NEW DELHI / MUMBAI (Reuters) – The Indian government has confirmed a proposal to guarantee loans to small businesses by financial institutions as it seeks to revive business when the coronavirus lockdown begins to ease, said a government source and two bank officials.
“Up to 100% of loans to MSMEs (micro, small and medium enterprises) would be supported by the state under the new program so that national credit flows to MSMEs,” said a familiar senior government official. with the plan.
The size of the fund is likely to be a function of immediate needs, and the guarantee could be between 25% and 100%, depending on the size of the company or the risks involved, two bankers said.
None of the officials wanted to be identified because the discussions are still private.
The total loan amount was not immediately clear. The program is expected to be rolled out “soon,” the government official said, without giving further details.
The finance ministry did not immediately respond to an email seeking comment.
The government is considering several measures to revive the economy, with lower economic growth expected due to the coronavirus pandemic and a nationwide lockdown.
Small businesses make up nearly a quarter of India’s $ 2.9 trillion economy and employ more than 500 million workers, according to government estimates. To ensure resumption of growth in the sector, New Delhi has pushed banks to lend more to MSMEs, a government official said.
But banks have made it clear to the government that they are unwilling to lend to small businesses without government guarantees as default fears increase.
Banks had a total exposure of over 4.91 trillion rupees at the end of March, according to central bank data.
Bad debts in the MSME sector are on the rise and accounted for around 12.6% of total loans in December 2019.
“The risk of lending to small businesses is very high because the future is uncertain and therefore we have requested up to 100% collateral on new loans to MSMEs. We believe the additional demand can be up to 10% of the existing loan amount, ”said a senior public sector banker.
Shadow banks have also requested that the loans they receive from banks be guaranteed by the government, according to a letter sent by a shadow banking association to the government and reviewed by Reuters. The letter argues that this will further promote lending to MSMEs.
Reporting by Aftab Ahmed and Nupur Anand; Editing by Alexandra Ulmer and Timothy Heritage