Context: Recently, the World Bank (WB) and the Government of India has signed the USD 750 million agreement for an Emergency Response Programme for Micro, Small, and Medium Enterprises (MSMEs).
Key Points

• The World Bank’s MSME Emergency Response Programme will address the immediate liquidity and credit needs of some 1.5 million viable MSMEs to help them withstand the impact of the current shock and protect millions of jobs. 
• This is the first step among a broader set of reforms that are needed to propel the MSME sector over time.
• The Government of India is focused on ensuring that the abundant financial sector liquidity available flow to NBFCs, and that banks which have turned extremely risk-averse, continue taking exposures in the economy by lending to NBFCs.
• This project will support the Government in providing targeted guarantees to incentivise NBFCs and banks to continue lending to viable MSMEs to help sustain them through the crisis.

The World Bank Group, including its private sector arm – the International Finance Corporation (IFC), will support the government’s initiatives to protect the MSME sector by:
Unlocking liquidity

• India’s financial system benefited from early and decisive measures taken by the RBI and the Government of India (GOI) to infuse liquidity into the market. 
• Given current uncertainties, lenders remain concerned about borrowers’ ability to repay – resulting in a limited flow of credit even to the viable enterprises in the sector. 
• This program will support the government’s efforts to channel that liquidity to the MSME sector by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs through a range of instruments, including credit guarantees.

Strengthening NBFCs and SFBs

• Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs. 
• This will include supporting the government’s refinance facility for NBFCs. In parallel, the IFC is also providing direct support to SFBs through loans and equity.

Enabling financial innovations

• Today, only about 8 percent of MSMEs are served by formal credit channels. The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments.
• Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost, especially small enterprises that currently may not have access to the formal channels.
• MSME sector is central to India’s growth and job creation and will be key to the pace of India’s economic recovery, post-COVID-19. The immediate need is to ensure that the liquidity infused into the system by the government is accessed by MSMEs.
• Equally important is to strengthen the overall financing ecosystem for MSMEs. This operation seeks to achieve both these objectives by furthering the role of NBFCs and SCBs as effective financial intermediaries and leveraging fintech to broaden the reach of finance into the MSME sector.
• The World Bank has to date committed $2.75 billion to support India’s emergency COVID-19 response, including the new MSME project. The first $1 billion emergency support was announced in April this year for immediate support to India’s health sector. Another $1 billion projects was approved in May to increase cash transfers and food benefits to the poor and vulnerable, including a more consolidated delivery platform – accessible to both rural and urban populations across state boundaries.
• The $750 million loans from the International Bank for Reconstruction and Development (IBRD), has a maturity of 19 years including a 5-year grace period.

Importance of MSMEs for Indian Economy

• Employment: It is the second largest employment generating sector after agriculture. It provides employment to around 120 million persons in India.
• Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
• MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes a $5 trillion economy.
• Exports: It contributes around 45% of the overall exports from India.
• Inclusive growth: MSMEs promote inclusive growth by providing employment opportunities in rural areas especially to people belonging to weaker sections of the society.
• Financial inclusion: Small industries and retail businesses in tier-II and tier-III cities create opportunities for people to use banking services and products.
• Promote innovation: It provides opportunity for budding entrepreneurs to build creative products boosting business competition and fuels growth.