Cabinet Clears Rs 70,000-Crore Debt Scheme, Fund Of Funds For Small Businesses: 10 Points

The central government will provide guarantee coverage of up to 85 per cent for loans up to Rs. 5 lakh and 75 per cent for loans beyond Rs 5 lakh to MSMEs to raise funds.

Cabinet Clears Rs 70,000-Crore Debt Scheme, Fund Of Funds For Small Businesses: 10 Points

The provision for sub-debt scheme will be Rs 20,000 crores and is likely to benefit two lakh MSMEs.

The Union Cabinet on Friday cleared a Rs 20,000-crore debt scheme to help stressed micro, small and medium enterprises (MSMEs) raise funds from financial institutions. The Distressed Assets Fund-Subordinate Debt Scheme is likely to benefit two lakh businesses, Minister of Heavy Industries and Public Enterprises Prakash Javadekar said after the Cabinet meeting. It also approved a Fund of Funds worth Rs 50,000 crore for MSMEs, in which the central government will be an anchor investor, to encourage private sector investments in the sector. Both the decisions were part of the government's Atma Nirbhar Bharat package, which was announced by Finance Minister Nirmala Sitharaman last month to support the economy in its fight against the damage caused by the coronavirus pandemic.

Here are 10 things to know about the MSME proposals cleared by the Cabinet on June 1:

  1. Under the debt scheme, the Centre will provide a guarantee coverage of up to 85 per cent for loans up to Rs 5 lakh, and 75 per cent for those above Rs 5 lakh, to enable MSMEs to raise funds from financial institutions.

  2. The scheme will provide a debt facility of up to 15 per cent of promoter contribution or Rs 75 lakh to the promoters, who, in turn, will infuse the amount in the MSME unit as equity.

  3. The subordinate debt scheme balances the risks and rewards between the lender and the customer.

  4. In a situation where an outright loan would be too risky, such a scheme with an inbuilt guarantee will allow the lender to provide requisite financing to the MSME concerned. On the other hand, the scheme opens a window for MSMEs that have either become, or are on the brink of becoming, NPAs and would not be able to avail a loan in the normal course.

  5. The Rs 50,000-crore Fund of Funds will encourage private sector investors - such as venture capitalists and private equity (PE) firms to help eligible high-growth MSMEs meet their capital requirements.

  6. The fund will leverage Rs 50,000 crore for MSMEs with the government as an anchor investor and the actual investment may be even higher, Mr Javadekar said. The move will attract a wide range of investors, including financial institutions, corporate investors, banks, government funds and high net worth individuals to the MSME sector.

  7. As of now, many venture capitalists and PEs firms offer early-stage funding but very few provide growth-stage funding to MSMEs. The proposals cleared by the Cabinet on Monday will enable MSMEs to grow bigger and get listed on stock exchanges.

  8. Last month, the government had announced a slew of measures to rescue MSMEs, including collateral-free, automatic loans. These steps were part of the monetary and fiscal support of Rs 21 lakh crore to support an already-slowing economy, which has been hit by the nationwide lockdown in force since March to curb the spread of coronavirus.

  9. On Monday, the government further tweaked the definition of medium enterprises to ensure that the recent decisions reach a larger number of businesses.

  10. Now, businesses having investments up to Rs 50 crore and a turnover up to Rs 250 crore will be considered medium enterprises, Mr Javadekar said.