FOR OFFICIAL USE ONLY Report No: ICR00005637 IMPLEMENTATION COMPLETION AND RESULTS REPORT L 9153-IN ON A LOAN IN THE AMOUNT OF US$ 750 MILLION TO INDIA FOR THE MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE DEVELOPMENT POLICY LOAN (P174292) June 23, 2022 Finance, Competitiveness And Innovation Global Practice South Asia Region The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) CURRENCY EQUIVALENTS (Exchange Rate Effective May 30, 2022) Currency Unit = Indian Rupee INR INR77.52 = US$1 US$0.012 = INR 1 FISCAL YEAR April 1 – March 31 Regional Vice President: Hartwig Schafer Country Director: Hideki Mori Regional Director: Zoubida Kherous Allaoua Practice Manager: Gabi George Afram Task Team Leader(s): Mehnaz S. Safavian, Marius Vismantas ICR Main Contributor: Venkat Bhargav Sreedhara The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises CPF Country Partnership Framework CPSE Central Public Sector Enterprises DFI Development Finance Institution DPF Development Policy Financing ECLGS Emergency Credit Line Guarantee Scheme FSAP Financial Sector Assessment Program GECL Guaranteed Emergency Credit Line GoI Government of India GST Goods and Services Tax IBRD International Bank for Reconstruction and Development IFC International Finance Corporation MoF Ministry of Finance MoMSME Ministry of Micro Small and Medium Enterprises MSME Micro Small and Medium Enterprises NBFC Non-Banking Financial Company NCGTC National Credit Guarantee Trustee Company Ltd NPL Non-performing Loan PCG Partial Credit Guarantee scheme PSB Public Sector Bank PSIA Poverty Social Impact Assessment PSL Priority Sector Lending RBI Reserve Bank of India SFB Small Finance Banks SIDBI Small Industries Development Bank of India SPV Special Purpose Vehicle TLTRO Targeted Long Term Repo Operations TReDS Trade Receivables Discounting System WB World Bank WBG World Bank Group The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) TABLE OF CONTENTS DATA SHEET .........................................................................................................................1 I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES ............................................... 4 II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES ........................................ 10 III. OTHER OUTCOMES AND IMPACTS ............................................................................ 19 IV. BANK PERFORMANCE ............................................................................................... 20 V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES .......................................... 21 VI. LESSONS AND NEXT PHASE ....................................................................................... 23 ANNEX 1. RESULTS FRAMEWORK ........................................................................................ 25 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES ...... 32 ANNEX 3. BORROWER, CO-FINANCIERS, AND OTHER DEVELOPMENT PARTNERS’/ STAKEHOLDERS’ COMMENTS .............................................................................................. 34 ANNEX 4. SUPPORTING DOCUMENTS ................................................................................. 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) . . DATA SHEET BASIC INFORMATION Product Information Project ID Program Name P174292 MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE Country Financing Instrument India Development Policy Lending DPF Options Programmatic Regular Deferred Drawdown Option Catastrophic Deferred Drawdown Option No No No Crisis or Post Conflict Sub-National Lending Special Development Policy Lending Yes No No Organizations Borrower Implementing Agency Republic of India Department of Financial Services, Ministry of Finance Program Development Objective (PDO) Program Development Objective (PDO) The Project Development Objective of the proposed DPF is to support the GoI in preserving flows of finance to MSMEs through the COVID-19 crisis and lay the foundations for a stronger MSME financing ecosystem in the recovery phase. PROGRAM FINANCING DATA (USD) FINANCE_TBL Approved Amount Actual Disbursed World Bank Administered Financing Page 1 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 750,000,000 750,000,000 IBRD-91530 Total 750,000,000 750,000,000 KEY DATES Concept Review Decision Review Approval Effectiveness Original Closing Actual Closing 01-Jun-2020 05-Jun-2020 30-Jun-2020 14-Jul-2020 30-Jun-2021 30-Jun-2021 RATINGS SUMMARY Program Performance Overall Outcome Relevance of Prior Actions Achievement of Objectives (Efficacy) Satisfactory