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Budget 2018: Financing to MSMEs gets special attention
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Finance Minister Arun Jaitley sought to bring discipline in the medium, small and micro enterprise financing space through higher capital allocation through loans from Micro Units Development & Refinance Agency Ltd (Mudra) and relaxation of corporate tax.

Jaitley said an announcement for effectively addressing non-performing assets and stressed accounts of MSMEs is also in the offing and underscored the importance of the accessing the bond market by the large corporates. A specalised fund for the affordable housing and potential listing of public sector insurers were the other highlights for the financial services space in the Union Budget 2018.

The MSME space has been ignored by the formal banking system in the country, primarily due to lack of credit history and asymmetric information on MSMEs business proceedings.

The finance minister said a formalisation of the businesses of MSMEs is taking place in the country after demonetisation and introduction of GST.

Since the MSME space is a major engine of growth and employment in the country, the government is providing Rs 3,794 crore to the MSME sector for giving credit support, capital and interest subsidy as well as enhacing innovation. An enormous financial information database of MSMEs’ businesses and finances will be created. This database will be used for improving financing catering to of MSMEs’ capital requirement, including working capital.

Rajiv Raj, co-founder and director, CreditVidya, said, “MSMEs contribute 40% of GDP and generate 69% of employment in India. Allocating capital support is going to empower them and have a cascading effect on the Indian economy.''

“It was reassuring to hear that the government is considering proactive measures to curb NPAs which should lead to bringing about the much-needed discipline in the MSME financing space,” said Jaspal Bindra, executive chairman, Centrum Group.

A major source of working capital for MSMEs has been provided by non-banking financial companies (NBFCs), particularly after the demonetisation. Jaitley said NBFCs can be a powerful vehicle for delivering loans under Mudra. Hence, a refinancing policy and eligibility criteria set by Mudra will be reviewed for enhancing refinancing of NBFCs.

Mudra provides loans at low rates to micro-finance institutions and non-banking financial institutions which then provide credit to MSMEs. Mudra Yojana, which was launched in April 2015, has led to sanctioning of Rs 4.6 lakh crore in credit. About 76% of loan accounts are of women and more than 50% belong to SCs, STs and OBCs. The finance minister proposed to set a target of Rs 3 lakh crore for lending under Mudra for FY2018-19.

Fintech for MSMEs

The finance minister has also underscored the importance of fintech in the financing space for enhancing growth of MSMEs. A group in the Ministry of Finance is examining the policy and institutional development measures needed for creating the right environment for boosting the growth of fintech companies in India.

Jaitley said efforts are being taken to onboard public sector banks and corporates on Trade Electronic Receivable Discounting System (TReDS) platform and link this with GSTN. Online loan sanctioning facility for MSMEs will be revamped for prompt decision making by the banks. The government will soon announce measures for effectively addressing non-performing assets and stressed accounts of MSMEs.

“Budget FY2018-19 is a landmark budget for MSMEs, startups and the fintech ecosystem In India. The proposal to create a unique identity for MSMEs will be a significant step towards formalising the sector,'' said Rana Kapoor, MD and CEO, YES Bank.

This is expected to bring larger financing of MSMEs and also considerably ease cash flow challenges faced by them. MSMEs with a turnover of up to Rs 250 crore will have now to pay a tax of 25%.

“Through incentives for MSMEs and corporate tax reduction to 25% for companies with a turnover under Rs 250 crore, the government will encourage small entrepreneurs in both urban and rural areas,” said Rakesh Dubey, president, Microfinance Institutions Network.

“The government's decision to review refinancing policy of Mudra for better financing of NBFCs is good news for NBFC-MFIs. Mudra has been an important source of financing for microfinance companies and after this announcement, microfinance firms can expect easier access to finance at lower rates through Mudra,” Dubey said.

“The steps to ensure increased credit flow to the MSME segment and a reduction in the corporate tax will go a long way in giving a significant boost to the segment, and will create more employment,” said Shanti Ekambaram, president – consumer banking, Kotak Mahindra Bank Ltd.

Bond market

To bridge the disparity in the equity and the bond market when it comes to meeting the financing needs of the country, Jaitley said the Securities and Exchange Board of India (SEBI) will consider mandating, beginning with

large corporates, to meet about one-fourth of their financing needs from the bond market. At present, corporate bonds rated ‘BBB’ or equivalent are investment grade.

In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment. The finance minister said it is now time to move from ‘AA’ to ‘A’ grade ratings. The government and regulators will take necessary action, he said.

Accordingly, a bank recapitalisation programme has been launched with bonds of Rs 80,000 crore being issued this year. This recapitalisation will pave the way for the public sector banks to lend additional credit of Rs 5 lakh crore, he said.

“Timely follow-up announcements from regulators to allow investments in rated bonds would help deepen the bond markets for mid and large companies,” said Sarosh Amaria, chief operating officer – commercial finance, Tata Capital.

Affordable housing fund

A dedicated affordable housing fund (AHF) linked to National Housing Bank will be launched. The AHF will be funded through fully serviced bonds authorised by the government.

However, Sarjan Shah, MD, Group Satellite, said it is a disappointing budget from the perspective of private sector involvement in creating mass housing stock that will make homeownership a reality for all Indians. “The Budget has ignored the stressed and vilified real estate sector that is in a desperate need of government support through specifically targeted tax breaks that help make building affordable homes in India viable,'' he said.

Health insurance

Jaitley also announced a flagship National Health Protection Scheme (NHPS) which aims to provide an annual health insurance cover of Rs 5 lakh, each, to 100 million poor families or about 500 million people.

Three public-sector general insurance companies—National Insurance Company Ltd, United India Assurance Company Ltd and Oriental India Insurance Company Ltd—will be merged into a single insurance entity and will be subsequently listed.

“Push for greater penetration of the prime minister’s schemes for life and personal accident insurance amongst Jan-Dhan accountholders is also going towards increased risk mitigation for the weaker sections of the society. The merger of three PSU general insurance companies followed by disinvestment is a positive move as it will create a company with a large scale that will drive value,'' said Roopam Asthana, CEO and whole-time director, Liberty Videocon General Insurance.

Last year, the government completed the New India Assurance’s Rs 9,600 crore ($1.5 billion) initial public offering.

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