From UPSC perspective, the following things are important :
Prelims level : International Finance Corporation
Mains level : Paper 3- Credit supply to MSME
The World Bank and the Government of India signed the $750 million agreement for the MSME Emergency Response Programme to support increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.
How will the agreement protect the MSME sector
1. Unlocking liquidity
- The Government is focused on ensuring that the abundant financial sector liquidity available flow to NBFCs and that banks.
- Banks and NBFCs have turned extremely risk-averse.
- This project will support the Government in providing targeted guarantees to incentivize NBFCs.
- Project will also support banks to continue lending to viable MSMEs to help sustain them through the crisis.
- It will be achieved by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs.
- This derisking will be done through a range of instruments, including credit guarantees.
2. Strengthening NBFCs and SFBs
- Improving the funding capacity of 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.
3. Enabling financial innovation
- 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.
- The digital platform will be helpful especially to small enterprises who currently may not have access to the formal channels.