MSME Reforms (2020) for COVID-19 relief – What has Changed?

Loans Against Property for MSME (2020)

The latest move by RBI of removing risk weight from loans against property will leave the banks with more capital to lend. This is important for those hit by the pandemic.

Riskier assets have a higher risk of weight. This means that the asset will have a lower value. With lower risk rates, banks will set aside less capital against these loans. This encourages banks to offer fresh credit without the pressure of additional capital on the borrower.

Currently, a loan against property carries a risk weight of 20 percent for Medium, Small and Micro Enterprises.   

To rescue the struggling sector, the government guaranteed loans for lenders in case of default. This has nudged them to expand their loan book by giving out a loan against property as well as business loans in India without mortgaging any further collateral.

Guaranteed Emergency Credit Lines facility for MSME (2020)

To aid MSME affected by the coronavirus pandemic, the government has implemented a credit line from banks and NBFC’s. These are up to 20% of the outstanding credit as at 29th Feb,2020. Other terms of the measure include

  • Declaring borrowers with up to ₹25 Crore outstanding and upto a ₹100 crore turnover eligible.
  • There has to be a 4-year tenure on business loans with a moratorium of 12 months on the Principal payment.
  • Interest is to be capped
  • Banks and NBFC’s get a 100% credit guarantee cover on principal and interest
  • There is no guarantee fee
  • New collaterals will not be given by MSMEs

These schemes can be availed my Medium, Small and Micro Enterprises till the 31st of October, 2020.

It is expected to benefit 45 lakhs businesses/MSMEs in India who can comfortably resume their operational activities and in turn, safeguard people’s jobs and country’s economy..

Other Measures

Other measures include the promotion of e-market linkage as a replacement to trade fairs and exhibitions. Receivables for MSMEs from the Government and CPSEs are yet to be released in 45 days.

There is also a change in the definition of MSMEs. This definition was long waited to be changed since the MSME Development Act of 2006.  

Final Verdict

The repercussions of COVID-19 pandemic derailed many lives. When it comes to financing, the impact was just as bad. Measures were needed to be taken for aiding those who were negatively affected.

Medium, Small and Micro Enterprises needed additional funds for payment of operational liabilities, buying raw material and restarting businesses. The measures will help MSMEs as conditions for loan against property and business loans change along with their definition in terms of Turnover and investment.

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