Economic Bailout Package: A Big Boost to the MSME Sector

Economic Bailout Package: A Big Boost to the MSME Sector

Economic Bailout Package A Big Boost to the MSME Sector

A large chunk of MSMEs comprise the auto component sector - MSMEs contribute 6.11 % to the country’s manufacturing GDP 

The country’s ailing and vulnerable Micro, Small and Medium Enterprises (MSME) sector has been severely hit owing to the COVID-19-induced six-week country-wide lockdown. It is important to understand that MSMEs play a significant role in the Indian automotive industry – it contributes 6.11 % to the country’s manufacturing GDP and a large chunk of MSMEs comprise the auto component sector. And Finance Minister Nirmala Sitharaman’s announcement of collateral-free automatic loan for MSMEs of up to Rs 3 lakh crore (to be infused through subordinate debt for stressed MSMEs who have equity problems) for a four-year tenure that is aimed at helping them resume business and safeguard jobs.. The Finance Minister also proposed setting up a corpus fund of Rs 10,000 crore that will help MSMEs increase their size.

The Automotive Component Manufacturers Association (ACMA) has welcomed the government’s bailout package for the MSME sector. Deepak Jain, President, ACMA, said the economic bailout package is indeed heartening and reassuring and will provide much-needed relief to the ailing MSME sector considering the fact that it is one of the stressed sectors owing to the prevailing lockdown. "Change in definition of MSME has been a long-standing recommendation of ACMA and a significant number of our members stand to benefit as the sector is dominated by small enterprises.”

Jain added that the infusion of liquidity through collateral-free automatic loan and subordinate debt scheme will ease the working capital challenges of the MSME sector.

Vinay Piparsania, Director –Automotive, Counterpoint Research, welcomed the move to offer collateral-free loans to the MSME sector. “I think offering collateral-free loans up to Rs 3 lakh crore to the MSME sector will be a big support to meet their working capital needs, especially lower tier vendors of the auto industry. However, it is critical that this loan is made urgently available to support restarting and investment for automated technologies supporting the new normal,” he pointed out.

Piparsania stated that the loan burden on MSMEs is always much higher than the larger enterprisers. “MSMEs often end up paying much higher rate of interest owing to their poor credit rating. However the default rate of most MSMEs is lower or maybe same as larger borrowers. MSMEs are also more labour-intensive employing mid-to-low level skills generating a higher proportion of local employment. Overall the Finance Minister’s bailout package is a positive development with a recognition that it is about managing immediate issues to stay in business,” he noted.

On the OEM front, Naveen Soni, Senior Vice President, Sales & Services, Toyota Kirloskar Motor, lauded the bailout package. "The stimulus package of will definitely boost the morale of the stressed sectors and industries, especially the MSMEs. The reclassification of the MSME sector, based on investment and turnover will open up various enterprises to remain as MSMEs, aiding cash flow with collateral free loans. The government is taking measures to boost the supply side of the economy and we now await their support to boost the demand side where government spending can boost a faster revival of the economy."

Meanwhile, Indian two-wheeler manufacturer TVS Motor Company Ltd welcomed the comprehensive and highly-progressive measures announced by the Finance Minister, injecting much-needed liquidity for NBFCs and MSMEs. Venu Srinivasan, Chairman, TVS Motor Company, said the announcement of Rs 3 lakh crore collateral-free automatic loans is an exemplary move to boost the industry sentiment. It will augment liquidity and help MSMEs revive business during these challenging times, and the large credit guarantee will be a great step to restore the supply chain that was heavily impacted by the shutdown, he added.  “The massive fiscal stimulus will help improve the impacted financial system and the positive business perception will stimulate demand.  These measures will kick-start financial activity and help rebuild the economy during the pandemic.”

Greaves Cotton Limited has also lauded the special economic package announced by the government. "The Finance Minister's host of positive announcements to revive the MSMEs, NBFCs & MFIs sectors is a welcome step. Being the backbone of our economy, providing significant economic relief to the MSMEs and NBFCs will boost the market confidence in the current uncertain and unprecedented time and help in the revival of these job-generating sectors," said Nagesh Basavanhalli, MD & CEO, Greaves Cotton Limited.

One hopes that the latest government move will boost the fortunes of the MSME sector as well as help support the overall economy.