Easy credit for MSMEs may not take off soon due to low demand

Capacity expansion unlikely in sector, will take 6 months for any impact to become visible: experts

The higher credit guarantee for micro, small- and medium-scale enterprises (MSMEs), announced by Prime Minister Narendra Modi on December 31, is unlikely to result in a greater loan offtake or growth in jobs due to lack of demand, according to economists.

Modi doubled the credit guarantee limit for MSMEs to Rs 2 crore. The move is, however, expected to improve liquidity.

"With such low demand, no one is going to engage in capacity addition. It will take around six months for any impact to become visible," said Devendra Pant, chief economist, India Ratings. CRISIL Chief Economist D K Joshi, while terming the move as a 'net positive' for the beleaguered sector, said low credit availability was just one of the challenges before MSMEs.

"In the current scenario, demonetisation has hit the sector hard and this move will offset some of the pain. However, the direction taken by the coming Budget exercise as well as global demand conditions will dictate how fast MSMEs can recover," he said.

The government currently underwrites loans given by banks to small businesses through the Credit Guarantee Fund Trust for Micro and Small Enterprises. Loans of up to Rs 1 crore have been covered under the policy so far. Also, the move did not address the core problem of MSMEs not getting access to bank credit, an industry insider said.

The scheme, which earlier covered loans given by banks, has been extended to those provided by non-banking financial companies (NBFCs) also.

Modi said this measure would give small shop-owners and small enterprises better access to credit, adding that banks and NBFCs 'will not' levy high interest on loans because the government was bearing the cost of underwriting them.

The MSME sector, which is employment-intensive, accounts for 45 per cent of the country's manufacturing, 40 per cent of exports and nearly 8 per cent of gross domestic product.

Recently the government had asked banks to raise the credit limit for small industry from 20 per cent of the turnover to 25 per cent.