The World Bank has approved a $750 million MSME Emergency Response program to support funding to MSMEs, severely impacted by the COVID-19 pandemic. The programme will help in improving funding capacity of small finance banks (SFBs) and non-banking financial companies (NBFCs) for the MSME sector.
World Bank Loan
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. 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 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 loan has a maturity of 19 years including a five-year grace period. In parallel, the IFC is also providing direct support to SFBs through loans and equity. The WB package will support the MSME package announced by the government under its ‘Self-reliant India’ programme.
Status of MSME sector
India’s manufacturing activity surged sharply in June but continued in the contraction mode for a third straight month as demand and output suffered from three months of lockdowns to quell the spread of the coronavirus.
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.
