MUMBAI: Micro, Small and Medium Enterprises (MSMEs) looking to avail fresh loans under the government’s ambitious 3 lakh crore liquidity program for the sector are running into additional costs in the form of stamp duty, a proposition that many of these businesses are finding difficult, said two people aware of the development.

According to people cited above, the issue was raised at a meeting with finance minister Nirmala Sitharaman last week but is taking time to be resolved as individual states will have to grant an exception. According to a banker, lenders pointed out how smaller micro, small and medium enterprises (MSMEs) are not able to pay the stamp duties and are not using the facility.

“These stamp duties vary from state to state and are becoming a burden on businesses with little cashflows. While the loan was touted to be hassle-free and devoid of any fresh collateral, a document called the memorandum of deposit of title deed is needed to be registered for the loan. That is where the stamp duties are applicable,” said the first person quoted above.

The first of the two people said the finance ministry has assured that the issue will be taken up with the states, seeking a waiver of stamp duties on these guaranteed loans.

Under the emergency credit line backed by a government guarantee, banks have sanctioned loans worth over 79,000 crore as of 20 June, of which more than 35,000 crore has been disbursed, showed government data.

“I do not see a major challenge in the scheme as of now—just that there is a minor deterrent in the additional cost of stamp duty that companies in some states may have to bear for the creation of a second charge for this loan (on the present security),” Manish Kothari, president and business head – corporate banking (large corporates, MNC, SME & new age companies), Kotak Mahindra Bank Ltd told Mint in a recent interview.

According to the second person, small business borrowers from private banks are having to pay more interest than their counterparts in state-owned lenders. The private banks, this person added, are charging an interest of 9.25% or the upper limit allowed by the government, adding to the cost for these small businesses.

“Public lenders are giving out these loans at a much lower interest rate of 7.5% as these are linked to an external benchmark, usually the Reserve Bank of India (RBI) repo rate,” said the second person. The RBI repo rate stands at 4%, after a 115 basis point (bps) reduction since March.

The person said that some borrowers being approached by banks for these funds are saying it does not make sense for them to pay a large stamp duty for a small loan. “For larger MSMEs also, it is more like an added cost that they do not want to shell out in these times,” said the second person.

Under the scheme, while non-banking financial companies (NBFCs) can charge an interest of up to 14% on the extra credit, banks can charge up to 9.25%.

Chandrakant Salunkhe, founder and president of SME Chamber of India said that some banks are also asking the borrower for personal guarantees, despite it being free of collateral.

“There is also a delay in disbursing these loans, which should be quickened because if the money does not reach people on time, the scheme will not be effective,” said Salunkhe.

Mint reported on 16 June that Sitharaman reached out to private sector lenders and non-banking financial companies (NBFCs), urging them to join public sector banks in scaling up lending to small businesses.

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