 FM Nirmala Sitharaman conveyed bank chiefs on 22nd May 2020.
 The government has asked banks to provide additional working capital to MSMEs.
 RBI slashed repo rates to ensure wider implementation of the FM’s message.

Analysis COVID-19 and economic crisis-NewsORB360

The Central government 2020 is propelling public sector banks to extend additional working capital support to small scale enterprises under the government’s loan policy to provide up to Rs 3 lakh crore to MSMEs as announced in its stimulus package. On the other hand, it has asked the banks to ensure that senior citizens gain interest on their fixed deposits to ensure adequate demand in the economy.

It has extended the Pradhan Mantri Vaya Vandana Yojna until 2023 under which senior citizens are entitled to an interest of 7.4% in the current financial a year and the figure to be reset the next year.


The government had also set forth an emergency facility to provide funds for businesses with less than 100 crores turn over and 25 crore outstanding liabilities (particularly, loans). The eligible business enterprises will be provided with additional working capital of 20% at 9.25%. The apex bank, RBI has previously slashed its repo rate on 22nd May by an additional 40 basis points which was an indication that public sector lenders may lower their lending rates.

Further to ensure larger implementation of its policy and credit creation in the economy impaired by the lockdown 2020, the government has directed the Reserve Bank of India assign zero risk weight to the funds given as additional working capital as these loans stand guaranteed by the government-owned National Credit Guarantee Trustee Company. Under this agreement, in case a borrower defaults and it turns to a Non-Performing Asset (NPA), 75% of the loan amount will be paid by the company.

While a full guarantee may have pushed the bankers even an additional step forward, the current provisions may also prove to be effective to increase the low-risk appetite as a result of their stressed books.


India’s largest public sector bank, State Bank of India’s chairman, Rajnish Kumar, stated, “ The measures for MSMEs through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation.”

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