policy-on-credit-rating-for-msme

In order to help investors and other players take an informed decision, the government is in the process of formulating a policy on credit ratings for micro, small and medium enterprises.

  • The government is now using technology and innovations to boost agricultural and tribal sectors through new technologies and innovations.
  • The government is working on backward integration to develop rural industry and create employment.
  • In continuation of backward integration, innovation and skill development in the MSME industry are being carried with the collaboration of the German government.
  • The collaboration with the German government will make Indian products more competitive in the international markets.

Credit Stimulus for MSMEs:

  • Recently, the centre has announced an important credit stimulus package for micro, small, and medium enterprises (MSMEs).
  • In order to encourage faster credit flow, the centre has promised the sanction of business loans of up to Rs. 1 crore within a time frame of 59 minutes.
  • Under the schemes, these companies will also receive an interest subvention of 2%  and support from public sector units.

Objective of Credit Flow:

  • MSME sectors account for 30% of India’s gross domestic product (GDP) that were hit by the twin shock of demonetization and implementation of the GST.
  • And IL&FS crisis which has hardly affected the amount of lending done by non-banking financial companies to the MSME sector.
  • The announced scheme is a tool to improve credit flow and the pace of job creation in the economy.

Concerns:

  • Misallocation of Productive Economic Resources: The biggest risk of a credit stimulus is the misallocation of productive economic resources.
  • Deterioration of the Credit Standards:  Another unintended consequence is the likely deterioration in credit standards as financial institutions are pushed to lend aggressively to MSMEs. 
  • Political Motive: As regard to growth and job creation in the economy, efforts to expedite business loan approvals may be welcome, but rarely end well when motivated by political reasons.

Example of Bad Loan:

  • The government's new scheme is no different from the MUDRA loan scheme, which has been troubled by soaring bad loans. 
  • The former governor had warned that loans extended under the MUDRA scheme could turn out to be the source of the next financial crisis.