In his second historic address to the whole nation (the first one was about demonetization), PM Narendra Modi opens his sack of goodies to not just consumers of the nation but also the business sector of the nation, which help to generate a part of nation’s GDP.

Stressing on the need for development of business sector apart from agrarian sector as well, PM Modi spoke on credit guarantee coverage.


Credit Guarantee of INR 2 Crores MSMEs

PM Modi stated that MSMEs or Micro, Small and Medium Enterprises of India are responsible for not only generating GDP but also for increasing employment in the nation. It is a known fact that majority of India’s working population work in the MSMEs, which are categorized as the unorganized sector of the economy.

The problem however is that many of these MSMEs eventually shutdown because of lack of credit facilities, which is vital for their survival and growth. The major threat comes from Chinese manufacturers who inject low-cost products into Indian market, forcing the Indian companies to shut down, causing mass unemployment problems.

To deal with this problem, PM Narendra Modi announced on this New Year’s Eve that government will increase credit guarantee for MSMEs from the existing INR 1 crore to INR 2 crores. The government will provide the guarantee to banks and NBFCs or Non-Banking Financial Companies through a trust.

The Union Government has explicitly asked the banks to increase the loan amount from INR 1 crore to INR 2 crores so that the MSMEs can expand and proliferate. Talking of NBFCs, the government clarified that all loans which are extended to MSMEs via NBFCs will also be covered under this modified credit guarantee scheme.

Benefits of This Decision

  • Because government will provide the guarantee, the interest on these credits forwarded to MSMEs by banks and NBFCs will be low.
  • Additionally, cash credit limit will be ramped up to 25% from 20%.
  • Additionally, transactions taking place through digital medium will be rewarded with increased working capital loan. The existing limit for working capital loan is 20%. For digital transactions, this loan will be increased to 30%.
  • PM Modi stated that many people of this sector (MSME) have deposited huge amounts of money in November (that is post demonetization) and hence, banks should consider those deposits while determining the working capital for micro, small and medium enterprises.

This interesting declaration from PM Modi is a boon for small businesses in India, who recently enjoyed a tax deduction as well. Just a gentle reminder, only recently, the government declared that those businesses which do a trade of up to 2 crores in a year will now be allowed to estimate their income as 6% of total trade and then pay taxes, as opposed to previously estimated 8% income of total yearly turnover. Tax relief along with increased credit limit will help the MSMEs to boom in India, thereby strengthening the manufacturing market of India. This will help India to effectively deal with Chinese competition, which is gradually killing Indian economy.

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