The Finance Minister today announced a host of measures as tranche 1 of the Rs 20 lakh crore stimulus package to address the outbreak of coronavirus pandemic. It is important to note here that the stimulus package of Rs 20 lakh crores covers the earlier announcement of Rs 1.7 lakh crores by the Finance Minister and liquidity measures announced by the RBI. Today, the FM announced 15 measures covering MSMEs, Employee PFs, NBFCs, Discoms, Contractors, Real Estate and various tax measures. Below I try to provide in simple terms the details of this package.
The total quantum of measures announced so far can be summarized as below:
- From the Government (Stimulus 1.0) = Rs 1.7 lakh crs (note Rs 1 lakh crs out of this amount was already a part of Budget 2020)
- From the RBI – Rs 5.24 lakh crs
- The current announcement: Rs 5.94 lakh crs (The total spending by the government is not more than Rs 16,500 crs (assuming Rs 10,000 crs as Funds of Funds is also brought in by GoI and the revenue foregone on account of TDS)
- Total comes up to Rs 12.88 lakh crs which means around Rs 7 lakh crs is work in progress.
What’s in store for each segment:
1. MSMEs:
a. Collateral free automatic loans of Rs 3 lakh crs to be provided to MSMEs: In simple terms, the government has directed the banks and NBFC sector to extend loans worth Rs 3 lakh crs which will be collateral free and without guarantee fee payment. The details of the loan availability is provided below:
a. The loan will be provided by banks and NBFCs upto 20% of the outstanding loan as of February, 2020 (no clarity on the how this outstanding loans will be computed)
b. The loans will have a tenure of 4 years with a moratorium of 12 months on principal repayments. Interest will be capped. (Interest rate ambiguity)
c. 100% credit guarantee cover to banks and NBFCs on principal and interest amount.
d. This scheme can be availed till October, 2020.
e. The loan is provided without paying any guarantee fee or collateral
What is the benefit: The MSMEs which have been badly hit will get liquidity support for undertaking its operations.
Amount infused/spent by the government: Nil
b. Subordinate debt of Rs 20,000 crs for MSMEs: The banks will provide loans to the promoter of the MSMEs (Say Mr X) and then then the promoter will infuse the money as equity into the MSMEs.
a. A subordinate debt is like an unsecured loan which has a lower weightage than other borrowing instruments (like bank borrowings) with respect to claims on assets and earnings. This alternatively means it is equivalent to an equity investment but not actually one.
b. Government will provide a support of Rs 4,000 crs to an undertaking called Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The CGTMSE will in-turn provide partial credit guarantee support to the banks.
c. This announcement is specifically for MSMEs which are stressed and are a NPA (non-performing asset).
What is the benefit: Liquidity infusion to stressed MSMEs via equity from the promoter of the MSMEs. It will not be reflected as debt in the books of the MSMEs.
Amount infused/spent by the government: Rs 4,000 crs to CGTMSE
c. Equity infusion for MSMEs through Fund of Funds: The idea here is to create a “Fund of Funds” with a total corpus of Rs 10,000 crs. This fund of funds framework will help leverage a total of Rs 50,000 crs of funds which will be used as equity funding into MSMEs with potential and viability.
d. Change in the definition of MSMEs – The definition of has been revised with the investment limit revised upward, introduction of additional criteria of turnover and elimination of the distinction between manufacturing and services sector.
a. Earlier, MSMEs were defined and segregated into micro, small and medium enterprises based on the amount of their investment into plant and machinery. There were pre-defined limits set as per the MSME act. These investment limits have been revised upwards.
b. The criteria on turnover, which was not present earlier has now been added.
c. The earlier definition of MSMEs were separate from manufacturing and service sector MSMEs. This differentiation between the two has been removed now.
What is the benefit: Allowing MSMEs to grow and continue to reap the benefits available to the MSMEs.
Amount infused/spent by the government: Nil
e. Global tenders to be disallowed upto Rs 200 crs: This means that the government procurement upto Rs 200 crs will disallow global tenders and tenders will be taken only from Indian MSMEs. The idea here is to remove the competition faced by the Indian MSMEs from foreign competition.
Amount infused/spent by the government: Nil
f. Other interventions for MSMEs:
a. E-market linkage for MSMEs to be promoted to act as a replacement for trade fairs and exhibitions.
b. Also payments from government to MSMEs to be released within the next 45 days.