Satisfactory Satisfactory Bank Performance Satisfactory RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) SECTORS AND THEMES Sectors Mitigation Co- Adaptation Co- Major Sector/Sector (%) benefits (%) benefits (%) SECTOR0_TBL Financial Sector 100 0.00 0.00 Banking Institutions 22 0 0 Capital Markets 57 0 0 Other Non-bank Financial Institutions 21 0 0 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Page 2 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Private Sector Development 43 ICT 43 ICT Solutions 43 Finance 100 Financial Infrastructure and Access 100 Credit Infrastructure 29 Payment & markets infrastructure 43 MSME Finance 100 Financial inclusion 14 Finance for Development 14 Infrastructure Finance 14 Public Sector Management 14 Public Administration 14 E-Government, incl. e-services 14 Human Development and Gender 100 Disease Control 100 Pandemic Response 100 ACCOUNTABILITY AND DECISION MAKING Role At Approval At ICR Regional Vice President: Hartwig Schafer Hartwig Schafer Country Director: Junaid Kamal Ahmad Hideki Mori Director: Zoubida Kherous Allaoua Zoubida Kherous Allaoua Practice Manager: Esperanza Lasagabaster Gabi George Afram Mehnaz S. Safavian, Marius Mehnaz S. Safavian, Marius Task Team Leader(s): Vismantas Vismantas . Page 3 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES A. Context at Appraisal Context 1. India’s economic growth was slowing down even before the shocks emanating from Covid -19, along with slowing credit growth. India’s GDP growth slowed from an average of 7.4 percent between FY 2014-15-FY 2018-19 to around 3.7 percent in FY 2019-20. Between FY 2018-19 and FY 2019-20, the GDP growth rate decelerated for eight consecutive quarters. The slowdown in economic growth is associated with slowing credit growth, overhang of legacy NPLs which limit the financial sector’s ability to support growth and weakening balance sheets of corporates and lenders. Credit growth for the banking sector also declined from 12.3 percent in FY 2018-19 to 6.7 percent in FY 2019-20. While Non-banking financial companies (NBFCs) have stepped in to partially address the credit gap for Micro, Small and Medium Enterprises (MSMEs) and others, defaults by two large NBFCs in 2018 had an adverse impact on NBFC liquidity and access to capital markets, resulting in a slowdown in NBFC credit. 2. The impact of Covid-19 and the associated national lockdown announced in late March 2020 exacerbated the slowdown in economic activity due to mobility restrictions and rising Covid-19 cases. A stringent national lockdown, one of the largest lockdowns across the globe, was implemented on March 24, 2020, which prohibited movement of almost all people and goods, except for essential services. These mobility restrictions caused disruptions in supply chains and adversely impacted supply and demand across the country. As a result, GDP for Q1 FY 2020-21 (April – June 2020) contracted by 23.8 percent(y-o-y). This contraction was uniform across both services and manufacturing sectors, with only the agriculture sector reporting positive growth. Even as mobility restrictions were gradually eased in Q2 FY 2020-21, and economic activity resumed in a limited capacity, growth remained negative at -6.6 percent (y-o-y) in Q2. This slowdown in economic activity had a damaging effect on the health of firms, especially MSMEs, and their ability to meet financial and other obligations, as revenues dropped precipitously, and lockdowns prevented movement of inputs and workers. At the same time, there was a significant impact on employment and livelihoods for workers employed in MSMEs and the informal sector, as income and consumption expenditure declined significantly during April-June 2020. 3. The MSME sector was among those worst affected by the lockdown, due to its structure and existing vulnerabilities to shocks, and required urgent support due to its significance to the Indian economy. The MSME sector consists of over 63.3 million firms, with over 99 percent of those categorized as micro firms, which typically have a lower degree of formality. The MSME sector contributes around 30 percent of GDP and around 45 percent of exports. The sector is also the largest non-agricultural employer with over 110.9 million workers employed in MSMEs1. The impact of Covid-19 and associated lockdowns on MSMEs was reflected in an immediate and significant reductions in revenues, disruption in orders and supply chains, and reduced hours for workers, with many MSMEs having to completely suspend operations. A survey by the Centre for Financial Inclusion on the impact of Covid-19 on the