World Bank grants India $750 mn emergency funding to help small businesses

Some 1.5 million businesses in MSME sector will get liquidity and jobs will be saved as a result, says World Bank.

The World Bank will give $ 750 million as loan to India for strengthening small businesses that form the backbone of the country’s economy and were devastated in the coronavirus pandemic.

The emergency lending will ensure liquidity for some 1.5 million micro, small and medium enterprises (MSME) and protect millions of jobs, said the Bank in a statement, referring to how India’s government small businesses.

The money will help government’s efforts to channel liquidity to MSME through a range of instruments, including credit guarantees, and de-risk lending from banks and Non-Banking Financial Companies (NBFCs).

It would improve the funding capacity of funding channels such as the NBFCs and Small Finance Bank (SFBs) and help them respond to the urgent and varied needs of the MSMEs. This will cover support for government’s refinance facility for NBFCs. The International Finance Corporation is separately providing direct support to SFBs through loans and equity.

Junaid Ahmad, World Bank’s country director for India, said the loan supports the government’s policy framework and it’s not funding a specific expenditure. It would work with government for specific sectors in the next stage.

The Bank has lent $5.13 billion to India in financial year 2020 (FY2020) which ended on June 30, 2020. The disbursals to India have been about $ four billion in Fy20, said Ahmad in conference call with media.

India's financial system benefited from early and decisive measures taken by the Reserve Bank of India and the government to infuse liquidity into the market. Given current uncertainties, lenders remain concerned about borrowers’ ability to repay – resulting in limited flow of credit even to the viable enterprises in the MSME sector.

The coronavirus has devastated the sector, which contributes 30 percent of India’s GDP and 40 percent of exports. The sector, which employs about 150-180 million people, is today burdened with cancelled orders, loss of customers and supply chain disruptions – causing a sharp fall in revenues.

The cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector, it added.