Summary: The Union Budget 2024 introduces several pivotal measures for Micro, Small, and Medium Enterprises (MSMEs) to boost their growth and global competitiveness. A new credit assessment method will leverage digital footprints such as GST and income tax returns, moving away from traditional credit ratings, potentially speeding up loan approvals but increasing bad loans risk. A government-backed guarantee fund will support stressed MSMEs, preventing non-performing asset (NPA) issues. A new credit guarantee scheme will facilitate up to Rs. 100 crores for machinery and equipment purchases, enhancing MSMEs’ access to modern technology without collateral. Mudra loans’ upper limit for ‘Tarun’ category is raised to Rs. 20 lakhs to encourage expansion. The Trade Receivables Discounting System (TReDS) platform’s threshold is reduced to Rs. 250 crores, improving receivables financing. SIDBI will open 24 new branches to support MSMEs, and e-commerce export hubs will be established to enhance global market access. Additionally, financial support will be provided for food irradiation units and quality testing labs, enhancing food safety standards.
The Union Budget 2024 has four focus areas for MSMEs:
- Improving Cash flow management and access to credit and finance,
- New paradigm of risk evaluation,
- Employment
- Encourage going global
Let us take dive into details in these areas:
1. New method of credit Assessment: Public Sector banks will henceforth develop its credit assessment capabilities/models instead of relying on credit rating by third party agencies. They will rely on digital footprints like GST Return/ Income Tax Return in place of traditional formal accounting system. In effect, it will be cashflow based assessment in place of balance sheet-based assessment of credit worthiness of MSMEs. This will lead to faster and more accurate credit assessment and loan disbursal. The flip side of this change may be significant increase in bad loans of banks
2. Special Mention Account: MSMEs showing early sign of stress will get credit through guarantee from a government promoted fund. They will continue to run business and avoid getting into trap of NPAs.
3. Credit Guarantee Scheme for machinery and equipment purchases: A self-financing guarantee fund will provide a guarantee cover up to Rs. 100 crores for each applicant (even if the loan amount may be higher), facilitating term loans to MSMEs without requiring collateral or a third-party guarantee. This will enhance MSMEs’ access to finance, allowing them to invest in machinery and equipment, leading to modernization and increased productivity. However, the borrower will have to pay upfront fee and annual guarantee fee on reducing balance. It must be noted that the present definition of MSMEs covering investment in plant and machinery up to Rs. 50 cr needs to be tweaked to accommodate the change.
4. Mudra Loans: The loan limit under the ‘Tarun’ category of the Mudra scheme is increased from Rs. 10 lakhs to Rs. 20 lakhs for entrepreneurs who have successfully repaid previous loans. This will encourage successful entrepreneurs to expand their businesses, promoting growth and scalability in the MSME sector.
5. TReDS Platform Onboarding: The turnover threshold for mandatory onboarding on the Trade Receivables Discounting System (TReDS) platform is reduced from Rs. 500 crores to Rs. 250 crores. This will increase the number of MSMEs eligible for the TReDS platform, facilitating faster and more efficient receivables financing, improving their cash flow.
6. SIDBI’s Reach: SIDBI will open new branches (24) to serve major MSME clusters and provide direct credit within three years. This will enhance MSMEs’ access to credit, particularly in regions with significant MSME activity, fostering regional economic development.
7. E-Commerce Export Hubs: E-Commerce Export Hubs will be set up in public-private partnership (PPP) mode to enable MSMEs and traditional artisans to sell their products internationally. This will open new markets for MSMEs, allowing them to expand their customer base and increase export revenues, fostering global competitiveness.
8. Food Irradiation Units: Financial support will be provided to set up 50 multi-product food irradiation units in MSME sector. The government will also establish 100 food quality and safety testing labs with NABL (National Accreditation Board for Testing and Calibration Laboratories) accreditation. This will improve food safety and shelf life, benefiting MSMEs involved in food production and processing, and enabling them to meet higher quality standards.
There are other schemes like plug and play facilities to be set up in 10 cities, weekly haats to be set up in 100 cities and others. These will significantly enhance to the credit, cash flow and quality of goods/services offered by MSMEs.
In case, you are part of MSME ecosystem, you need any support or have any query regarding fund raising, compliances, valuation and taxation, you may like to connect with us.
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Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, KPAM & Associates, Chartered Accountants, New Delhi ; +91 9990013755; +91 9910744992; [email protected]; [email protected]
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