero risk, and borrowers desperately are looking for funds. They may borrow and repay earlier loans, but that's fine as the govt. is absorbing this (rather than absorbing later-day bankruptcies)

• Two schemes for NBFCs: They intend to provide upto Rs.75000 cr liquidity to NBFCs (via an SPV) for upto three months at a time. These may be less successful in helping NBFCs grow but will avoid defaults. 

1. Rs.50000 cr fund is provided as equity for MSMEs (with Rs.10000 cr by govt.) - this equity will then be leveraged (to get more credit). 
2. Why do all this? Losses are wiping out risk capital, something India lacked before COVID-19 itself. If growth is to be restored, this has to be strengthened.

• For farmers: Credit to farmers via the Kisan Credit Cards is now extended to livestock farmers and fishermen. Special loans also available now.
• Limitations: All the above are measures to provide support to formal sector and agriculture, but not informal non-agri enterprises. Why so? Because the govt. is using taxpayer money and formal savings. That is where the pain can retard the economy.
• Less fiscal: The actual fiscal outgo in this package is very less (10%). The government is excessively cautious on fiscal deficit, which is not a good approach. It has already indicated that additional borrowings will be financed through separate bond issues, so bond markets are not unstable for now.  (that is likely going to be via RBI buying government bonds directly)
• Summary: The economic damage so far is immense, and govt. will need to support much more in coming days.
• The stimulus package tries to create new credit for various sectors, and in coming months, it is likely that government will need to put in far more efforts to push the growth rate.

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