As businesses come to a halt due to the nationwide lockdown, banks and industries have sought government guarantees on loans. Smaller businesses, with limited cash-flow, have been the worst hit and, unlike their bigger peers, are unable to manage the disruption. Lenders, through their lobby body Indian Banks’ Association (IBA), have suggested that the government guarantee all incremental loans to small businesses. According to estimates by bankers, the sector needs incremental loans of at least ₹50,000 crore, and a guarantee by the government will allow risk-averse banks to start lending.
The Reserve Bank of India’s data shows total bank loans to small businesses stood at ₹4.78 trillion for the fortnight ended 28 February. Despite the MSME sector contributing 30.3% to India’s gross domestic product (GDP) in FY19, flow of credit to small businesses has been sluggish for a while now. Loans to micro and small industries declined 1.1% between March 2019 and February.
Banks have suggested that these loans could be disbursed through a portal like the psbloansin59minutes.com, which generates immediate in-principle approval for borrowers. The portal uses algorithms to analyse data from the goods and services tax (GST) database, income tax (IT) returns and bank statements to decide on eligibility. Once the proposal to backstop loans is accepted by the government, banks will open their purse strings to lend to the sector and then apply for the guarantee cover. At present, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme guarantees 50-85% of loans up to ₹2 crore.
However, since banks are in favour of an online portal that uses GST data to process loan requests, a chunk of India’s small businesses will be left out. According to Chandrakant Salunkhe, founder and president, SME Chamber of India, there are more than 60 million small businesses in India, of which only 910,000 are registered on Udyog Aadhaar, a government portal allowing Aadhaar-based registration of MSMEs.
Salunkhe said more than 70% of India’s small businesses do not have access to bank credit at the moment and, even if the government guarantees incremental loans, these entities will be left out by the virtue of operating in the informal sector. “Loans through the online portal will only help the registered MSME with GST records,” he said.
While lenders in India seek government backing for loans to small businesses, countries, such as the US, have already implemented a similar scheme. The US has announced $359 billion in forgivable small business administration loans and guarantees to help small businesses that retain workers as part of its $2 trillion covid-19 package. In the UK, there is talk of offering 100% government-guaranteed loans to small businesses to ensure these companies do not go into bankruptcy, The Guardian reported on 19 April.
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