In the pipeline, a credit card just for MSMEs

Small businesses could be offered a bespoke credit card with a Limit of 1 lakh if ​​the government’s plan to universalize credit flows materializes.

The credit card will be offered by SIDBI to micro, small and medium-sized enterprises (MSMEs) registered on the Udyam portal.

The card will bundle all credit schemes available to MSMEs, including interest subsidy, in addition to offering collateral-free loans of up to 1 lakh, similar to what is provided to Kisan Credit Card (KCC) recipients, two people with knowledge of the development said.

According to them, it could be the Vyapar credit card (VCC), as suggested by the Standing Committee on Finance in a recent report. It will be offered to MSMEs to meet their business credit needs with provisions for enhanced credit, based on their financial performance and credit service capabilities. The initial limit can vary between 50,000 and 1 lakh. The rules for providing CIBIL ratings for MSMEs may also be amended to allow for improved and updated data flows to rating agencies to provide fairer ratings to the sector.

Questions sent to the Ministry of Finance and the Secretary of the Department of Financial Services and MSMEs remained unanswered until press time.

“This will create a substantial incentive even for nano-MSMEs (such as roadside vendors, kirana shops and village saloons) to register on the Udyam portal. There are millions of MSMEs that have not yet entered the formal financial system. The Vyapar credit card will be an excellent mechanism to bring them into the system,” the standing committee report says.

Once MSMEs are registered on Udyam, other targeted programs can also be created by sector, geography and size. The MSME database can also be used by states and other stakeholders to help small businesses.

Of course, while the Ministry of Finance has started discussions on the VCC, it had previously indicated that several banks were already providing their own credit cards to MSME borrowers, including Pradhan Mantri Mudra Yojana borrowers, so a separate card may not be necessary at this point. .

However, the people quoted above said the program is in line with the ministry’s attempts to universalize the benefits of the card across all banks so that the services offered to cardholders do not vary from bank to bank. .

It will also provide MSMEs with easy and convenient access to formal credit. It is expected that VCC will provide short-term loans at low interest rates to meet the working capital needs of MSMEs.

It will be further expanded to provide small unsecured loans to MSMEs, such as the 1 lakh unsecured available for KCC holders.

A limit of 5-10% of institutions credit limits could be encouraged through the card for bona fide business expenses. New to credit, informal customers, once formalized, can be offered low value limits through the card. Other advantages can also be offered by appropriate links with the card. A detailed plan will probably be prepared for this purpose in consultation with the main banks.

Formal borrowing by MSMEs is currently very limited, with up to 60% of India’s 600 million MSMEs not borrowing from banks and institutions.

This resulted in a credit spread of 20-25 trillion. Furthermore, lower ratings mean that many MSMEs are forced to borrow at high interest rates and have limited access to financial products. The VCC is expected to address some of these concerns by providing cash flow based loans to smaller entities.

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