MSMEs get special attention in budget
The MSME sector is the largest employer after agriculture in India and has 35% share in India’s manufacturing output.
Finance minister Nirmala Sitharaman announced a revival package for the MSME sector that will include enhanced Mudra loans of up to ₹20 lakh, a collateral-free credit guarantee scheme to help purchase machinery and equipment, and a new assessment model to help unlisted enterprises access bank credit, among other measures.
Sitharaman announced that the turnover threshold of buyers for mandatory onboarding on the TReDS platform will be reduced from ₹500 crore to ₹250 crore to help MSMEs finance trade receivables. She declared a new mechanism for facilitating continuation of bank credit to MSMEs during stress.
“Turning attention to the full year and beyond, in this budget, we particularly focus on employment, skilling, MSMEs, and the middle class,” the finance minister announced, resetting the political priorities after the Lok Sabha elections, in which the BJP’s tally shrank from 303 in 2019 to 240.
The MSME sector is the largest employer after agriculture in India and has 35% share in India’s manufacturing output.
Sitharaman announced that the Union Budget provides “special attention to MSMEs and manufacturing” and said, “We have formulated a package covering financing, regulatory changes and technology support for MSMEs to help them grow and also compete globally.”
“For facilitating term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee, a credit guarantee scheme will be introduced. The scheme will operate on pooling of credit risks of such MSMEs. A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to ₹100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance,” she said.
On the new mechanism to help MSMEs get credit during stress, she said, “I am happy to announce a new mechanism for facilitating continuation of bank credit to MSMEs during their stress period. While being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and to avoid getting into the NPA stage. Credit availability will be supported through a guarantee from a government-promoted fund.”
The budget provided for a 100% hike in Mudra loans, one of the popular avenues to get collateral-free credit for small entrepreneurs.
“The limit of Mudra loans will be enhanced to ₹20 lakh from the current ₹10 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category,” Sitharaman announced. In FY23-24, the government had disbursed ₹5.32 lakh crore under Mudra loans, including ₹1.27 lakh crore under the Tarun category, according to official data.
A new credit assessment model has also been envisaged in the budget. That aims to remove one of the key stumbling blocks for the sector. “Public sector banks will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment,” the finance minister announced, “They will also take a lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy. This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system.”
She also announced more SIDBI branches in MSME clusters to serve all major clusters within 3 years, and provide direct credit to them. “With the opening of 24 such branches this year, the service coverage will expand to 168 out of 242 major clusters,” Sitharaman added.
The budget also earmarked financial support for setting up of 50 multi-product food irradiation units in the MSME sector and the government will facilitate setting up of 100 food quality and safety testing labs with NABL accreditation.
In another step to help MSMEs find new markets, Sitharaman announced, “To enable MSMEs and traditional artisans sell their products in international markets, E-Commerce Export Hubs will be set up in public-private-partnership (PPP) mode. These hubs, under a seamless regulatory and logistical framework, will facilitate trade and export-related services under one roof.”
Tamal Sarkar, senior adviser to the Foundation for MSME Clusters, said, “This budget has given a lot of weightage in terms of developmental issues like a technology upgrade fund, investment-grade energy audit, special promotion of food processing clusters and the overall promotion of MSMEs through clusters by a very knowledgeable organisation in this respect, SIDBI, which had several decades of experience in cluster-based promotion of MSMEs.”
He added that “the new credit assessment tool that will give high weightage to digital footprint may take into account carbon footprint too and give special support to carbon-neutral and carbon-negative investment.”