Indian MSME sector2 found that more than 89 percent of respondents reported a decline in profits during April-June 2020, with over 37 percent reported 1 https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf 2 https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/india Page 4 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) a decline in profits of 50 percent or more.3 Over 30 percent of respondent firms reported that they reduced the number of employees. More than 50 percent of MSMES reported that they could not meet household expenses for more than 2 months, in the absence of income from their business. Other surveys indicated that MSMES in the manufacturing sector in particular were impacted due to the reverse migration of workers, mobility restrictions and other related factors. 4. There was a sharp decline in employment levels, and consequently in consumption expenditure, for workers, many of whom were employed in the MSME sector. A survey by CMIE4 on employment immediately after the national lockdown reported that a significant decline in workforce participation rate between February 2020 (pre-lockdown) and April 2020 (post-lockdown) resulted in the temporary elimination of over 100 million jobs5, across the formal and informal sectors. Though employment levels recovered gradually over the next few months, the survey reported 15 million fewer jobs in July 2020, as compared to February 2020. The government’s Periodic Labour Force Survey (PLFS) reported that the unemployment rate increased from 9.1 percent in January – March 2020 to 20.9 percent in April – June 20206. Many workers in the MSME sector do not any form of social security7, and women and young workers were particularly vulnerable to job losses and decline in income. A CMIE survey on household consumption found that the percentage of individuals with monthly consumption expenditure of Rs.1000 or below increased from 5.0 percent in August 2019 to 10.0 percent in August 2020, while the share of respondents with monthly consumption expenditure below Rs.2000 increased from 34.9 percent in August 2019 to 50.3 percent in August 2020. Sector Context Pillar 1 – Channeling financing flows to MSMEs 5. MSMEs in India face multiple challenges in accessing finance from the formal financial sector and many firms remain underfunded, limiting their competitiveness and ability to grow. Even though MSMEs represent the largest non-agricultural employer in India, they are often unable to access a commensurate share of credit from formal financial institutions. Many banks consider MSMEs to be risky and are averse to lending to them even in normal times8. While overall credit growth for the banking sector was low at around 6.7 percent for FY 2019-20, credit growth for micro and small enterprises was even lower at 2.5 percent. The government and RBI had over the years implemented several schemes to enhance MSME lending including categorization of lending to micro and small enterprises as part of priority sector lending (PSL), collateral free loans schemes, credit guarantee schemes, among others. However, a large credit gap for MSMEs still needed to be addressed. 6. Low bargaining power and level of formalization exacerbate the lack of access to finance for MSMEs. Many MSMEs provide goods and services to large corporates, as well as to Public Sector Enterprises (CPSEs). 3 Over 36 percent of respondent firms reported that they were unable to meet business expenses with the reduced levels of revenue during April-June 2020. 4 CMIE conducts the CPHS survey multiple times in a year to determine employment, consumption and other indicators for over 70000 households across India. 5 https://cse.azimpremjiuniversity.edu.in/wp-content/uploads/2021/05/State_of_Working_India_2021-One_year_of_Covid- 19.pdf 6 http://mospi.nic.in/sites/default/files/publication_reports/PLFS_Quarterly_Bulletin_April_June_2020.pdf 7 A study by ILO in 2021 found that over 85 percent of MSME workers were not enrolled in any social security scheme. https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---sro-new_delhi/documents/publication/wcms_798079.pdf 8 IFC estimated in 2019 that the addressable MSME credit gap in India was around Rs.25 trillion in total. https://documents1.worldbank.org/curated/en/759261548828982149/pdf/134150-WP-IN-Financing-India-s-MSMEs- Estimation-of-Debt-Requirement-of-MSMEs-PUBLIC.pdf Page 5 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) However, these buyers often delay payments to their MSME vendors9, which disrupts working capital requirements and their ability to access funding at lower rates. MSMEs also face challenges with providing collateral for loans, due to their small size and low level of formalization, which further limits their options for funding from the banking sector. These factors also contribute to lower credit ratings for MSMEs, which increases cost of funding and in some cases, makes funding unavailable. 