India's government has firmed up a proposal to guarantee loans given to small businesses by financial institutions, as it seeks to kick-start business when the coronavirus lockdown starts to ease, a government source and two bank officials said.
"Up to 100% of loans given to MSMEs (micro, small and medium enterprises) would be sovereign-backed under the new scheme so that national credit pours into MSMEs," said a top government official familiar with the plan. The size of the fund is likely to be based on immediate needs, and the guarantee could be between 25% and 100%, depending on the size of the company or the risks undertaken, said two bankers. None of the officials wanted to be identified as the discussions are still private.
It was not immediately clear what the total of the loans could be. The scheme is set to be rolled out "soon," the government official said, without giving more details. The Finance ministry did not immediately respond to an email seeking comment. The government is weighing several measures to kick-start the economy, with a drop in economic growth expected because of the coronavirus pandemic and a nationwide lockdown.
Small businesses account for nearly a quarter of India's $2.9 trillion economy and employ more than 500 million workers, according to government estimates. To ensure growth resumes in the sector, New Delhi has been nudging banks to lend more to the MSMEs, a government official said.
But banks have made clear to the government that they are unwilling to lend to small businesses without a government guarantee, as fears of defaults increase. Banks had a total exposure of over 4.91 trillion rupees as of the end of March, according to central bank data. Bad loans in the MSME sector have been on an upswing and accounted for around 12.6% of total loans as of December 2019.
"The risk of lending to small businesses is very high because the future is uncertain and so we have asked for up to a 100% guarantee on new loans to MSMEs. We believe that incremental demand can be up to 10% of the existing loan amount," said a senior public sector banker. Shadow banks have also asked that the loans they receive from banks be guaranteed by the government, according to a letter sent by an association of shadow banks to the government and reviewed by Reuters. The letter argues that will further foment loans to MSMEs.