The COVID-19 induced pandemic has clearly overwhelmed the Indian society. Seeing the tragedy unfold on our TV screens has been heart breaking for many. Loss of lives has been immense. And my heart goes out to everyone. Hopefully, lessons are being learnt, and people along with businesses will find the relief that they badly need, in order for them to come out of this crisis stronger, and then build back better.

I must say, it was quite heart warming to see the generosity of people from across the world. In time of need, people did whatever they could in their own capacity to help. In my personal capacity, I have tried to do whatever I could to help. And now that the spike is flattening, the focus will shift from saving lives to providing financial relief to people and the businesses at large. This is where I feel, the government along with central bank should be brave enough to explore innovative ideas to support the economic recovery of the country.

The economic cost of the lockdown on people and businesses especially the MSMEs is mounting. Based on various estimates the current covid -19 pandemic related lockdown in India is costing the economy around US$ 1.3 billion per week, which translates to a contraction of over 11% year-on-year basis in the overall economic output of the country.

So targeted support is going to make all the difference. MSMEs make up over 30% of India’s GDP, and therefore are a key driver of the economy employing more than 110 million people across the country.

Based on the Reserve Bank of India (RBI) report, as of June 2020, the total commercial lending exposure in India stood at over USD 919.06 billion, of this the overall exposure to MSME is roughly around USD 232 billion. But the requirement is far greater, leaving a very sizeable funding Gap of around 219 billion and growing.

Although fintech lenders have started providing innovative financing to the MSME sector, the availability of funding is still a major bottleneck. It has always been an issue in an economy like India. And this problem has multiplied multi fold during the COVID-19 pandemic related lockdown in the country this year.

As the economy starts to open up from June onwards, it is becoming increasingly likely that a sizeable percentage of the MSMEs will find it very difficult to stay afloat, and therefore, it is extremely important that a support infrastructure using the existing resources are put in place to help protect the sector, and also the economy.

So what are the options that the government along with the central bank ( RBI ) could explore ? There are a number of ideas, and I am taking the liberty of throwing a hat from my side in the ring.

To encourage lending, the government of India acting through the Credit Guarantee Fund for Micro and SmalI Enterprise, which comes under the ministry of MSMEs could insure US $ 25 billion worth of new credit exposure of financial firms to MSMEs for a period of 5-years, and charge a flat fee of 1 % per year for extending the facility along with a 0.50% in arrangement fee. The central Bank, RBI could extend a 5-year covid recovery facility in the amount of US$ 25 billion to banks as well as qualified non banking financial companies in the country, either in the form of term funding facility or asset purchase.

The financial firms including banks could avail the facility from the RBI to provide new funding requirement of MSME against the insured loans. And the portfolio could also be securitised and then sold in the secondary market.

Also to help support people who have lost their livelihood because of the lockdown and stabilise the consumption, the ministry of finance of the country could explore issuing US$ 25 billion worth of 10-year redeemable digital covid relief voucher linked to people’s aadhar card (unique identification) and bank account.

Qualifying banks could provide funding against this digital voucher redeemable in 10-years for a flat fee. The entire process could be managed by the central bank. And the banks along with other non banking financial companies could sell the portfolio of consumer loans secured against the digital covid relief voucher to the central bank under the asset purchase initiative.

I am quite aware of the pros & cons of the ideas that I have taken the liberty of proposing, and by no means, this is a silver bullet, but yes, it is indeed an idea worth exploring. The government of the day along with the central bank will have to find innovative ways to support the economic recovery, and my hope is that, this crisis will kickstart the process of redesigning the architecture of the economy. Which the country badly needs.

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