India: World Bank Approves $750mn to Aid MSMEs

Jul 2020
India, July, 01 2020 - The $750-million loan from the International Bank for Reconstruction and Development (IBRD) will be used to improve the funding capacity of key market-oriented channels of credit, such as the NBFCs and SFBs to help them respond to the urgent and varied needs of the MSMEs.

The World Bank Wednesday said it has approved $750-million loan to increase flow of finance to micro, small, and medium enterprises (MSMEs) in India, which have been severely impacted by the covid-19 crisis.

This will support the MSME package announced by the government under its ‘Self-reliant India’ programme.

“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 multilateral lending institution said in a statement.

India’s MSME sector, which contributes 30% of India’s GDP and 40% of exports, is currently facing severe stress. The sector, which employs 150-180 million people, is now burdened with cancelled orders, loss of customers and supply chain disruptions, causing a sharp fall in revenues. This cash flow shortage is worsened by constraints to accessing finance, potentially creating solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector.

“The MSME sector is central to India’s growth and job creation, and will be key to the pace of India’s economic recovery post covid-19. The immediate need is to ensure that the liquidity infused into the system by the government is accessed by MSMEs. Equally important is to strengthen the overall financing ecosystem for MSMEs," said Junaid Ahmad, World Bank country director in India.

“This operation seeks to achieve both these objectives by furthering the role of NBFCs and SCBs as effective financial intermediaries and leveraging fintech to broaden the reach of finance into the MSME sector."

The bank has lent $5.13 billion to India—the highest in a decade—in its last financial year ended 30 June, including $2.75 billion to support India’s efforts to meet the covid-19 challenge. The first $1-billion emergency support was announced in April 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—accessible to both rural and urban populations across state boundaries. The $750-million loan for the MSME sector from the International Bank for Reconstruction and Development (IBRD) has a maturity of 19 years, which includes a five-year grace period. The fund will be used to improve the funding capacity of key market-oriented channels of credit, such as the NBFCs and SFBs to help them respond to the urgent and varied needs of the MSMEs. “This will include supporting government’s refinance facility for NBFCs. In parallel, the IFC is also providing direct support to SFBs through loans and equity," the World Bank said.

As part of INR 3 trillion support for the MSME sector, finance minister Nirmala Sitharaman in May announced INR 30,000 crore liquidity support for NBFCs, and microfinance institutions (MFIs) that would indirectly benefit small businesses. Under the scheme, banks will be allowed to invest in investment-grade debt papers issued by NBFCs and MFIs. The World Bank funding could support the government’s effort in this regard.

Source : Livemint

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