World Bank approves $500 mn program to help boost India's MSME sector

The loan has a maturity of 18.5 years including a 5.5-year grace period.

The World Bank's Board of Executive Directors has approved a USD 500 million program to support India's nationwide initiative to revitalise the MSME sector, which has been heavily impacted by the COVID-19 crisis.

According to a statement released last Friday, the program targets improvements in the performance of 555,000 MSMEs and is expected to mobilise financing of USD 15.5 billion, as part of the government's USD 3.4 billion MSME Competitiveness - A Post-COVID Resilience and Recovery Programme (MCRRP).

The USD 500 million Raising and Accelerating Micro, Small and Medium Enterprise (MSME) Performance (RAMP) Program is the World Bank's second intervention in this sector, the first being the USD 750 million MSME Emergency Response Program, approved in July 2020 to address the immediate liquidity and credit needs of millions of viable MSMEs severely impacted by the ongoing COVID-19 pandemic.

"To date, 5 million firms have accessed finance from the government program. With the program approved today, the World Bank's financing towards improving the productivity and financial viability of the MSME sector amounts to USD 1.25 billion over the past year," the statement said.

"Having supported the immediate liquidity and credit needs of viable MSMEs in the first phase, the RAMP Program will support the Government of India's efforts to increase MSME productivity and financing in the economic recovery phase, crowd in private sector financing in the medium term, and tackle long-standing financial sector issues that are holding back the growth of the MSME sector," it added.

According to the release, the MSME sector is the backbone of the country's economy, contributing 30 percent of India's GDP and 40 percent of exports. Out of some 58 million MSMEs in India, more than 40 percent lack access to formal sources of finance.

"The MSME sector, a critical backbone of India's economy, has been hard hit by the Covid-19 pandemic," said Junaid Ahmad, World Bank Country Director in India. "The RAMP program will intensify efforts to support firms to return to pre-crisis production and employment levels, while laying the foundations for longer-term productivity-driven growth and generation of much-needed jobs in the MSME sector."

The RAMP program will provide better access to finance and working capital for MSMEs by strengthening the receivable financing markets; and scale up online dispute resolution mechanisms to address the problem of delayed payments. Such efforts are expected to improve the cost-effectiveness, quality, accessibility, impact, and outreach of such schemes.

"The MSME sector in India faces several challenges. There is need to strengthen access to formal sources of financial and non-financial services, including of women headed MSMEs, and strengthen coordination in the national and state MSME support programs. Given the magnitude and geographical spread across the country, direct interventions can be prohibitively costly," said Peter Mousley, Lead Private Sector Specialist and World Bank's Task Team Leader for the program.

"The RAMP program will support the Government's MCRRP objective of providing a more comprehensive and coordinated Centre-State approach to improve MSME sector productivity, reduce the gender gap, and promote more environmentally sustainable investments."

The USD 500 million loan from the International Bank for Reconstruction and Development (IBRD), has a maturity of 18.5 years including a 5.5-year grace period.