7. MSMEs were severely impacted by the lockdowns due to the impact of Covid-19 as cash flows dried up and lenders turned risk averse. The MSME sector was faced with a sharp declined in cash flows due to cancellation of orders, non-payment of invoices by existing buyers, and decline in sales. At the same time, MSME lending by banks declined as banks recognized the decline in repayment ability and credit worthiness of MSMEs due to stress in their business operations. Pillar 2: Strengthening NBFCs 8. The NBFC sector emerged as a key source of funding to sector such as housing finance, MSMEs and others. Bank lending growth declined in the last few years, in part due to high NPLs which resulted in many banks being placed under the Prompt Corrective Action (PCA) framework which limited fresh lending. The NBFC sector stepped in to address the resulting gap in credit, particularly in sectors such as MSMEs, housing finance etc. Between 2015-2019, credit growth for the banking sector was around 9-10 percent per year, while NBFC credit grew much faster with credit growth in 2016 being 18.5 percent and as high as 32.8 percent in 2018. As a result, the share of NBFCs in MSME credit increased from 13 percent in 2013 to 21 percent in 2018. NBFCs often have expertise in addressing the credit needs of specific sectors and geographies and are more agile and have a lower turnaround time as compared to banks. As a result, NBFCs have become important for the financial inclusion agenda in India, as they are able to address credit gaps for important sectors that remain underserved by the banking sector. 9. NBFCs struggle to access sustainable long-term funding and are often dependent on banks for financing. The NBFC sector is concentrated with the top 50 NBFCs accounting for around 85 percent of NBFC assets. While these large NBFCs were able access capital market funding, many other smaller NBFCs, which nonetheless serve important sectors, were dependent almost completely on banks for funding. These smaller NBFCs account for around 21 percent of MSME funding.10 Following defaults by two large NBFCs in 2018, capital market funding dried up and NBFCs had to increasingly rely on banks for funding.11 This led to liquidity issues, as well as an increase in cost of funding for NBFCs, as banks became increasingly selective in lending to the NBFC sector. The lack of liquidity led to a significant decline in NBFC credit growth in FY 2019-20. 10. The NBFC liquidity crisis was exacerbated by the impact of Covid-19, as many NBFCs did not receive counterbalancing moratoriums on their borrowings. NBFCs were stressed on both the asset and liability sides of their balance sheet due to the shocks emanating from Covid-19. The collection efficiency of NBFCs declined due to mobility restrictions as well as a mortarium on repayments for borrowers. However, many NBFCs did not receive counterbalancing moratoriums on their own borrowings. Also, NBFCs do not have direct access to liquidity from the Reserve Bank of India (RBI), and there no dedicated NBFC refinance institutions. Borrowing costs for NBFCSs increased significantly leading to a decline in bond issuances by 9 The MSMED Act 2006 mandates that MSME receivables should be paid within 45 days, but payments are often delayed. 10 https://www.omidyarnetwork.in/wp-content/uploads/InsightSeries-ON_India_CRISIL_India- The_Transmission_Conundrum.pdf 11 The share of market funding for NBFCs declined from 57.8 percent of total borrowings in June 2018 to 41.8 percent in June 2020. Page 6 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) NBFCs. This lack of liquidity and possible ALM mismatches posed increased risks to the health of NBFCs, particularly smaller NBFCs, many of whom served the MSME sector. Pillar 3: Incentivizing the use of Fintech and digital channels in MSME lending and payments 11. While India has made tremendous progress in digital payments, the potential for increased fintech adoption to address the large MSME credit gap needs to be explored further. MSMEs are often unable to access credit from formal financial institutions due to lack of collateral, low formality and information asymmetry. Fintech lending has the potential to bridge this gap by providing digital credit appraisal for MSME loans based on information on the MSMEs cash flows from tax databases and other sources. While digital lending in India has grown in recent years12, its share in overall lending remains low. In addition to lending, fintech solutions can also help improve working capital management for MSMEs by providing digital platforms for receivable financing. 