Doubling the credit guarantee on loans taken by small and medium enterprises (SMEs) and enhancing their cash credit limits is expected to increase the banking sector fund flow to the SME sector. These steps announced by Prime Minister Narendra Modi on Saturday would also lower borrowing costs of the SMEs.

“These decisions will ensure that additional deposits mobilised by the banks during demonetisation period are not directed only at lending towards large industries. SMEs will get better access to credit with doubling of the guarantee,” said Bhuwan Goyal, Director at A.P. Refinery, a Punjab-based edible oils refiner operating in the SME sector.

The Credit Guarantee Fund Trust for Micro and Small Enterprises, run by the government and SIDBI, provides guarantee on up to 85 per cent of the sanctioned loan facility availed by such enterprises for a fee. This guarantee enables both existing and new SMEs to get collateral-free loans at lower rates.

As on May 31, 2016, a total of 24.31 lakh proposals from micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs 1.13 lakh crore. Apart from bank loans already covered by the Trust, credit from non banking finance companies will also be covered under the scheme. A senior banker at a Delhi-based PSU bank said government’s intent is clear that additional deposits mobilised through withdrawal of old notes of Rs 500 and Rs 1,000 should be used to enhance credit to SME sector.

“Basically now we can finance loans to projects worth double the earlier costs as the guarantee will be there,” the banker said.

“Enhancing the limit from Rs 1 crore to Rs 2 crore for credit guarantee and increasing the cash credit limit from 20 per cent to 25 per cent will help them in their working capital requirements and keep the trade moving at a time when remonetisation process is still ongoing,” industry chamber FICCI said.

“Government of India underwrites loans given by banks to small businesses through a trust. So far, loans were covered up to Rs 1 crore. This limit is now being enhanced to Rs 2 crore. Earlier the scheme only covered bank loans. Hereafter it will cover loans given by NBFCs as well,” Modi said in his address to the nation on December 31.

“Banks and NBFCs will not levy high interest on these loans, as Government of India is bearing the cost of underwriting them,” Modi said.

Source: Indian Express