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World Bank approves $750 million to help Indian MSME sector

World Bank approves $750 million to help Indian MSME sector

India’s micro small and medium enterprises (MSME) sector, one of the worst impacted by the Coronavirus pandemic, has reasons to cheer. The World Bank has approved a $750 million MSME Emergency Response programme to support increased flow of finance into this sector.

The World Bank said that the initiative will help in resolving the immediate liquidity and credit needs of about 1.5 million viable units. It will also ensure protection of millions of jobs.

“The MSME sector is central to India’s growth and job creation and will be key to the pace of India’s economic recovery, post COVID-19. 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,” Junaid Ahmad, World Bank Country Director in India said in a statement. “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,” he added.

With rising uncertainties, lenders have remained concerned about borrowers’ ability to repay, resulting in limited flow of credit even to the viable enterprises in the sector. This programme will support government’s efforts to direct money 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.

Besides, only about 8 per cent of MSMEs are served by formal credit channels. The World Bank programme 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 who currently may not have access to the formal channels,” the multilateral agency said in a statement.

The MSME sector considered to be the backbone of India’s economy contributed about 30 per cent of the country’s GDP and 40 per cent of exports, the World Bank noted. The sector, which employs about 150-180 million people, is today burdened with cancelled orders, loss of customers and supply chain disruptions – causing a sharp fall in revenues. This cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector, the World Bank said..