On May 12, 2020, India’s Prime Minister, Shri Narendra Modi, announced a special economic package for MSMEs to help them overcome the COVID-19 problem. The Prime Minister announced a package worth 20 lakh crores or 10% of India’s GDP also known as the MSME Relief package.
This package was presented to help the country achieve ‘Atmanirbhar Bharat’. It is concerned with land, labour, liquidity and legislation and is offered to many groups, including cottage industry, MSMEs, labourers, the middle class and industries, among others. Smt. Nirmala Sitharaman, Finance Minister, released the details of the special economic package on May 13, 2020. In this blog, the specifics of the MSME Relief package are explained in detail.
Revised Criteria for Classification of MSMEs
The classification criteria for Micro, Small and Medium Enterprises (MSMEs) have undergone revision by the government. Effective from 1st July 2020, this new definition brings about significant changes in the classification of enterprises. The redefined criteria expand the scope of inclusion, benefiting more enterprises. Unlike the previous classification, which varied between manufacturing and services, the new definition provides uniform limits for both sectors. Consequently, a larger number of enterprises can now access loans and schemes personalised for MSMEs.
New Definition
The revised criteria for classification in both the manufacturing and services sectors are as follows:
| Criteria for Manufacturing and Services Sector | Micro | Small | Medium |
| Investment in Plant and Machinery or Equipment | Not more than 1 Crore | Not more than 10 Crore | Not more than 50 Crore |
| Annual Turnover | Not more than 5 Crore | Not more than 50 Crore | Not more than 250 Crore |
This updated classification system provides a more inclusive framework, ensuring that a wider spectrum of businesses can benefit from the privileges and support extended to MSMEs.
Impact and Implications of the Revised Criteria
The unified limits for investment and turnover across manufacturing and services sectors simplify the classification process and rationalise access to benefits. This revamped definition aligns with the government’s commitment to encouraging economic growth, encouraging entrepreneurship and enhancing the contribution of MSMEs to the nation’s development.
MSME Relief Package – Credit Guarantee Scheme for Subordinate Debt (CGSSD)
The ‘Distressed Assets Fund – Subordinate Debt for Stressed MSMEs’ introduces the ‘Credit Guarantee Scheme for Subordinate Debt (CGSSD).’ This initiative allocates Rs.20,000 crore in subordinated debt for two lakh stressed or NPA MSMEs. Aimed at revitalising struggling MSMEs, banks extend subordinate-debt to promoters’ equivalent to 15% of their existing stake, with a maximum limit of Rs.75 lakhs.
Guarantee Coverage and Objective
The CGSSD ensures 90% guarantee coverage, with the remaining 10% borne by promoters. The scheme’s objective is to offer personal loans to distressed MSME promoters through banks, channelling funds as equity/quasi-equity for restructuring eligible businesses.
Assistance Details
- Promoters receive credit equal to 15% of their stake (combining equity and debt), up to a maximum of Rs.75 lakh.
- Interest rates on the credit are capped.
- Repayment tenure spans up to 10 years.
- A maximum principal payment moratorium of 7 years is provided.
Eligibility Criteria
- Applicable to MSMEs that maintained standard accounts on 31.03.2018 and sustained regular operations during the financial years 2018-19 and 2019-20, either as standard accounts or NPA accounts.
- Promoters of MSME units are eligible for personal loans.
- The scheme covers stressed MSME units, including those categorised as SMA-2 (Special Mention Accounts-2).
- Also applicable to NPA accounts as of 30.04.2020 that qualify for restructuring according to RBI guidelines held by lending institutions.
MSME Relief Package – Three Lakh Crore Loans to MSMEs
The MSME sector bore the impact of the COVID-19 pandemic, incurring significant losses. To encourage their recovery by addressing operational liabilities, raw material acquisition and business restart, the government introduced a three lakh crore loan as MSME relief package. Notably, this relief offers an extraordinary opportunity for MSMEs, requiring no personal guarantee or collateral. Administered by the Department of Financial Services, this initiative aims to revitalise the sector and boost economic recovery.
Key Features of MSME Relief Package – Three Lakh Crore Loans to MSMEs
The scheme includes several notable features, with the government extending 100% credit guarantee coverage on principal to banks and NBFCs. This guarantee comes free of any fees and the requirement for fresh collateral is waived. MSMEs can benefit from this scheme until 31st October 2020, encouraging an environment conducive to revival and stability.
Assistance Details
- MSMEs can avail of additional working capital finance, equivalent to 20% of their outstanding credit as of 29.02.2020, in the form of a term loan.
- Concessional interest rates apply.
- Loans extend over a four-year tenure.
- A 12-month moratorium on principal repayment is provided.
- Interest rates are capped to ensure affordability.
