Small businesses could be offered a bespoke credit card with a ₹1-lakh limit if the government’s plan to universalise credit flows goes through.
The credit card will be offered by SIDBI to micro, small and medium enterprises (MSMEs) registered on the Udyam portal.
The card will pool together all the credit schemes available for MSMEs, including interest subvention, in addition to offering collateral-free loans of up to ₹1 lakh, similar to what is provided to Kisan Credit Card (KCC) beneficiaries, two people aware of the development said.
According to them, it could be branded as Vyapar Credit Card (VCC), as suggested by the standing committee on finance in a recent report. It will be offered to MSMEs for meeting their business credit needs with provisions for enhanced credit, based on their financial performance and credit servicing abilities. The initial limit could vary between ₹50,000 and ₹1 lakh.The rules for providing CIBIL ratings for MSMEs may also be tweaked to allow improved and updated data flows to ratings agencies to provide fairer ratings to the sector.
Queries sent to the finance ministry, and secretary, department of financial services, and MSME remained unanswered till press time.
“This will create a substantial incentive for even nano-MSMEs (such as roadside vendors, kirana shops and village salons) to sign up on the Udyam portal. There are crores 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 said.
Once MSMEs are registered on Udyam, other targeted programmes can also be created by industry, geography and size. The MSME database can also be used by states and other stakeholders to help small businesses.
To be sure, while the finance ministry has begun discussions on VCC, it had earlier indicated that several banks were already providing their own credit cards for MSME borrowers, including Pradhan Mantri Mudra Yojana borrowers, so a separate card may not be needed at this juncture.
However, the people quoted above said the scheme chimes in with the ministry’s attempts to universalize card benefits among all banks so that services offered to card holders do not vary from one bank to another.
This will also provide MSMEs an easy and convenient access to formal credit. It is expected that VCC will provide short-term loans at low interest rates for meeting the working capital requirements of MSMEs.
It will be further extended to provide collateral-free, small loans to MSMEs, like the ₹1 lakh collateral-free facility available to KCC holders.
A limit of 5-10% of the credit limits of the institutions could be encouraged through the card for bonafide business expenditure. New to credit, informal customers, once formalized, may be offered small value limits through the card. Other benefits may also be offered through suitable linkages to the card. A detailed plan is likely to be prepared for this in consultation with leading banks.
Formal borrowing by MSMEs is very limited at present with as high as 60% of India’s 600 million MSMEs not borrowing from banks and institutions.
This has resulted in a credit gap of ₹20-25 trillion. Also, lower ratings mean 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 lending to the smallest of entities.
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