Context: The Union Cabinet on Monday approved additional funding of up to ₹3 lakh crore to micro, small and medium enterprises (MSME) as part of the ₹20 lakh crore economic package.
More on the news:
- Under the scheme, 100% guarantee coverage will be provided by National Credit Guarantee Trustee Company Limited (NCGTC) to eligible MSMEs and interested borrowers of the MUDRA scheme.
- It will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
- The tenure of loan under this scheme will be four years with a moratorium period of one year on the principal amount.
- No guarantee fee will be charged by NCGTC.
- Interest rates on loans extended by banks and financial institutions will be capped at 9.25%, and 14% for those extended by non-banking financial companies (NBFCs).
Issues with the Banking Sector
- The banking sector seems to be risk averse as the government is not giving a direct guarantee.
- It is of the view that the current credit guarantee scheme is similar to the CGTMSE [Credit Guarantee Fund Trust for Micro and Small Enterprises] scheme.
- The claims will not be settled unconditionally.
- Since the scheme is not directly guaranteed by the government, banks still have to attach a risk weight of 20% for the loans.
- And, if the claim is not settled, banks have to make provision in line with the period of default.
Other proposals approved by the Cabinet
- The Cabinet also approved a subsidy of almost ₹3,110 crore for distribution of extra foodgrains to about eight crore migrant workers and their families.
- It also approved a new centrally-sponsored scheme to support micro food processing units at an outlay of ₹10,000 crore.
- The scheme will be implemented over a five-year period and will benefit about two lakh self-help groups, farmer producer organisations and other small units through a credit-linked subsidy.
- It also approved the Pradhan Mantri Matsya Sampada Yojana, a scheme announced in the latest Budget, to develop the fisheries sector over a five-year period.
- The Cabinet Committee on Economic Affairs also approved the adoption of a new methodology for the auction of coal and lignite blocks on a revenue-sharing basis.
- The tenure of coking coal linkage was increased to 30 years.
- It will also permit commercial exploitation of coal-bed methane in the mining lease area. Rebates in revenue share payments will be given in the event of an early production of coal from the mine.
- Further rebates will be offered for gasification of coal to encourage environment-friendly actions.
National Credit Guarantee Trustee Company Ltd (NCGTC)
- It is a private limited company incorporated under the Companies Act 1956, established by the Department of Financial Services, Ministry of Finance, as a wholly owned company of the Government of India.
- It acts as a common trustee company for multiple credit guarantee funds.
- Credit guarantee programmes are designed to share the lending risk of the lenders and in turn, facilitate access to finance for the prospective borrowers.
- Presently, there are five dedicated credit guarantee Trusts under the Management of NCGTC viz.
- Credit Guarantee Fund Scheme for Educational Loans (CGFEL)
- Credit Guarantee Fund Scheme for Skill Development (CGFSD)
- Credit Guarantee Fund Scheme for Factoring (CGFF)
- Credit Guarantee Fund for Micro Units (CGFMU) and
- Credit Guarantee Fund for Stand Up India (CGFSI)
Emergency Credit Line Guarantee (ECLG)
- It came in as a specific response to the unprecedented situation caused by COVID-19 and the consequent lockdown, which has severely impacted manufacturing and other activities in the MSME sector.
- The Scheme aims at providing MSMEs with additional funding of up to Rs. 3 lakh crore in the form of a fully guaranteed emergency credit line.
- Provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and Non-Banking Financial Companies.
It will facilitate MSMEs to meet operational liabilities and will also help MSMEs in rebooting their businesses.
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