Recently, the World Bank (WB) and the Indian government signed an agreement worth USD 750 million for an Emergency Response Programme focusing on Micro, Small, and Medium Enterprises (MSMEs). These response programmes are aimed at enhancing community resilience confronting fragility, poverty, vulnerability to conflict and disaster.
Financial Aid Amidst Pandemic
The key highlight of this agreement is the USD 750 million loan provided by the International Bank for Reconstruction and Development (IBRD), a part of the WB group. This loan, which has a maturity period of 19 years along with a grace phase of 5 years, will be of great assistance to India’s MSME sector significantly affected by the Covid-19 crisis.
Previously in 2020, the WB committed to support India’s emergency Covid-19 response, which included the new MSME project with total financial aid of USD 2.75 billion. The first wave of USD 1 billion was allocated for immediate support to India’s health sector in April, followed by another USD 1 billion in May to increase cash transfers and food benefits for the underprivileged.
The Role of the Agreement in Liquidity Unlocking
Recognizing the looming uncertainties, financial lenders are wary of borrowers’ repayment capabilities. Hence, this program aims to bolster the government’s initiative to inject liquidity into the MSME sector by de-risking bank and non-banking financial companies’ loans through credit guarantees.
Strengthening Non-Banking Financial Companies and Small Finance Banks
The program also plans to address the diverse needs of MSMEs by amplifying the funding capability of significant credit channels such as Non-Banking Financial Companies (NBFCs) and Small Finance Banks (SFBs). This arrangement aligns with the government’s refinance facility for NBFCs. In tandem, the International Finance Corporation (IFC) would extend direct support to SFBs via loans and equity.
Encouraging Financial Innovations
Presently, a mere 8% of MSMEs have access to formal credit channels. The program seeks to mainstream the utilization of fintech and digital financial services in MSME lending and payments, thus incentivizing and modernizing the system.
About World Bank Group
The World Bank Group comprises the International Bank for Reconstruction and Development (IBRD), which provides loans, credits, and grants; the International Development Association (IDA), providing low- or no-interest loans to low-income countries; the International Finance Corporation (IFC), offering investment, advice, and asset management to corporations and governments; the Multilateral Guarantee Agency (MIGA), insuring lenders and investors against political risks; and the International Centre for the Settlement of Investment Disputes (ICSID), settling disagreements between investors and countries. India, however, is not a member of ICSID.
Retaining focus on MSMEs
The MSME sector plays a pivotal role in the growth and job creation of India’s economy and will be instrumental in the post-Covid-19 economic recovery. The financial aid provided by the World Bank forms a part of the necessary reforms to bolster the MSME sector over time. Under the Atmanirbhar Bharat Abhiyan scheme, the Indian government has announced a Rs.3-lakh crore collateral-free assistance or sovereign credit guarantee. However, the immediate need is to ensure that the liquidity infused into the system by the government reaches the MSMEs. Simultaneously, it’s vital to strengthen the financing ecosystem for MSMEs.
Last Modified: February 8, 2024