Due to the coronavirus lockdown, many businesses and MSMEs have suffered. Addressing the nation on 12th May 2020, PM Modi announced a Rs 20 lakh crore relief package for all businesses and MSMEs. This will be called Aatma Nirbhar Bharat package. Furthermore, PM Modi said that Finance Minister Nirmala Sitharaman would go on to give a detailed briefing on the usage of this relief package in the coming days. Thus, on 13th May 2020, Nirmala Sitharaman gave her first briefing on the 20 lakh crore package usage for relief to businesses and MSMEs. This brief contains some sixteen points. In this article, we will discuss points seven and eight of this package. These points are regarding EPF support for employers and employees.
Table of Contents
PMGKY Benefit Date Extension
- Under the Pradhan Mantri Garib Kalyan Yojana, the Central Government was going to pay the employees’ EPF contribution of 12% of their wages as well as the employers’ EPF and EPS contribution of 12% of the wages. Hence, a total of 24% of the monthly wages will come directly from the Central Government.
- For the eligibility of this scheme, a firm must have less than 100 employees. Additionally, 90% of those employees must earn below Rs 15,000/month.
- This was applicable for the months of March, April and May 2020.
- If companies had filed their ECR then they would get this benefit. Since this scheme was notified late, it was also announced that if any company had already filed their EPF payments then they would get a reimbursement.
- The PMGKY has now been extended for another three months. Hence, employers and employees will get their benefits for June, July and August 2020 as well.
- This package will benefit approximately 3.67 lakh establishments along with 72.22 lakh employees. Plus, it will cost the Central Government approx Rs 2500 crore.
- Read all further details on PMGKY in Pradhan Mantri Garib Kalyan Yojana (PMGKY) | EPF 24% Relief Full Details.
PF Contribution Rate Reduction
- The PF contribution rate for employers and employees has been reduced. Both employer and employee will contribute 10% of their salary to EPF instead of the earlier 12% each.
- This will reduce the contribution towards employee’s PF fund, but alternatively, his take-home salary will increase.
- The revised PF contribution rate is applicable for the next three months, i.e., June, July and August 2020.
- However, all state PSUs and CPSEs will continue to contribute 12% as the employer’s contribution to EPF. Although, employees will contribute only 10%.
- This scheme is not eligible employees who are already covered under PMGKY. Wherein, the Central Government is already paying 24% EPF contribution.
- Approx 6.5 lakh establishments and 4.3 crore employees, who are not covered under PMGKY, will benefit from this PF contribution rate reduction. It will cost the government Rs 6750 crore.
Practical Challenges to Expect
- For CPSEs and state PSUs where employer and employee contributions will be different, there will be higher chances of having calculation errors. Since most softwares for PF contribution are designed to have an equal contribution from both parties. Recalibrating them to calculate the revised different contributions, might create difficulty.
- Secondly, employees covered under PMGKY must receive direct EPF contribution from the government. And their salary should not include EPF deduction. But it is not possible to know which employees are covered under PMGKY and will get the benefit. So calculations will be difficult for the concerned personnel.
Watch more details on the 20 lakh crore package in the video below.
Relief Methods for MSMEs
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FM Nirmala Sitharaman gave further areas of relief where the 20 lakh crore package will be utilized for aid to MSMEs specifically. These areas of relief will be as follows:
Collateral-Free Automatic Loans
- MSMEs will not have to put any collateral or guarantee such as house, land, gold, etc., against taking these loans. Hence they are termed “collateral-free”.
- These loans will get sanctioned automatically without any additional legal paperwork required. Hence termed as “automatic”.
- Collateral free automatic loans will be available for all MSMEs except stressed ones. It is available till 31st October 2020.
- Overall, Rs 3 lakh crore has been sanctioned for this relief. It is believed to benefit some 45 lakh units.
- Under collateral free automatic loans, an emergency credit line will be available to all businesses and MSMEs.
- This loan will be available from banks and NBFCs.
- A maximum loan of 20% of the firm’s entire outstanding credit as on 29th February 2020 will be given.
- All businesses/MSMEs with an outstanding credit of up to Rs 25 crore and eligible turnover of up to Rs 100 crore are eligible for this.
- This loan will have a tenor of 4 years with a moratorium of 12 months on the principal repayment. So the principal amount does not have to be repaid, only the interest has to be repaid.
- Interest on this loan will be capped.
