scorecardresearch

Coronavirus lockdown: Why India can't protect small companies the way Germany, Spain, France can

Most coronavirus-hit European countries are taking strong fiscal steps to protect small businesses, is India doing enough

The big stumbling block for offering any government guarantee to lending institutions is the budget constraint. The big stumbling block for offering any government guarantee to lending institutions is the budget constraint.

KEY HIGHLIGHTS

  • RBI extended Rs 3.74 lakh crore liquidity package to banks
  • Economic Task Force needs to unclog liquidity wheels, protect small businesses
  • Banks' current exposure to MSMEs is Rs 15 lakh crore
  • Emergency credit lines offered only to financially strong companies
  • Weaker firms left to fend for themselves

India's fiscal efforts to protect small businesses seem small as compared to some of the coronavirus-hit European countries. The most noticeable move in India has been the Reserve Bank of India (RBI)'s decision to extend a Rs 3.74 lakh crore liquidity package to banks. The liquidity is supposed to be passed down to the industry, but it is not happening at a fast pace.

Globally, coronavirus-hit countries, particularly European nations, have been quick in protecting small businesses. Take for example Spain, which is offering a 80 per cent guarantee on every new loan. Germany, which contained the coronavirus outbreak quite successfully, has gone a step ahead by offering a 90 per cent guarantee to all kinds of loans - from small to large.

Similarly, France, Italy and other countries have also followed a loan percentage guarantee model to help businesses. Beyond Europe, in Australia too, the government is offering a cover of 50 per cent as guarantee on small loans.

Meanwhile, in India, micro, small and medium enterprises (MSMEs) are caught in a bind. The banks, which already face higher delinquencies in the small loan portfolios, are very cautious in increasing their loan exposure.

So, what's being done?

Some public sector banks have opened emergency credit lines for MSMEs, but the outflow is selective to financially strong companies. The Economic Task Force set up by the Prime Minister has to now unclog the liquidity wheels so that funds flow to MSMEs.

There are wide range of suggestions, including offering a fixed percentage of guarantee to banks (say 25 to 80 per cent of the incremental loan), offering a flat fixed incremental loan amount as guarantee, using the existing SIDBI (Small Industries Development Bank of India) mechanism where the government partners with SIDBI to offer loan guarantee on very small loans.

The big stumbling block for offering any government guarantee to lending institutions is the budget constraint. Currently, banks' exposure to MSMEs - including those operating under the priority sector - is around Rs 15 lakh crore. Even a Rs 2 lakh crore guarantee cover means supporting incremental loans by around 12 per cent.

Also read: Coronavirus Impact: FY20 credit growth plunges to 50-year low at 6.1%

The former RBI Governor Raghuram Rajan, whom IMF has roped in as part of coronavirus task force, has suggested government should offer a guarantee covering the first loss in incremental small loans. But he advised that the maximum loan guarantee should be up to the quantum of the income tax paid by the SME in the previous year.

There is another issue on who should get the government guarantee benefits on priority basis. Clearly, the MSMEs serving the sectors offering essential services like FMCG, healthcare, food processing, agri should be given priority.

The MSMEs, which are defaulters in the banks' book and those which have taken the restructuring benefits under the Rs 25 crore aggregate loan scheme should be avoided. MSMEs have been through tough times in the last five years. First there was a disruption from demonetisation and GST, followed by the bankruptcy code, which pushed many large corporates into insolvency.

Since these small firms formed the supply chain of the large companies that went bust, their cash flows and ability to service loans also took a beating. The IL&FS debacle further chocked the credit lines while the slowdown in the economy impacted their revenue streams. Coronavirus lockdown has come  as a last nail in the coffin for this most vulnerable segment, which contributes over 30 per cent to the country's GDP.

Also read: Coronavirus in India: Two MPC members share mantra to contain economic fallout

Also read: Coronavirus EMI scam alert! Protect yourself from online fraudsters