Credit and Finance for MSMEs: MSME association Federation of Indian Micro and Small & Medium Enterprises (FISME) has signed a memorandum of understanding (MoU) with financial guarantee provider Eqaro Surety to set up a digital lending platform for MSMEs in the country. FISME said the platform is expected to be launched this year and will provide access to collateral-free capital up to Rs 25 lakh to fulfil MSMEs’ need for urgent funds post due diligence of their businesses. The credit would be backed by guarantees from Eqaro.
“This is like an overdraft facility initially pegged at Rs 25 lakh that could be tapped anytime from anywhere should an MSME need funds,” said Prashant Patel, President, FISME in a statement. The MoU was signed between Patel and Eqaro’s chief executive officer Vikash Khandelwal. FISME represents over 740 MSME associations with an outreach of over 2 million MSMEs.
“Lending has traditionally been collateral-based. This unique and first time in India initiative will help MSMEs get easier access to credit backed by a surety guarantee without the need to put up collaterals,” said Khandelwal.
While surety guarantees are a proven financial instrument used in developed countries such as the US in place of traditional collateral securities or bank and performance guarantees, it is still in its nascent stages in India, said FISME.
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Importantly, Finance Minister Nirmala Sitharaman in her budget speech this year had announced the use of surety bonds as a substitute for bank guarantees to be made acceptable in government procurements. “IRDAI has given the framework for the issue of surety bonds by insurance companies,” the minister had said. This is expected to help MSME suppliers and work contractors who could now look at insurance firms for surety of their payments.
A surety is essentially a risk transfer mechanism where the surety company assures the project owner of the performance obligation of the contractor. MSMEs usually have to give margin money and collateral security to cover the risk of a bank guarantee. As a result, bank guarantees restrict working capital for MSMEs and limit them from participating in more tenders.