GoI, World Bank sign US$750mn loan deal for MSMEs

The World Bank and the Government of India on July 6 signed a US$750-million loan agreement for the MSME Emergency Response Programme to support the increased flow of finance into the nation’s micro, small, and medium enterprises (MSMEs) severely impacted by the COVID-19 crisis

July 7, 2020

Indian MSMEs have steadily expanded their expertise, capacity, and global market, and at end-2019 contributed 29.7% of the national GDP and 49.66% of national exports

A major disruption in economic activities globally brought up by the pandemic created serious challenges for the survival of many among India’s over 60 million MSMEs

The MSME Emergency Response Programme will address the urgent liquidity and credit needs of around 1.5 million viable MSMEs to help them withstand the shock from COVID-19

India’s MSMEs, a leading force of economic growth and employment creation, have received critical policy, regulatory and financial support from the Central Government

GoI, World Bank sign US$750mn loan deal for MSMEs

The World Bank and the Government of India on July 6 signed a US$750-million loan agreement for the MSME Emergency Response Programme to support the increased flow of finance into the nation’s micro, small, and medium enterprises (MSMEs) severely impacted by the COVID-19 crisis. Indian MSMEs have steadily expanded their expertise, capacity, and market, and at end-2019 contributed 29.7 per cent of the national GDP and 49.66 per cent of total national exports. However, a major disruption in economic activities brought up by the pandemic created serious challenges for the survival of many among India’s over 60 million MSMEs. The MSME Emergency Response Programme will address the urgent liquidity and credit needs of around 1.5 million viable MSMEs to help them withstand the impact of the current shock and protect millions of jobs. This is the first step among a broader set of reforms that are needed to propel the MSME sector over time.

India’s MSMEs, a leading force of economic growth and employment creation, have received critical policy, regulatory and financial support from the Central Government as part of a stimulus programme that is expected to strengthen grassroots businesses. The Rs.21 trillion (US$280 billion) programme aims to build an Aatmanirbhar Bharat (self-reliant India) by bolstering the economy and driving socio-economic development following the challenges of the COVID-19 pandemic. The World Bank Group, including its private sector arm – the International Finance Corporation (IFC), will support the Indian Government’s initiatives to protect the MSME sector by:

Unlocking liquidity

Given current uncertainties, lenders remain concerned about borrowers’ ability to repay – resulting in a limited flow of credit even to the viable enterprises in the sector. This program will support efforts to channel that liquidity to the MSME sector by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs through a range of instruments, including credit guarantees.

Strengthening NBFCs and SFBs

Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs. This will include supporting the Government’s refinance facility for NBFCs. In parallel, the IFC is also providing direct support to SFBs through loans and equity.

Enabling financial innovations

Currently, only about 8 per cent of MSMEs are served by formal credit channels. The programme will incentivize and mainstream the use of fintech and digital financial services in MSME lending, payments. Digital platforms will play a key role by enabling lenders, suppliers, and buyers to reach firms faster at a lower cost, especially small enterprises that currently may not have access to the formal channels.

The MSME sector will be key to India’s economic recovery post-COVID-19. To that end, there is an immediate need to ensure that the liquidity infused into the system by the Government is accessed by MSMEs. Equally important is to strengthen the overall financing ecosystem for MSMEs. The MSME Emergency Response Programme will seek to achieve both these targets. Including this new MSME project, the World Bank has to date committed US$2.75 billion to support India’s COVID-19 response.