India and the World Bank on Monday, July 6, signed the 750 million dollar agreement for the MSME Emergency Response Programme, which is aimed at increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.
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. This is the first step among a broader set of reforms that are needed to propel the MSME sector over time, an official release said.
COVID-19 pandemic has severely impacted the MSME sector leading to loss of livelihoods and jobs. The [project will provide targeted guarantees to incentivize NBFCs and banks to continue lending to viable MSMEs to help sustain them through the crisis.
The World Bank Group, including its private sector arm – the International Finance Corporation (IFC), will support the government’s initiatives to protect the MSME sector by:
- Unlocking liquidity
India’s financial system benefited from early and decisive measures taken by the RBI and the Government of India (GOI) to infuse liquidity into the market. Give current uncertainties, lenders remain concerned about borrowers’ ability to repay – resulting in limited flow of credit even to the viable enterprises in the sector. This program will support government’s efforts to channel that liquidity to the MSME sector by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs through a range of instruments, including credit guarantees.
- Strengthening NBFCs and SFBs
Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and Small Finance Bank (SFBs), will 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.
- Enabling financial innovations
Today, only about 8 percent of MSMEs are served by formal credit channels. The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments. Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost, especially small enterprises that currently may not have access to the formal channels.
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 World Bank has till date has committed 2.75 billion dollar to support India’s emergency COVID-19 response, including the new MSME project, the release said. The first one billion dollar emergency support was announced in April for immediate support to India’s health sector. Another one billion dollar 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 dollar loan from the International Bank for Reconstruction and Development (IBRD) has a maturity of 19 years including a 5-year grace period.
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