Liquidity lifeline: On Nirmala’s MSME package

Introduction

The first tranche of announcements made by Finance Minister Nirmala Sitharaman under the Atmanirbhar Bharat Abhiyan on Wednesday is impressive indeed.

Focus areas

The measures announced will go a long way in lifting the spirits of the two key and troubled sectors of MSMEs and non-banking finance companies.
While for the MSMEs it is an existential crisis, for the NBFCs it is one of liquidity.

Fiscal package for MSMEs

The massive ?3-lakh crore collateral-free assistance handed out to MSMEs will help them crank up their operations.
The Government has extended a sovereign credit guarantee for the complete amount as banks may otherwise have been reluctant to support troubled borrowers.
The ?20,000 crore partially guaranteed subordinated debt programme and the ?50,000 crore fund of funds scheme will help boost the equity portion on MSME.

Subordinated Debt

Subordinated debt is riskier than unsubordinated debt. Subordinated debt is any type of loan that's paid after all other corporate debts and loans are repaid, in the case of borrower default. Borrowers of subordinated debt are usually larger corporations or other business entities. Subordinated debt is the exact opposite of unsubordinated debt in that senior debt is prioritized higher in bankruptcy or default situations.

When a corporation takes out debt, it normally issues two or more bond types that are either unsubordinated debt or subordinated debt. If the company defaults and files for bankruptcy, a bankruptcy court will prioritize loan repayments and require that a company repay its outstanding loans with its assets. The debt that is considered lesser in priority is the subordinated debt. The higher priority debt is considered unsubordinated debt.

Fiscal Stimulus to NBFCs

NBFCs, housing finance firms and micro finance entities get a much required liquidity boost in the form of a ?30,000 crore scheme wherein their debt paper will be fully guaranteed by the government.
With this, and the partial credit guarantee scheme of ?45,000 crore, the government has broken the logjam wherein banks were unwilling to extend credit despite the RBI’s strong push.
This should largely attenuate the liquidity crisis in the non-banking space for now.

The Minister has also done well in addressing the liquidity issues of power distribution companies through a ?90,000 crore infusion that will be securitised on their receivables and backed by a State government guarantee.

While the headline numbers appear big, the reality is that the government will be called upon to bear the liability only if the economic situation becomes hopeless; it may not come to that.

Issues

The government did not specify interest cap on these loans without leaving it to individual lenders as each of them has its own rate structure.
The scheme could have been extended until the end of this financial year instead of until October 31.
India is now entering the monsoon season when activity is traditionally dull, so it is not clear how many borrowers will get the benefit.
There are no measures for the migrant workers in its announcements.

Source: TH

Join Our Telegram

Desert Locusts

Foreign Contribution Regulation Act (FCRA),2010

India–Azerbaijan

05 Apr, 26
SHARE

A year after tensions arising from Operation Sindoor, India and Azerbaijan have taken steps to restore and normalise bilateral relations. The 6th round of Foreign Office Consultations, held in Baku, marked the first such engagement since 2022, signaling renewed diplomatic momentum. Recent Diplomatic Engagement During the consultations, bo

India–Australia Economic Cooperation and Trade Agreem

04 Apr, 26
SHARE

The India–Australia Economic Cooperation and Trade Agreement has completed four years since its signing. Both countries now aim to build on this progress through strengthened collaboration and ambitious targets, including reaching AUD 100 billion in bilateral trade by 2030. What is the India–Australia Economic Cooperation and Tra

ADR Report on Political Funding

03 Apr, 26
SHARE

A recent report by the Association for Democratic Reforms (ADR) analyses donations of ?20,000 or more declared to the Election Commission of India (ECI) by national political parties for FY 2024–25, highlighting transparency and accountability in political financing. Key Findings Massive Funding Surge Total donations to nationa

Maritime Chokepoints

03 Apr, 26
SHARE

Maritime chokepoints are narrow channels along global shipping routes where maritime traffic is concentrated. These points are geopolitically and economically critical, as they handle a large proportion of global trade, especially energy shipments. Current Relevance Over two-thirds of seaborne energy trade passes through a handful o

US-Israel-Iran War

01 Apr, 26
SHARE

Following the launch of Operation Epic Fury (U.S.) and Operation Roaring Lion (Israel), the geopolitical landscape has shifted fundamentally with the confirmed death of Iran’s Supreme Leader, Ayatollah Ali Khamenei.Iran retaliated through Operation True Promise 4, launching missile attacks against Israel and nearby Gulf states. The escala