The Modi government’s push to lift the MSME (micro, small and medium enterprises) sector out of the mire they are steeped in, may get a fillip through external borrowings against sovereign guarantees. Reports indicate that in the first tranche, $14.5 billion could be arranged as line of credit from foreign lenders. 

Some indication to the effect that the government intends to go in for external borrowings was given by the Finance Minister in her budget speech in Parliament earlier this month. She had said India’s debt to GDP ratio of under 5% was one of the lowest in the world. There were separate indications from the government that the amount to be raised through external borrowings this fiscal could be around $10 billion.

It is under these circumstances that this news has now surfaced that the nodal ministry at the Centre for the MSME sector has initiated talks with Germany’s state-owned development bank KfW Group, the World Bank and some Canadian institutions for possible lending. The finance ministry mandarins could then step in and conclude the discussions. These funds would then be routed through dedicated government-owned institutions like the Small Industries Development Bank of India (SIDBI). Some sources have indicated that the lenders may focus on specific sectors like solar power where the funds could be utilised.

If these reports are true and the funds are being arranged, this could be a welcome and timely step for the country’s economy, particularly the MSMEs which have been identified as a key component propelling the engine of growth. The government finds itself in a catch-22 situation. The banks are unable to lend freely and the smaller-sized firms have their own issues with regard to their ability to raise funds through the mainstream banking channels. If they turn to the shadow banking industry or the NBFCs as they are called, the rate of interest charged which is around 20% p.a. becomes unaffordable by the MSMEs. In this kind of a backdrop, this is a wise move. It will tick several boxes in one go. Here’s how.

• The rate of interest will come down
• The lenders will be happy with the sovereign guarantee offered by the government of
• The mainstream banks will be spared of the mundane small loans to the MSME sector and continue lending to the important sectors of the
• India’s small savings will remain steady and
• The MSME’s can be revived and can lift the overall economy helping the larger objective of reaching the $5 trillion
• Unemployment situation may ease a bit