- Central Government will give 100% credit guarantee to banks and NBFCs on principal and interest. This is to encourage them to give these loans freely and not have any risks.
Subordinate Debt for Stressed MSMEs
- MSMEs that have ongoing NPAs with banks and poor financial status are termed stressed MSMEs.
- Such stressed MSMEs will receive a subordinate debt of Rs 20,000 crores from the Indian Government. Thus, the government will take guarantee for these loans.
- This will benefit 2 lakh units.
- Central Government will provide relief worth Rs 4000 crore to Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). CGTMSE will provide partial credit guarantee to support the banks.
- The promoters of the MSME and not the company itself will receive this loan from the bank.
- The promoters, in turn, can infuse this loan with their company, or purchase it as an equity unit.
- Thus, this loan becomes the MSME promoters liability and will be reflected on their credit score. It will not be the company’s liability.
Fund of Funds (FoF) to Help MSMEs Grow
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- Central Government will issue a fund of funds with a corpus of Rs 10,000 crores.
- This fund will be used for equity funding of viable MSMEs with growth potential.
- It will be operated through a Mother Fund and few Daughter Funds.
- A total of Rs 50,000 crore worth of funds has been allocated to viable MSMEs which are currently doing well. Apart from Central Government, other investors will pitch in too.
- These MSMEs will later be encouraged to get listed on the stock exchange market. So that their equities can be sold and the investment returned.
The New Definition of MSME
- The previous definition of MSMEs has been revised.
- It now includes a higher investment limit.
- Additional criteria of turnover limit has also been introduced.
- The distinction in criteria between the manufacturing and service sector has been eliminated, to make way for a single criterion.
- The necessary amendments to the law required for this new MSME definition will also be brought about.
- As seen in the image below, Investment for Micro units is now defined as under Rs 1 crore. Meanwhile, Turnover for Micro units is capped at Rs 5 crore.
- Similarly, Investment for Small units is capped at Rs 10 crore and Turnover is capped at Rs 50 crore.
- Lastly, Investment for Medium units is capped at Rs 20 crore and Turnover is capped at Rs 100 crore.
Other Relief for MSMEs
- Global tenders will be disallowed in Government procurement tenders of up to Rs 200 crores. Only Indian brands will be eligible.
- MSME receivables from Government and CPSEs will be released in 45 days (Eg. Air India, BSNL, IRCTC, etc.)
Watch detailed video on the relief designed with the 20 lakh crore package for MSMEs below.
Mudra Loan For MSMEs at 2% Less Interest
As part of the PM relief package, Mudra Loans for MSMEs will be given at 2% less interest rate. As everyone knows, Mudra Loan aims at bringing collateral-free loans to small and medium businesses, thus helping them grow. Moreover, the key target audience for Mudra Loans are citizens under SC, ST and OBC categories. It is possible to take upto Rs 10 lakh worth of loan, which would be a great help in these difficult financial times.
Who Can Take Mudra Loan?
Any income-generating business in the non-farming sector, such as trading, manufacturing, and services, that requires under Rs 10 lakh loan, can apply for Mudra Loan. Over 24 crore people have already benefited from this loan.
Types of Mudra Loan
- Shishu Loan – It is a loan of upto Rs 50,000 with 1% interest per month and 12% interest per annum. Its tenure lasts from 3-5 years.
- Kishore Loan – This loan can range from Rs 50,000 to Rs 5 lakh. The interest is decided by the bank depending on one’s credit history as well as the tenure is decided by the bank.
- Tarun Loan – This loan can range from Rs 5-10 lakh. The interest is decided by the bank depending on one’s credit history as well as the tenure is decided by the bank.
Uses of Taking a Mudra Loan
One must have a definite purpose for taking the Mudra Loan. Moreover, one needs to create a report explaining how they intend to use the loan money. The purpose for taking the loan can be one of the following:
- Purchasing a car or commercial vehicle
- Purchasing a two-wheeler for work
- Need for working capital
- Loan for plant and machinery
- Redoing the business space
Documents for Taking Mudra Loan
Depending on the type of loan one is taking as well as the bank, the documents needed may vary. However, one has to furnish proof of their business for the loan since it is collateral-free. The following documents are needed overall:
- Identity proof – Any type of driving license, voter ID card, PAN card, passport, Aadhaar card, any photo ID issued by the government authority, or signature identification of proprietor or partner from the present banker.
