[Editorial Analysis] Liquidity lifeline: On Nirmala’s MSME package

Mains Paper 3: Economy
Prelims level: MSME packages
Mains level: Role of MSMEs in economic inclusion


• From an overall perspective, the first tranche of announcements made by Finance Minister Nirmala Sitharaman under the Atmanirbhar Bharat Abhiyan on Wednesday is impressive indeed.

• There are, and will be, many issues in the details but taken as a whole, the measures announced will go a long way in lifting the spirits of the two key and troubled sectors of MSMEs and non-banking finance companies. While for the former it is an existential crisis, for the latter it is one of liquidity.

Allocate ₹3-lakh crore for MSMEs:

• The massive ₹3-lakh crore collateral-free assistance handed out to MSMEs will help them crank up their operations. Ms. Sitharaman has done well in extending a sovereign credit guarantee for the complete amount as banks may otherwise have been reluctant to support troubled borrowers.

• Sovereign Guarantee is a promise by the Government to discharge the liability of a third person in case of his default. The guarantee cover of the Government of India (GoI) is limited only to the payment of principal and normal interest in case of default.

• The government could have specified the interest cap on these loans without leaving it to individual lenders as each of them has its own rate structure. Again, the scheme could have been extended until the end of this financial year instead of until October 31.

• India is now entering the monsoon season when activity is traditionally dull, so it is not clear how many borrowers will get the benefit. The ₹20,000 crores partially guaranteed subordinated debt program and the ₹50,000 crore fund of funds scheme will help boost the equity portion on MSME finances but again, the finer details need to be clear.

• Subordinated debt is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings.

• A Fund of Fund is a mutual fund scheme that invests in other mutual fund schemes. In this, the fund manager holds a portfolio of other mutual funds instead of directly investing in equities or bonds. A given FoF may invest in a scheme of the same fund house or another fund house)

₹30,000 cores scheme for NBFCs:

• NBFCs, housing finance firms, and microfinance entities get a much-required liquidity boost in the form of a ₹30,000 crore scheme wherein their debt paper will be fully guaranteed by the government.

• With this, and the partial credit guarantee scheme of ₹45,000 crores, the government has broken the logjam wherein banks were unwilling to extend credit despite the RBI’s strong push. This should largely attenuate the liquidity crisis in the non-banking space for now.

For power distribution companies:

• The Minister has also done well in addressing the liquidity issues of power distribution companies through a ₹90,000 crore infusion that will be securitized on their receivables and backed by a State government guarantee.
• The announcements are focused on the liquidity part of the crisis. While the headline numbers appear big, the reality is that the government will be called upon to bear the liability only if the economic situation becomes hopeless; it may not come to that.


• What the announcements do is to break the confidence logjam in the credit market and give the assurance to lenders and borrowers that the government is willing to backstop their commitments.

• This is the signal that MSMEs and their lenders needed as liquidity was always there but only for the most creditworthy of borrowers. Here, the government has played its role to perfection.


Prelims Questions:

Q.1) With reference to a report “Impact of energy efficiency measures for the year 2018-19”, consider the following statements:

1. It was published by NITI Aayog.

2. India has already reduced the energy intensity of the economy by 20% compared to 2005 levels.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B

Mains Questions:

Q.1) How liquidity packages announced by the government can boost up the economy?

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