Eligibility Criteria
- All businesses and MSMEs qualify for this scheme.
- Units with up to Rs.25 crore outstanding and a turnover of up to Rs.100 crore are eligible, provided their accounts maintain standard status.
- MSMEs can apply through Banks, the Department of Financial Services (DFS) and the National Credit Guarantee Trustee Company Ltd (NCGTC).
Impact and Anticipated Benefits
This initiative potentially benefited approximately 45 lakh units, giving a boost to the sector and safeguarding employment opportunities. By providing significant financial support and simplifying access, the scheme revitalises business activities and fuels the much-needed recovery of the MSME sector.
MSME Relief Package- Equity Infusion for MSMEs Through Fund of Funds
When the MSMEs were grappling with a significant challenge – the shortage of equity, in response, the innovative ‘Equity Infusion for MSMEs Through Fund of Funds’ scheme offers a lifeline. Designed to empower MSMEs with growth potential and viability, this scheme aims to boost equity funding in the sector, mobilising around Rs.50,000 crore. By collaborating with Venture Capitals (VCs) and Private Equity (PE) firms, this scheme bridges the gap between early-stage funding and the growth stage, encouraging a conducive environment for government-backed intervention.
Objectives and Mechanism
The primary objective of this scheme is twofold:
promoting MSME growth and encouraging their listing on stock exchanges.
To achieve this, the government is establishing a ‘Fund of Funds’ with a corpus of Rs.10,000 crore. This financial mechanism operates through a coordinated network of Mother and Daughter funds. This arrangement has been projected to use Rs.50,000 crore with a multiplier effect of 1:4 at the level of Daughter funds.
Fund Structure and Partnership
The architecture of the scheme includes a Mother Fund, with the Government of India as the Anchor Investor. The Mother Fund extends investments to Daughter funds, which, in turn, channel these investments into carefully selected MSMEs. This collaborative approach solidifies a partnership between the government, MSMEs and financial entities, propelling the growth of MSMEs and positioning them for listing on stock exchanges.
Assistance and Benefits
- Growth Funding through Equity Financing: The scheme facilitates investment by VCs and PE firms into commercially viable MSMEs, addressing their growth needs. Using the proposed fund of funds, private sector investments have flourished, potentially exceeding Rs.50,000 crore.
- Private Funding: Employing seasoned fund managers with strategic oversight, the scheme taps into private funding leveraging mechanisms. This extends to diverse investors, ranging from financial institutions and banks to corporate investors and High-Net-Worth individuals, strengthening investments in MSMEs.
Eligibility and Application
All MSMEs qualify for participation, with the avenue of application accessible through Investor Funds onboarded and registered with the proposed Fund of Funds.
MSME Relief Package- No Global Tenders for Procurement Up to Rs.200 Crore
In a strategic move to strengthen Indian enterprises, the government announced a key decision: the amendment of General Financial Rules (GFR) to exclude global tenders for procurement valued at less than Rs.200 crore. This reform aimed to level the playing field, protecting Indian Micro, Small and Medium Enterprises (MSMEs) and other domestic firms from uneven competition by foreign counterparts.
Objective and Implementation
The primary objective of this reform is to empower Indian MSMEs and companies by curbing unfair competition from international entities. The disallowance of global tenders for government procurement valued at up to Rs.200 crore provides much-needed support to domestic businesses.
Amendment Details
- The amendment to General Financial Rules signifies an important shift. While global tenders up to Rs.50 lakh previously were not floated, this revision extends the threshold to Rs.200 crore.
- Under special circumstances, global tenders exceeding Rs.200 crore can still be considered with the explicit approval of the Finance Ministry’s expenditure department.
Impact on MSMEs and Domestic Enterprises
This amendment is a significant boon to the MSME sector, particularly in terms of securing government procurement contracts. By reserving global tenders up to Rs.200 crore for MSMEs, this policy helps in a dynamic ecosystem that fuels domestic growth. The move not only presents increased opportunities for domestic MSMEs but also reduces the competitive pressure exerted by foreign companies.
Final Thoughts
In response to the challenges posed by the COVID-19 pandemic, India’s comprehensive MSME relief package introduces a transformative era for the sector. The revised classification system, Credit Guarantee Scheme for Subordinate Debt, three-lakh-crore loans, Equity Infusion through Fund of Funds and the exclusion of global tenders up to Rs.200 crore collectively emphasise the government’s commitment to encouraging growth, resilience and self-sufficiency. These measures empower MSMEs, encourage innovation and support the nation’s economic growth.
As India finds its way through uncertain times, these initiatives stand as pillars of support, cultivating a vibrant landscape for Micro, Small and Medium Enterprises to thrive and lead the way to a resilient future.
For more clarity on MSME Relief Package, connect with our experts at StartupFino.
