The World Bank and the Govt of India on Monday signed the $750 million agreement for the MSME Emergency Response Programme to support the increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.
The World Bank’s MSME Emergency Response Programme will address the immediate liquidity and credit needs of some 1.5 million viable MSMEs to help them withstand the impact of the current shock and protect millions of jobs.
The agreement was signed by Sameer Kumar Khare, Additional Secretary, Department of Economic Affairs, Ministry of Finance on behalf of the government and Junaid Ahmad, Country Director India on behalf of the World Bank.
Khare said that the COVID-19 pandemic had severely impacted the MSME sector leading to loss of livelihoods and jobs. The government was focused on ensuring that the flow of abundant financial sector liquidity to non-banking finance companies (NBFCs), and that banks that had turned extremely risk-averse, continued taking exposures in the economy by lending to NBFCs. This project would support the government in providing targeted guarantees to incentivise NBFCs and banks to continue lending to viable MSMEs to help them survive the crisis.
World Bank’s Ahmad said that the MSME sector was central to India’s growth and job creation and would be key to the pace of India’s economic recovery post-COVID-19. The immediate need was to ensure that the liquidity infused into the system by the government was accessed by MSMEs. It was equally important to strengthen the overall financing ecosystem for MSMEs. This operation sought to achieve both these objectives by furthering the role of NBFCs and scheduled commercial banks (SCBs) as effective financial intermediaries and leveraging fintech broadened the reach of finance into the MSME sector.
The World Bank Group, including its private sector arm, the International Finance Corp. (IFC), would support the government’s initiatives to protect the MSME sector through a series of measures like unlocking liquidity, strengthening NBFCs and small finance banks (SFBs) and enabling financial innovations.
Mainstream Fintech and Digital Financial Services in MSME Lending
India’s financial system benefited from early and decisive measures taken by the Reserve Bank and the Central Government to infuse liquidity into the market. Give current uncertainties, lenders remain concerned about borrowers’ ability to repay, resulting in the limited flow of credit even to the viable enterprises in the sector. This programme will support the government’s efforts to channel that liquidity to the MSME sector by de-risking lending from banks and NBFCs to MSMEs through a range of instruments, including credit guarantees.
Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and 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.
Today, only about 8 per cent of MSMEs are served by formal credit channels. The programme will incentivise and mainstream the use of fintech and digital financial services in MSME lending and payments. Digital platforms will play an important role by enabling lenders, suppliers and buyers to reach firms faster and at a lower cost, especially small enterprises that currently may not have access to the formal channels.
The World Bank has to date committed $2.75 billion to support India’s emergency COVID-19 response, including the new MSME project. The first $1 billion emergency support was announced in April this year for immediate support to India’s health sector. Another $1 billion project was approved in May to increase cash transfers and food benefits to the poor and vulnerable, including a more consolidated delivery platform, which is accessible to both rural and urban populations across states.
The $750 million loan from the International Bank for Reconstruction and Development (IBRD), has a maturity of 19 years including a five-year grace period.