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The Prime Minister, Mr. Modi, in his speech on 12 May 2020, announced that India’s relief package shall be 20 Lakh Crore (that’s 2 followed by 13 zeroes), or approximately 10% of India’s GDP.  The details of the relief package would be announced by the Finance Minister who over the week would explain each sector’s share

The Finance Minister on 13 May 2020 made the first announcement. The cornerstone of the package announced was relief to MSMEs.

Let’s see what the fine print has in store.

MSME Automatic Loans

The first, and most discussed, announcement concerns ‘automatic loans’. Here is the verbatim breakdown of the press release

  • To provide relief to the business, additional working capital finance of 20% of the outstanding credit as on 29 February 2020, in the form of a Term Loan at a concessional rate of interest will be provided.
  • This will be available to units with upto Rs 25 crore outstanding and turnover of up to Rs 100 crore whose accounts are standard. 
  •  The units will not have to provide any guarantee or collateral of their own.
  • The amount will be 100% guaranteed by the Government of India providing a total liquidity of Rs. 3.0 lakh crores to more than 45 lakh MSMEs. 

The language used does raise many questions. There is no doubt that the relief could have been presented in much simpler terms. But here is our interpretation of the relief offered

  • Though the FM’s presentation starts with the heading “loans for Businesses, including MSMEs”, the press release states that 3 lakh crore will be available to more than 45 lakh MSMEs. Thus, only MSMEs might qualify for the loan, not other businesses in general. (Clarification awaited)
  • The maximum loan extended would be 20% of loan balance as on 29-Feb. Thus, two questions arise
    • Is the benefit is only for those who have already borrowed capital, i.e. debt free MSMEs might not get any relief?  Is that the indication by the use of the words “standard account” in the second bullet
    • If the SME has closed loans before this date, would they be eligible as the balance on 29-Feb is 0?
  • MSMEs should satisfy both conditions, i.e.
    • borrowing based, less than Rs. 25 Cr outstanding loan, and 
    • turnover of less than Rs. 100 Crore.
  • The loan is collateral free and automatic. Thus, the paperwork involved should be minimum. It appears as a top up loan on credits already availed by MSMEs.
  • The loan would be in the form of a Term Loan, with
    • repayment starting from month 13, and
    • concessional rate of interest – it needs to be seen what the interest rate is.

This announcement will increase the liquidity in the market. Please note that RBI has already announced liquidity measures worth Rs. 5 Lakh Crores. How much of that money has flowed into the hands of MSMEs needs to be seen.

Other measures for MSMEs

  • The definition of MSME has been changed. The new definition is as per the table below. The increase of turnover limits will bring in more businesses within the MSME fold and also enhance their chances of getting automatic loans as mentioned above.
  • This definition, however, is not in line with the 2018 Union Cabinet approval of the amendment to the MSME Act whereby investment limits were scrapped and definition was based only on turnover, the highest limit being Rs. 250 Crore. Clarification is awaited.
  • Subordinate debt (i.e. lower in priority of settlement if company goes into liquidation), of Rs. 20,000 Cr announced for stressed MSMEs or those that are classified as NPAs.
  • Fund of Funds of Rs. 50,000 Crores being set up for investment into equity capital of MSMEs. The government will infuse Rs. 10,000 Crore and the rest will be invested by participating funds (mostly owned by LIC or SBI)

Tax & PF measures

  • The rate of contribution to provident fund by employer and employee has been reduced to 10% instead of 12%.
    • This will provide greater liquidity to the employer, at the cost of savings for employees, and
    • This will add more money in the hands of the employee at the end of the month as well.
    • The government shall not fund this deficit. 
  • Benefit to eligible employers under PMGKP has been extended till August 2020. This benefit could be availed by employers who employed less than 100 persons, 90% of whom earned less than Rs. 15,000 per month (how many employers this would eventually cover needs to be seen).
  • The rate of TDS & TCS has been reduced by 25%,
    • the reduction will be only on non-salary payments, and
    • only residents will enjoy the benefit of reduced TDS rates.
    • The reduction is effective 14 May 2020 and will be so for the entire financial year.
  • Due date for filing income tax returns has been extended to 30 November 2020. Similarly, payment to “Vivad se Vishwas” scheme has been extended to 31 December 2020.

Closing comments

In addition to the benefits provided above, the FM also made announcements to increase liquidity in the market. While most of the announcements deal with liquidity measures, there is little information about actual monetary relief. It was speculated that the announcements may follow the UK model where the government funds salary cost of businesses. While it might be hard to do so in an unstructured and largely unorganised market like India, MSMEs definitely need more support than what has been announced. 

Liquidity has not been a challenge. In fact, out of the 3.75 Lakh Crore package announced by RBI, only Rs. 2.8 Lakh Crore has been completed. Of that, how much will reach businesses is another matter. The automatic loans are a step in the right direction – our understanding is that it means less paperwork and faster disbursements. But who qualifies, and who doesn’t still needs to be answered – for one, there are 8 Crore MSMEs (registered + unregistered estimate) & the number referred to in the speech is 45 lakh (a mere 6%). The rate of interest & utilisation norms need to be defined as well. 

Only time will tell us how these schemes are eventually implemented – & the luxury of time is what we unfortunately do not have.

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