Collateral free MSME loans under COVID relief package

The Finance Minister recently announced an economic relief package to MSME units in the form of collateral free loans. This facility is for standard MSMEs, that is, those MSMEs which were running fine until the Covid-19-induced lockdown disrupted their work.

The total value of this relief package as declared by the Government was to the tune of INR 3 lakh crores.

This credit facility will be like an emergency credit line. Those MSMEs that have an already outstanding loan of up to INR 25 crores and those with a turnover less than INR 100 crores shall be eligible to apply for this credit facility.

These loans shall have tenure of 4 years and will allow a moratorium of 12 months (which means that the payback starts only after the initial 12 months).

This loan can be availed by eligible MSMEs on or before October 31, 2020.

The Finance Minister has also clarified that these loans will be 100% guaranteed by the Government.

In short, any MSME which has an existing loan (up to INR 25 crores) with any bank or NBFC if, as a result of the Covid-19 crisis, would require more funds then it can avail more loans, without the need for any collateral, because the government will guarantee such loans fully.

The reason for this figure of INR 3 lakh crores as declared by the Government has probably some reasoning behind it. As per the Government estimates, the total outstanding loan to MSMEs by the banks and NBFCs would be around INR 25 lakh crores. It is assuming that 80% of these loans would be working capital loans and the borrowers would be financed 15% incremental funding, it works out to approximately INR 3 lakh crores.

Only those MSMEs who had a regular repayment history prior to the Covid lockdown would be entitled to this loan. The government is hoping that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.

It should be noted that the guarantee is not being offered by the government directly, but from the Credit Guarantee Trust Fund for Micro and Small enterprises (CGTMSE).

The loan guarantee scheme for MSMEs will not be available to businesses which had repayments overdue by more than 30 days as on February 29, 2020.

For stressed MSMEs and those whose loans have turned bad, a different scheme in the form of INR 20,000 crores subordinated debt scheme has been envisaged.

The interest rate on additional emergency funding has been capped at 1% over a bank’s marginal cost of funds based lending rate (MCLR) and at 14% for NBFCs.

The amount of emergency working capital funding would be equivalent to 15% of the working capital for loans up to INR 1 crore. For loans between INR 1 crore and INR 25 crores, the emergency working capital funding would be equivalent to 10% of the working capital, as per the draft guidelines.

The draft guidelines also state that in case the amount of emergency fund as per above threshold is not able to cover six months of salary outgo (including contractual worker) for people employed by MSME, the working capital fund has to be enhanced to the amount of 6 months of salary outgo. The draft guidelines have also added that lenders must obtain necessary proof to ascertain the salary outgo of the MSME.

This is to ensure that MSMEs don’t lay off any employee due to the lack of funds. In case a borrower has existing limits with more than one lender, the emergency funding limit can be availed with only one lender.

When government guarantees a loan, capital charges become zero, but in case of CGTMSE guarantee, there will be some capital charges. The present guarantee fee applicable for the existing collateral free loans guaranteed by CGTMSE should ideally apply here too.

Presently, a composite all-in Annual Guarantee Fee of 1.0 % of the credit facility sanctioned (0.75% for credit facility up to INR 5 lakhs and 0.85% for above INR 5 lakhs and up to INR 100 lakhs for Woman, Micro Enterprises and units in NER including Sikkim) is now being charged.

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