Amount infused/spent by the government: Nil
2. Employee provident fund benefits:
a. Liquidity relief for EPF establishments under the Pradhan Mantri Garib Kalyan Package:
i. Under the Pradhan Mantri Garib Kalyan Package (announced by the government few weeks back), 24% of the monthly wages were to be credited into the PF accounts for March, April and May. This was applicable for wage earners earning below Rs 15,000 per month and businesses having employees less than 100 workers.
ii. This scheme will now be extended for June, July and August.
What is the benefit: Additional liquidity to the employees as their EPF contribution will not be deducted. It is important to note here that the deduction for the employee is only 12% and the balance is contributed by the employer. Thus the balance 12% benefit is for the employer.
Amount infused by the government: Rs 2,500 crs
b. Reduction in EPF contribution for workers for the next 3 months
i. The statutory PF contributions of both employer and employee will be reduced from 12% to 10%.
ii. This is applicable for all establishment except for those covered in the Pradhan Mantri Garib Kalyan Yojana and Central Public Sector Enterprises.
iii. The government says that this will provide liquidity benefit of Rs 6,750 crs to the employee and employers.
What is the benefit: For employees whose PF is getting deducted will get an advantage of the 2% for the next 3 months. This is applicable also for the employer.
Amount infused/government by the government: Nil
3. For NBFCs
a. Special Liquidity Scheme for NBFCs/ HFCs/ MFIs:
i. A scheme will be introduced by the Government of India where the NBFCs/ HFCs/ MFIs can raise money from the debt market.
ii. The money here will not flow from the Government of India but the scheme will be launched by them and the securities in which this money will be invested will be guaranteed by the Government of India (100% guarantee)
iii. Under this scheme, the investment will be made in both primary and secondary market transactions in investment grade debt instruments.
What is the benefit: The investment grade NBFCs/ HFCs/ MFIs who require funds will be able to raise funds through this channel as investors will find it safe owing to government backed security.
Amount infused by the government: Nil
b. Partial Credit Guarantee Scheme 2.0 for NBFCs
i. The Budget 2020 had announced a partial credit guarantee scheme where the government would provide a partial guarantee to cover 10% of the loss faced by the PSBs investing in highly rated NBFCs.
ii. The government has now come up with a partial credit guarantee scheme 2.0 which will provide a partial guarantee of upto first 20% of the loss to the public sector banks who invest in the primary issuances of bonds and CPs of the NBFCs/ HFCs/ MFIs. The NBFCs defined here are the one having low credit rating but are still investment grade.
iii. The difference between the two schemes is that the loss coverage has been increased from 10% to 20% and the investment criteria has been changed from highly rated NBFCs to even low rated NBFC
iv. The government has said that there will be a liquidity infusion of around Rs 45,000 crs.
What is the benefit: The low rated NBFCs will be able to garner more funds which can support on-lending to MSMEs.
Amount infused by the government: Nil
4. Liquidity injection for Power Distribution Companies:
a. The liquidity infusion to the power distribution companies (who are facing cash flow problems) will get money from Power Finance Corporation/ Rural Electrification Corporation aggregating Rs 90,000 crs. This amount will be raised by the distribution companies against the receivables/ debtors in their books of accounts (like a collateral). So simply, it is a loan given by PFC/REC to the distribution companies. The loans which will be given will be backed by state government guarantees.
b. This money in turn can be used to make payments to power generation companies.
What is the benefit: The power distribution companies get liquidity to make payments to the power generation companies.
Amount infused by the government: Nil
5. Extension to the Contractors:
a. 6 months of extension to be provided to the contractors by all central agencies (like Railways, Ministry of Road Transport& Highways etc) to cover its construction work and get it completed.
b. Government agencies to partially release bank guarantees to the extent of the work completed by the contractor.
Amount infused/spent by the government: Nil
6. Extension of registration and completion dates of real estate projects under RERA. The amount infused by the government is Nil.
7. Tax proposals:
a. From May 14 to March 31, 2021, TDS and TCS rate has been reduced by 25%. This is for non-salaried tax payments. The government estimates this will release 50,000 crs in the hands of the people. However, the amount infused/spent by the government is Nil. This is like a revenue loss to the government.
b. Other regulatory extensions like due dates of income tax returns, tax audits, date of assessments.
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