The Government of India is in talks with foreign lenders to provide credit to MSMEs in India, but does this spell good news in the long run too?
The GoI is talking to foreign lenders to provide over $14.5 billion to the 63 million industries that fall in the MSME sector in India.
Who are the foreign lenders currently in talks with the Government?
The GoI is in talks with World Bank, KfW Group, a German development bank and several Canadian institutions.
The talk with KfW group was mostly to discuss the possibility of extending credit lines to small businesses to encourage solar power generation.
Why is the Government of India approaching foreign lenders?
One of the core expectations MSMEs had from the Budget 2019 was to increase credit availability and provide easier loan access to carry out business.
However, it has come to light that the Indian banking sector may not be strong enough to provide a large amount of credit that MSMEs need.
The push for foreign loans comes on the heels of the Indian government’s announcement earlier this month that it plans to borrow about 700 billion rupees ($10bn) by issuing overseas sovereign bonds.
The MSME sector in India is solely responsible for more than a quarter of the country’s manufacturing and services output. Therefore, one of the main goals for the GoI was to equip MSMEs with sufficient funds to accelerate their technological growth.
Challenges Faced by MSMEs with Access to Credit:
India’s GDP has seen a 5-year decline, about 5.8%. This is short of 3% than the 8% goal set by the Government. This was primarily due to:
- Lack of Credit availability for small and medium firms. Small businesses alone account for over 45% of India’s total exports.
- Increase in debt among small businesses that took loans from several private lenders.
Currently, NBFC’s are one of the most popular lenders for small businesses. However, a liquidity crisis has seen big lenders struggle to remain solvent. Small businesses are also paying high rates of Interest (over 17%). NBFC’s tend to charge a higher percentage (almost 20%).
State-owned banks, which dominate the sector, have not been able to drive increased lending because they are burdened with more than $145bn in bad loans.
How will foreign lending help MSMEs:
Just like the $14.5 billion credit from foreign lenders, the MSME Ministry has been working on several external aided projects with the likes of the World Bank for the past year.
Lending to small businesses can be risky due to fluctuations in credit history and an inability to adhere to quick repayment of loans. However, the Government has a plan in place to ensure that any foreign loans coming in.
The loans are estimated to be sovereign guarantees and will be assessed through Indian government agencies such as the Small Industries Development Bank of India before becoming accessible to the MSME sector.