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29 May
  • JLPN Marketing Services Pvt. Ltd (Content Curator)
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The MSMEs forms the backbone of the Indian economy, contributing significantly to the GDP and being the second largest job provider after agriculture. It is also one of the sectors that has been badly affected by the Covid-19 crisis, causing severe disruptions in cash flow and working capital, among others. To help salvage the situation, the government stepped into announce Rs 20-crore financial bailout package.
But what actually is this package all about and how does it help the MSMEs? That is what this blog explores.

The 8 Main Elements of the Bailout Package for MSMEs and how they can help
The focus of the financial bailout package has been to provide liquidity support to MSMEs by arranging seed money for working capital to the cash strapped MSMEs. Following are a few important elements defining this bailout package:
 
  • Collateral free loans
To increase liquidity in the market and help MSMEs get additional funding in order to restart operations, buy raw material, and meet liabilities, the government has announced Rs 3 lakh crore automatic collateral – free loans for businesses. This will help the MSMEs, who already had a loan (upto Rs 25 crore) or a turnover of less than Rs 100 crore, get another loan without pledging more collateral. With the government standing as a guarantor, the financial institutions will now not hesitate to give loans to the MSMEs – something they would never do in the current situation.
 
  • Redefining MSMEs
In a move that was long pending and much needed to boost the Indian economy, the government changed the classification of MSMEs – tying it to turnover rather than investment. Previously, MSMEs were classified based on the investments they made. The problem was that most businesses did not want to make larger investments and grow big since that would mean losing the benefits (like cheaper loans, not-to-strict compliances, tax advantages) that came from being classified as an MSME. In short, the process that was set up to help MSMEs was now stifling their growth. In order to set this correct, the government has changed the classification criteria. A business would now be classified as a micro, small or medium based on its turnover. The investment limit has also been expanded to encourage businesses to invest more and grow without worrying about losing incentives.
Also, the same investment and turnover criteria (meant for manufacturing units to be listed as MSME)will apply to the service sector.
 
  • Infuse equity through Fund of Funds
To solve the severe shortage of equity that the MSMEs are facing, the government has put together a mother fund of Rs. 10,000 crores, which is divided into smaller daughter funds with hopes of getting additional venture capital funds to increase the corpus. This corpus is Fund of Funds, which shall be used to help promoters infuse equity capital in their businesses. So if you are a promoter, you can avail funds from this Fund of Funds and inject cash in your business through equity capital. This will help increase the size and the capacity of the MSME.
 
  • Provision of subordinate debt for stressed MSMEs
There have been MSMEs that have been declared NPAs by financial institutions but still have a viable business. Subordinate debt will be provided with partial government backing, amounting to a total of Rs. 20,000 crores to such MSMEs. Even if you have had loan repayment problems in the past, you can contact your lending financial institution to get additional loans and use the same to restart your business.
 
  • 12-month Principal payment moratorium
The first instalment of the principal payment will be after a year. The loans can be availed till 31 October and the tenure for the same would be 4 years. Since it may take a while to increase sales revenues, this moratorium will help you to conduct business without worrying about EMIs for a year.
 
  • Aatmanirbhar Bharat: Protection from Foreign firms
To ensure that the MSMEs do not face unfair competition from foreign firms, no foreign tenders will be allowed for government procurement tenders up to Rs 200 crores. Without foreign competition, MSMEs (even those without technology prowess, funds or manpower strength) will be able to compete fairly, win more business and become more self-reliant.
 
  • Clearing of MSME dues
The government will settle all dues that it owes to MSME vendors within a period of 45 days to help in improving the liquidity situation.
 
  • E-market linkage
With trade fairs, exhibitions and market places expected to remain closed for quite some time now, the government hopes to adapt to this new environment by providing e-market linkages to the MSMEs in order to facilitate them to do business and revive the economy. This way, MSMEs can connect to these e-markets and grow their businesses digitally. This will also prompt businesses to find alternate ways in which they can receive online orders and conduct business on the internet by modifying supply chains to favour the circumstances. This move is also aimed at preparing businesses for the future where social distancing is likely to play a prominent role.
 
Implications for start-ups
The Coronavirus stimulus package has no separate relief measures for start-ups. If you are a start-up, you need to register under Udyog Aadhar portal as an MSME and avail the easy loan and other benefits.
 
What can we conclude
This financial bailout package (amounting to around 5 – 6 % of the GDP) might have fallen short of giving immediate relief (like cash remittances in form of waiver of rent or electricity bills or assistance in paying wages to workers), but it does delivery on the goal of providing MSMEs a recuperating ground to stay afloat. With access to the much-needed working capital, businesses will be able to procure raw materials, pay wages to workers, provide for the fixed capital, and overall stay afloat. The only thing to remember here is that caution should be used while taking these loans, since over-leveraging in this situation can lead to more debt and worsen the situation.
 

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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