Credit and financing for MSMEs: MSME association, Federation of Indian Micro, Small and Medium Enterprises (FISME), has signed a Memorandum of Understanding with financial guarantee provider Eqaro Surety to set up a digital lending platform for MSMEs in the country . FISME said the platform is expected to launch this year and will provide access to unsecured capital of up to Rs 25 lakh to meet the urgent need of MSMEs for funds after due diligence of their businesses. The credit would be backed by guarantees from Eqaro.
“It is like an overdraft facility initially pegged at Rs 25 lakh that could be tapped anytime and from anywhere should an MSME need funds,” FISME Chairman Prashant Patel said in a statement. The MoU was signed between Patel and Eqaro Managing Director Vikash Khandelwal. FISME represents over 740 MSME associations with a reach of over 2 million MSMEs.
“Loans are traditionally based on collateral. This unique and unprecedented initiative in India will help MSMEs to access credit backed by a surety bond more easily without having to provide collateral,” said Khandelwal.
While surety guarantees are a tried and tested financial instrument used in developed countries such as the United States in place of traditional collateral guarantees or bank and performance guarantees, they are still in their infancy in India, said the FISM.
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Importantly, Finance Minister Nirmala Sitharaman in her budget speech this year announced the use of surety bonds as a substitute for bank guarantees to make them acceptable in public procurement. “The IRDAI has provided the framework for the issuance of bonds by insurance companies,” said the minister. This should help MSME suppliers and sub-contractors who could now turn to insurance companies to guarantee their payments.
A surety is essentially a risk transfer mechanism where the surety company assures the client of the contractor’s performance obligation. MSMEs usually have to give margin money and collateral to cover the risk of a bank guarantee. As a result, bank guarantees restrict the working capital of MSMEs and prevent them from participating in more tenders.