India’s small businesses need cheaper loans, not just an interest vacation

India’s small businesses, along with unsecured personal loans, get the most expensive loans regardless of their wealth and job creation for the economy.

The weighted average lending rate for micro, small and medium-sized enterprises (MSMEs) was 11.24% in February, the second highest among various segments, according to the Reserve Bank of India (RBI).

The benefit of deep rate cuts has clearly not reached small businesses as banks’ credit spreads are added in place of the risk perception of their businesses.

Policymakers need to set the cost of borrowing or small businesses would remain in trouble even after returning to normal once the lockdown is gradually lifted.

One way to do this is to sponsor loan guarantees from Small Industries Development Bank India (Sidbi). “The flow of credit to MSMEs could be increased through additional refinancing facilities for banks and other financial institutions such as SIDBI, which focus on these companies,” said analysts at Delloitte Touche Tohmatsu India Llp in an April 1 release that salaries could also be considered they added.

Sidbi has already announced a reduced interest rate of 5% for MSME loans as part of its Covid-19 emergency package. Existing loan guarantee systems can also be strengthened.

Still, the importance of temporary relief efforts cannot be overstated. At the behest of the RBI, banks have started to provide emergency credit lines for companies to meet their immediate needs. The interest payment for working capital lines was deferred for three months. These were necessary so that MSMEs could survive after the lockdown had lost their sources of income.

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Costly business.

All of these measures will ensure that MSMEs survive. But beyond the lockdown, companies would need cheap credit to get back on their feet and even strengthen their balance sheets.

MSMEs contribute around 30% to the gross domestic product (GDP). While the blow to GDP cannot be wiped away during the lockdown, the economy desperately needs small businesses to stay in business and recover if things return to normal. If small firms crumble under the burden of interest payments, the effect of previous aid measures will be undone.

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