12. The digitalization of lending and financing by banks and others needed to be enhanced in response to the mobility restrictions due to national lockdowns. The digital channel for lending assumed increased significance in a scenario where borrowers could not easily and safely access credit through bank branches. Increased automation and digitalization of funding processes was needed not only for applying for credit but also for credit appraisal and sanction. Increased adoption of fintech solutions were needed not only to implement innovative solutions for MSME lending, but also to provide MSME borrowers with platforms where they could compare lending rates and amounts across a variety of lenders including PSBs, private banks etc. The required interventions from the government, RBI and SIDBI, among others. Rationale 13. The government requested the World Bank for a policy-based loan of US$ 750 million to support the emergency measures needed to channel liquidity to financial institutions and ultimately to MSMEs, to protect firms, jobs and livelihoods impacted by the Covid-19 crisis. The government and RBI responded to the urgent need to maintain liquidity in the financial system, and to channel this liquidity to firms that needed support to survive, by implementing a series of measures including emergency liquidity lines with government guarantees, long term repo operations, policy rate cuts, lowering reserve requirements etc. The government recognized the value that the World Bank could bring through a quick disbursing policy-based loan, which would become part of the budgetary support and facilitate the government’s Covid-19 emergency response, at a time when there were many pressing demands on fiscal resources. The request for support was made at time when urgent action was needed to preserve confidence in the financial sector and to ensure that firms had access to liquidity they needed to survive. 14. The program was well-aligned with both the WBG’s approach to helping economies navigate the Covid-19 crisis and the Government of India’s (GoI) strategy of providing sustainable support to sectors that are key to job creation and livelihoods. The WBG’s approach to supporting responses to Covid-19 focused on four pillars: (i) saving lives; (ii) protecting poor and vulnerable people; (iii) ensuring sustainable business growth and job creation; and (iv) strengthening policies, institutions and investments for rebuilding better. The program focused particularly on pillar (iii) and aimed to help otherwise viable business survive the liquidity and credit crisis precipitated by Covid-19, while also addressing job losses and decline in incomes for workers. The focus was on measures that would both address immediate concerns while also contributing to a sustainable and inclusive recovery. The government’s emergency response was also aligned with 12As per the Digital Lenders Association of India (DLAI), digital lending in India increased from US$58 billion in 2017 to US$ 110 billion in 2019. Page 7 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) implementing measures that would contribute immediately to preserving liquidity and cash flows for firms in the short terms and strengthening the MSME ecosystem in the medium term. In particular, the program supported the government’s growing recognition of the significance of NBFCs in the MSME funding ecosystem and the need for dedicated facilities to improve NBFC liquidity. 15. This DPF was also aligned with the priorities of the India Country Partnership Framework (CPF) (2018-22). The DPF focuses on important outcomes in the second pillar of the CPF, “Enhancing competitiveness ad enabling job creation”, by enabling a stronger MSME financing ecosystem that helps in improving competitiveness and increasing employment in MSMEs. 13 The program also focused on two important elements of the India CPF – using IBRD to leverage public and private finance (GoI’s program has committed around 1.5 percent of GDP to MSME finance) and partially funding new operations through restructuring of the existing WB lending portfolio (30 percent of this DPF was reallocated from savings and restructuring). 