India’saspiringproposition to offerapproximately Rs. 3 lakh crore ($39.5 billion) in loans to small businesses to elevate the economy ravaged by coronavirus pandemic has got off due to a slow start with banks disbursing only a tiny fraction of the accessible funds.Lenders have paid out barely 4% of the sum earmarkedamounting to Rs 12,200 crore,and approved loans worth Rs 24,260 crore since the third week of May, according to finance ministry data released on Thursday.
Re-opening Of the Indian Economy Post Lockdown
The Indian Government re-opened economy for business in June after months of lockdown but for thousands of small entrepreneurs in the many towns, the blow has been devastating. Businesses from textiles to sports goods and furniture are shuttered or working at a bare minimum, and cows roam streets that would be normally packed with workers and vehicles.
According to some entrepreneurs their business was so crippled by the pandemic that taking on new debt made little sense. Instead, they would think that the government had helped them by trimming the goods and services tax or relinquish the interest on loans. Others said that despite Modi’s promise to open up the credit lines, it was not easy persuading bankers to lend because of the death throes their businesses were in.
What The Finance Ministry And The Banks Are Saying
The Indian government recently revealed the fully-guaranteed government-backed loan scheme for small businesses, which account for nearly a quarter of India’s economy and employ hundreds of millions of workers, according to government estimates. New Delhi has been pressing banks to lend more to these firms which have been hit by the more than two-month lockdown to rein in the spread of the virus. However, lenders worry about defaults.
A senior official in finance ministry accepted that according to feedback received from the industry, the scheme is facing several problems. However, the government is trying to convince the bankers to implement the scheme in “letter and spirit”.
A senior banker at a public bank said there had been a clear lack of demand because of the country’s lockdown. He said that “Businesses don’t want to avail themselves of it so the traction has been low”.
The finance ministry and the IBA (Indian Banks’ Association), an industry body for lenders, didn’t immediately respond to a request for comment.
According to the bankers, there is “constant monitoring” by the government and pressure to dole out more loans, but businesses are not coming forward as demand remains tepid. Another banker at a state-owned lender said, “We are pushing very hard and have contacted the borrowers but most of them aren’t interested at all”.
Businesses claim that the lenders are either asking for increased paperwork or the ones in desperate needs are being presumed ineligible. An entrepreneur in Modi’s home state of Gujarat said, “I was asked to provide collateral and also buy insurance for getting this loan whereas it is supposed to be collateral-free”.
However, two bankers said that securing money from the government even in a fully-backed sovereign guarantee scheme is not easy. “The experience is unpleasant,” said the former corporate head of a state-owned bank. He further added, “You lend to most of these businesses only because the government has directed but when it comes to getting the money back, one has to spend considerable resources and time which makes little sense”.A third Banker said that banks are selectively picking healthier and better-placed companies as recovering such loans, even though they are government-backed, is not an easy task.
Ground Situation Is Quite Grim To Say The Least
Small businesses that account for nearly one-fourth of India’s 2.9 trillion dollar economy and employ more than 500 million workers are the ones badly affected by the pandemic. Businesses have been pushed to the wall as their suppliers have not paid and orders have trickled to zero while fixed costs including electricity, wages, and installments for earlier bank loans have drained their funds. As per the Consortium of Indian Associations, in absence of government support, nearly 35% of the 650 million small enterprise businesses across the country could shut down soon during the pandemic.
Sanjeev Rastogi, a garment manufacturer in Meerut who is running his factories at 25% of the production capacity, said, “We have not got a single rupee relief from the government”. Rastogi has incurred a loss of 3.5 million rupees in the last two months and believes he may have to shut down his business in the next three months. Rastogi is making last-ditch efforts to remain in business. “Otherwise, I will sell the factory at any price to save some money for my retirement.”
Anurag Agarwal, chairman of the Meerut chapter of Indian Industry Association, said, “About 25% small factories out of over 10,000 textile units in Meerut could shut down and default on bank loans in the next few months”.