MSME Funding Package of Govt of India – A Critical Analysis

MSMEs are offered a financing package to overcome pains from COVID19 lockdown. The package is not universal and likely to have limited impact on the segment.

Govt of India recently announced a scheme for supporting MSMEs who are affected due to sudden lockdown and resultant total disruption of their money flow on account of  COVID 19 pandemic.

The package comprises the following:

  • ECLGS Scheme -Three lakh crores collateral-free automatic Loans, with a tenure of 4 years, which will have a one-year moratorium on repayment.
  • Rs 20,000 crore subordinated debt will be provided for stressed MSMEs under the ambit of CGTMSE.
  • To set up a Fund of Fund with an outlay of Rs 10000 that will create a total of Rs 50000 crores of equity for MSMEs

The package apparently sounds very good.  It is felt that these measures require critical analysis.

ECLGS Scheme- Three lakh crore loan scheme:

The highlights of the scheme: It is available for those who have SMA 0/1 gradation and obviously SMA2 is not eligible. It is guaranteed by NCGTC, a central govt entity meant to undertake credit insurance activities. The term of the loan is 4 years with one year repayment holiday. It is a cash loan without any requirement of drawing power. The package restricts its relevance for those who are already having a loan as a top-up.

It does not cover those who do not have a loan but require some support to transition through the painful situation and the next two quarters are crucial for them.

It is not a collateral-free loan. Rather it is said that fresh collateral will not be asked. It implies that the collateral security already given will be extended to a new loan and added to that there will be an additional cover of guarantee.

The product is extremely risk-averse: In the event of default, the guarantee cover will be relevant only after executing the recovery action against the securities extended. Against this backdrop, one can easily assume that the relevance of guarantee cover is very minimal.  It may be useful to those who already availed under CGTMSE scheme (Maximum of Rs 2 crores).

To set up a Fund of Fund(FoF) with an outlay of Rs 10000 crores that will create a total of Rs 50000 crores of equity for MSMEs

Along with the above, Govt. made an ambitious announcement of setting up funds to provide equity investment to MSMEs.  It has proposed to set up an FoF of Rs 10000 crores.

There are two issues here- Mechanism of FoF and past performance of Govt’s FoF

Mechanism of FoF:  Whenever I interact with MSMEs they have an impression that Govt will be providing equity capital support of Rs 50,000 crores. Hence I found it is better to clarify the exact position in the matter.

In this scheme, Govt will provide 10000 crores to a notified organisation most likely SIDBI. In turn, SIDBI will invest this money in daughter funds. Here the daughter funds are private equity/venture capital funds set up by private entities. These entities will have to secure 80% of the fund on their own and then only they will be eligible to secure balance 20% from this fund.

In the ideal situation, this should lead to the creation of an equity fund base of Rs 50000 crores.

To check the reality, it is better to review the similar scheme of the Govt in the recent past.

Recent History of Fund of Funds Set up by the Govt of India:

Upon assuming power NDA Govt announced an FoF of Rs 10,000 crores to support startups. Even after six years of existence, the performance of this fund is abysmal.

Under that fund as on 18th February 2020, SIDBI has committed Rs 3,123.20 crore to 47 SEBI registered alternative investment funds (AIFs). These funds have raised a corpus fund of Rs 25,728 crore. This information is shared by none other than Mr Piyush Goyal Miniter of Industry & Commerce.


The Minister’s statement is the pointer to what will be the fate of new FoF that they are proposing.

It is unlikely to garner the interest of PE/VC funds to participate in the FoF because they may not be comfortable with the conditions which are normally associated with Govt money and it is just 20%.  Secondly, the impact will be felt in the very long run and not in the immediate future to help MSMEs to beat the challenges from COVID 19.

Rs 20,000 crore subordinated debt will be provided for stressed MSMEs under the ambit of CGTMSE.

Govt proposed a new fund to help MSMEs in distress to revive their business.  As per the press statement, each entity will get 15% of their equity capital as subordinated debt to the maximum of Rs 75 lakhs.

It implies that an entity having a capital of Rs 5 crores will be eligible for Rs 75 lakhs.  Secondly, it will be restricted to limited companies or may require conversion of the firm into a limited company to become eligible to issue subordinated debt papers to investors (In this case banks).

It is a welcome step for one reason. For the first time, the Govt made an attempt to identify potentially viable firms through policy and fiscal support. Instead of whitewashing the stressed businesses as bad people and emphasising to recover through various means leading to the destruction of the economic value of the enterprises.

However, given the magnitude of the stressed assets in  India and the size of the scheme (Rs 20000 crores)  is disproportionately low. The govt’s commitment (not necessarily an investment) will be Rs 4000 crores in this scheme.

Govt should lead by committing more own resources:

One thing that is apparent in these measures is that Govt is not providing leadership in the crisis time.  Govt has turned risk-averse.  Instead, Govt is satisfying itself by creating a scheme that is aiming to transfer the risk on one hand and deflate the interest rate to public depositors whose money banks are supposed to protect. If Govt can’t, the banks which are already having strained balance sheet may not be able to serve with full vigour and assist MSMEs to overcome the challenge from lockdown.

Another point is Govt is abundantly cautious and maybe fearing that the facility may be misused.  Against the backdrop of their own fierce campaign against misuse of banking facility during the previous regime, they are treading cautiously, it appears. Secondly, Govt is not parting with money in any of these measures and sounds extremely vary of rating downgrade by the international rating agencies. Hence they are trying to do without expressly committing any monetary support.


The measures announced so far not enough to support the MSMEs segment. It is not universal and not reflective to address the needs in sufficient quantity. If Govt chooses tread carefully, who else will bear with the risk that too when the COVID spread is getting severe.