- Proof of residence- Any type of recent telephone bill (dated within last 3 months), recent electricity bill (dated within last 3 months), passport, recent tax receipt of the property, voter ID card, Aadhaar card, recent bank statement that is duly attested by the bank officials.
- Two recent passport size photos of the loan applicant
- Last 6 months bank statement
- Identity proof and address proof of the business establishment – copies of most recent business license or registration certificate of the business. Other documents containing the owner’s name and the business address also could be furnished.
- Rental agreement if the business establishment is in a rented facility/premises.
- Clearance certificate from the pollution control board, in case applicable.
- Small scale industry (SSI) registration from the ministry of micro, small and medium enterprises is required for certain businesses.
- For the loan amount above 2 lakhs, audited balance sheets of the units for the most recent three years are required along with the returns of income tax or sales tax.
- All loan amounts above 2 lakhs, the projected balance sheets for the next two years for working capital limits and projected loan period for term loans are to be furnished.
- For a company, need the memorandum as well as the article of association.
- For a partnership business, a partnership deed is required.
- Guarantors and promoters need to furnish assets and liabilities statements as well as the latest income tax return.
- Pertaining documents in case the applicant belongs to SC/ST/ or any other special category and intends to avail loan under those categories.
- Quote for the machinery or other items to be purchased.
Where Can You Get the Mudra Loan?
The loan is available at:
- 27 public sector banks
- 31 regional rural banks
- 17 private sector banks
- 36 microfinance institutions
- 25 non-banking financial institutions
- 4 co-operative banks
What Benefits Did FM Announce?
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FM announced that once your 3 months moratorium is over and you start paying the EMI, for the period from then till the next 12 months you can get a 2% less interest rate. However, this is only applicable for people who take the Shishu Mudra Loan. Also, one needs to pay the EMI on time else they cannot take the benefit.
It is also important to note that while applying for Mudra Loan, no bank can charge a processing fee. Secondly, if all documents are complete, then one must get this loan within 30 days. Else they can file a complaint against the bank.
Watch more details about this update from the 20 lakh crore package annocement in the video below.
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Frequently Asked Questions (FAQs)
The Pradhan Mantri Garib Kalyan Yojana (PMGKY) benefit date was extended by three months (June, July, and August 2020). Under this scheme, the Central Government covers both the employer’s and employee’s EPF contributions (12% each) for eligible businesses with less than 100 employees, where 90% of the workforce earns below ₹15,000 per month.
This extension aims to support approximately 3.67 lakh establishments and 72.22 lakh employees, costing the government around ₹2,500 crore.
The Aatma Nirbhar Bharat package includes a provision for collateral-free automatic loans to MSMEs. These loans do not require any collateral and are automatically sanctioned without additional paperwork. MSMEs with outstanding credit up to ₹25 crore and turnover up to ₹100 crore as of February 29, 2020, are eligible.
The loan has a four-year tenor with a 12-month moratorium on principal repayment. The government provides a 100% credit guarantee to banks and NBFCs, encouraging them to disburse these loans.
The definition of MSMEs was revised under the Aatma Nirbhar Bharat package. Micro enterprises are now defined as businesses with an investment of up to ₹1 crore and a turnover of up to ₹5 crore.
Small enterprises have an investment cap of ₹10 crore and a turnover cap of ₹50 crore.
Medium enterprises can have investments up to ₹20 crore and a turnover up to ₹100 crore. This new definition includes a unified criterion for both manufacturing and service sectors.
Mudra Loans are collateral-free loans provided to MSMEs, with interest rates reduced by 2% under the relief package. Loans are available up to ₹10 lakh, with specific types like Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
These loans are designed to support small businesses in sectors such as trading, manufacturing, and services. No processing fee is charged, and the loan should be disbursed within 30 days if all documents are complete.
The PF contribution rate for employers and employees was reduced from 12% to 10% of the employee’s salary for three months (June to August 2020). This reduction aims to increase the take-home salary of employees.
However, CPSEs and state PSUs will continue contributing 12% as the employer’s share. This reduction does not apply to employees covered under PMGKY, where the government already pays the full 24% EPF contribution.
There are potential challenges in implementing the PF rate reduction and the PMGKY benefits. For CPSEs and state PSUs, differing employer and employee contribution rates might cause calculation errors, as most payroll software is designed for equal contributions.
Additionally, it may be difficult to identify which employees are covered under PMGKY, complicating payroll calculations for concerned personnel.
