Announcing relief for MSME sector as part of Rs 20 lakh crore stimulus to tide over coronavirus crisis and boost economy, Finance Minister Nirmala Sitharaman on Wednesday announced Rs 3 lakh crore collateral free automatic loan saying it will benefit 45 lakh small businesses. The loan will have a four-year tenure and also a 12-month moratorium in repayment.

Sitharaman also announced Rs 20,000 crore subordinate debt for stressed MSMEs which would cover 2 lakh businesses. The smaller firms, however, expressed disappointment and said that they were expecting salary support for their workers and staff in the absence of cash flow which is expected to remain minimal as orders have dried up and demands plummeted.

Federation of Indian Micro and Small & Medium Enterprises (FISME) President Animesh Saxena told ‘BusinessToday’ that industry is on ventilator and needed oxygen support and not medicine, which will work in three months. “We needed oxygen and immediate ventilator. If I talk in medical terms, most of MSMEs need ventilator. If they are not given benefit and immediate support they will not survive 3-4 months of no business,” Saxena said.

He said that government is not shelling out any money and all the announcements are seeking to provide indirect help. “We are clearly disappointed. At the end we are seeing that it is only loan without guarantee. Rest all is frivolous. In this kind of crisis with mounting losses and no business we were expecting that government will come with direct support,” the FISME President said.

On extending provident fund (PF) benefits for another three months, Saxena said the scheme does not cover a large number of MSMEs. In the previous stimulus package, Finance Minister Nirmala Sitharaman had announced the government would contribute employers as well as employees’ share of PF for three months beginning March. This has now been extended by another three months till August.

This PF benefit is applicable to all only those establishments which have up to 100 employees and out of which 90 per cent earn a monthly salary of less than Rs 15,000. Terming the loan offer and other proposed benefits as gimmick, SME Chamber of India President Chandrakant Salunkhe said that only financially sound MSMEs would benefit from the collateral free loan and those struggling would just shut down.

“Only those MSMEs which are capable would qualify for fresh loan and those who are grappling with the crisis will eventually close down,” Salunkhe said, adding that such government announcements are not properly implemented on ground. “We were expecting at least two months’ salary for the employees to be paid by the government,” Salunkhe added.

Addressing one of the long-pending demands of the MSME sector, Sitharaman on Wednesday widened the definition of MSMEs revising the investment limit upward and adding the criteria of turnover into it. The distinction of manufacturing and services sectors have also been done away with. Accordingly, firms with with investment of less than Rs 1 crore and turnover of less than Rs 5 crore would be classified as micro units. Those firms with investment in plant and machinery of less than Rs 10 crore and turnover of less than Rs 50 crore would be treated as small enterprises. Firms with investment of upto Rs 20 crore and annual turnover of Rs 100 crore or less would be classified as medium enterprises.

Acknowledging that Indian MSMEs and other companies often face unfair competition from foreign companies, the government has disallowed global tenders in public procurement upto Rs 200 crore. The Finance Minister also announced the release payment of long-pending MSME dues from government and its PSUs within 45 days. FISME’s Saxena said that payments from PSUs and government agencies should be a regular phenomena.

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The lenders are accepting penalty rates to keep a record $92 billion a day with the Reserve Bank of India and have shunned a central bank program aimed at credit-starved corporates, choosing safety as the pandemic cripples economic activity.

The government responded on Wednesday by offering $62 billion in credit lines and cash injections to the smaller firms and the non-traditional lenders that fund them.

“The binding constraint for lending has not been liquidity or interest rates, but risk aversion,” said Duvvuri Subbarao, a former RBI governor. That threat to the viability of small businesses “has forced the government to announce several steps and also provide guarantees to banks.”

A legacy of bad loans, a shadow banking implosion and a historic bank bailout in March have left Indian lenders weakened coming into the lockdown, which has stalled the economy and pushed joblessness to 27 per cent. Credit growth may slow to a multi-decade low of 2 per cent to 3 per cent in the year to March 2021, from 6 per cent a year earlier, according to CRISIL Ltd., the local arm of S&P Global Ratings.

That’s a contrast with China, where state lenders including Industrial & Commercial Bank of China Ltd. responded to government urging and boosted lending by 22 per cent in the first quarter, up from 20 per cent a year earlier. The loans have been a lifeline for China’s smaller firms as they attempt to stay afloat during the economy’s virus-induced swoon.

In India, the banks’ reluctance has been threatening millions of small businesses, which make up a third of the economy and are the biggest employers. Already, the economic lockdown forced 122 million people out of their jobs last month, according to estimates from the Centre for Monitoring Indian Economy Pvt., a leading private sector think tank.

The new government program may have limited success in reversing the trend, according to Sujan Hajra, chief economist at the brokerage Anand Rathi.

It involves a loan guarantee worth nearly $40 billion over four years, benefiting about 4.5 million firms, with a stay on repayment for 12 months and all defaults thereafter borne by the government.

But that will help less than a tenth of India’s 63 million smaller companies, Hajra said. With banks still unwilling to take the risk of these loans on their own books, the protracted liquidity squeeze could still lead to as many as 20 million more job losses, he added.

Already saddled with one of the world’s worst bad loan ratios, Indian lenders are naturally reluctant to add to those risks.

“If I look out of my window I see no economic activity,” Axis Bank Ltd. Chief Executive Officer Amitabh Chaudhry said last month, after announcing results for the March quarter that included a 185% increase in provisions against potential bad loans. Before agreeing new loans, “I need to know how much risk I am taking. I don’t know that right now,” Chaudhry said.

India’s benchmark bank index has fallen about 41% since the start of the year, outpacing the 25% drop in the broader market.

The banks’ caution can be seen in their varied reaction to the RBI’s funding programs intended to throw a lifeline to the corporate sector during the lockdown.

The first tranche, open to all companies, drew an enthusiastic response and was three times oversubscribed. Reliance Industries Ltd., controlled by the nation’s richest man; Tata Steel Ltd., part of India’s biggest conglomerate; engineering group Larsen & Toubro Ltd.; and automaker Mahindra & Mahindra Ltd., one of the largest automakers, secured about a quarter of the 1 trillion rupees ($13.2 billion) offered via the RBI’s special refinance window, according to people with knowledge of the matter.

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