Credit guarantee scheme, hike in Mudra loan give fresh hope to MSMEs

The government has increased the limit of Mudra loans from Rs 10 lakh to Rs 20 lakh in the Union Budget 2024-25 and introduced a new assessment model for MSME credit, Finance Minister Nirmala Sitharaman said on Tuesday (July 23).

Such loans are provided by Micro Units Development and Refinance Agency (Mudra) Banks at low rates to micro-finance institutions and non-banking financial institutions (NBFCs) that provide credit to MSMEs (micro, small and medium enterprises).

Credit guarantee scheme

“A credit guarantee scheme will be introduced to facilitate term loans to MSMEs for the purchase of machinery and equipment without collateral or third-party guarantee, and the scheme will operate on pooling of credit risks of MSMEs,” Sitharaman said in her Budget speech.

“A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to Rs 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 added.

Industry demand

Noticeably, the creation of a new category of NBFCs dedicated to priority sector lending (PSL) to support the growth of MSMEs was among the key demands by business leaders ahead of the presentation of the Union Budget 2024-25.

“We have requested the government to consider the challenges faced by NBFCs that cater to MSMEs. We have called for the establishment of NBFC-PSL, which would focus at least 85 per cent of their assets under management (AUM) on the priority sector. Creating an NBFC-PSL category will foster a more inclusive and resilient financial ecosystem for MSMEs,” Shachindra Nath, Founder & MD of UGRO Capital Ltd, had earlier said in statement to the media.

“Loans from banks to NBFCs for onward lending to MSMEs should be classified as PSL loans, with current caps removed,” Nath had asserted.

Boost in exports

The government also said the share of exports of MSME-specified products in all-India exports recovered in the financial year 2023-24 after three years of decline.

Sharing the figures from the Data Dissemination Portal of the Directorate General of Commercial Intelligence and Statistics (DGCIS), Shobha Karandlaje, Minister of State (MoS) in the MSME Department, said in a written reply to a question that the percentage of exports of MSME-related products in all-India exports stood at 45.73 per cent in FY24.

MSME sector in bad shape

Government data suggests that till February 2024, 52,024 MSMEs shut down since it launched the Udyam registration portal in July 2020. Of the total closures, 13,290 units shut down in the financial year 2022-23, while 6,222 shut down in 2021-22, and 175 in 2020-21. In the current financial year, till February 5, 15,993 MSMEs have closed their businesses.

According to the data, 8,967 MSMEs shut down in Maharashtra, followed by 4,606 in Tamil Nadu, 3,243 in Gujarat, 2,925 in Uttar Pradesh, and 2,723 in Rajasthan.

Gujarat hit hard

Of the primary factors that have impacted MSMEs is the advent of cheap goods from China. Gujarat, which accounts for 80 per cent of the country’s MSMEs, has been impacted the most.

About 35 per cent of the stainless steel MSMEs in Gujarat shut shop in the second quarter of the financial year 2023-24 due to the influx of cheap Chinese products in the market.

“Indian stainless-steel companies are bearing the brunt of the heavy influx of cheaper Chinese imports. It caused almost 30-35 percent of medium and small businesses in Gujarat to shut down between July and September last year,” Rajamani Krishnamurti, the President of Indian Stainless Steel Development Association (ISSDA), told The Federal.

Decision that hurt steel units

Notably, in 2023, the industry representatives had filed a petition urging the government to impose countervailing duty (CVD) on Chinese stainless-steel products. Steel imports were subject to duty until the 2021 Union Budget when the government decided to remove it.

“Since the government’s decision to roll back the CVD in 2021, most MSMEs have been operating on a smaller scale. Some even had to become traders. It is not only the steel MSMEs that have been impacted; other MSMEs are also scaled down their operations,” added Krishnamurti.

The data from Udyam portal also reveals that 63,248 people working in the MSME sector lost their jobs between July 1, 2020 and July 20, 2022. As many as 19,862 jobs were lost in the MSME sector in FY2021, 42,662 in FY2022, and 724 till July in FY23.