16. This DPF was the result of the WBG’s long-standing collaboration with the GoI on the MSME sector on issues including MSME finance, capacity building and others. Pre-COVID-19, the WBG had already been deepening the dialogue with the GoI around developing a more modern financial sector that could support India’s aspirational growth rates, with focus on key sectors such as MSMEs14. The WBG’s involvement in the MSME agenda included robust analytical work, just-in-time responses to emerging policy issues and support to high level Indian expert committees such as the RBI MSME Committee. The onset of Covid-19 led to accelerating the engagement on MSME finance, resulting in this operation. 17. This DPF was the first in a series of comprehensive interventions in the MSME sector by the World Bank and IFC. This US$ 750 million program, approved in June 2020, was followed by the US$ 500 million Raising and Accelerating MSME Productivity (RAMP) P4R program, approved in 2021, which address structural issues in the MSME sector including capacity building, access to markets and finance, and institutional strengthening to improve MSME productivity in India. Further interventions in the MSME sector involve an initiative by IFC in leveraging private sector financing through market linked financing and risk mitigation instruments, to address the large MSME funding gap. This initiative builds on IFC’s substantial MSME portfolio and history as one of the largest financier for the MSME sector in India. The World Bank and IFC leverage their respective strengths to offer holistic solutions in the MSME space through regulatory reforms combined with mobilization of large private sector funding for MSMEs in India. The collaboration between World Bank and IFC allows the WBG to optimize the impact these interventions have on the overall development of the MSME sector. Original Program Development Objective(s) (PDO) (as approved) 18. The original Program Development Objective (PDO) as approved was to support the GoI in preserving flows of finance to MSMEs through the COVID-19 crisis and lay the foundations for a stronger MSME financing ecosystem in the recovery phase. Original Policy Areas/Pillars Supported by the Program (as approved) 13 The CPF’s Second Pillar identifies the importance of improving the business environment and select firm capabilities, increasing the resilience of the financial sector, improving connectivity and logistics, increasing access to quality, market- relevant skills, and enabling more quality jobs for women. 14 While the World Bank focused on supporting risk mitigation measures and regulatory reforms, IFC had a track record as one of the largest financers of MSMEs in India. Page 8 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 19. The original policy pillars supported by the program as approved were: (i) Channeling financing flows to MSMEs;(ii) Strengthening NBFCs; and (iii) Incentivizing the use of Fintech and digital channels in MSME lending and payments Pillar 1: Channeling financing flows to MSMEs 20. There was an urgent need to channel financing flows to otherwise viable MSMEs who were struggling for liquidity in the immediate aftermath of the Covid-19 crisis. While several measures by the RBI15 ensured that there was no immediate liquidity crisis in the financial sector, funding was not being channeled to MSMEs and other important sectors, as banks turned even more risk averse than usual. Flow of credit to MSMEs in April 2020 was only 35 percent of the level of credit in February 2020. It was important to identify multiple channels to improve MSME funding and also to explore mechanisms to de-risk lending to MSMEs to counter the risk aversion of lenders. At the same time, it was important to eligibility for any liquidity facilities was based on the viability of MSMEs in normal times. 21. This pillar supported the innovative use of guarantees to enhance MSME lending. The government launched a new temporary emergency credit line (GECL) supported by a 100 percent guarantee by a state- owned guarantee fund. The emergency credit line provided additional credit of up to 20 percent of exposure as of February 2020, to MSMEs and other eligible borrowers who were not in default as on February 2020. The government also strengthened its existing credit guarantee schemes for MSMEs, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), by including fintech NBFCs as lenders within the scheme and also by withdrawing a cap on utilization of the guarantee facility multiple times by the same beneficiary. Pillar 2: Strengthening NBFCs 22. The government recognized the need to mitigate stress on NBFCs’ balance sheets due to the impact of Covid-19. The share of NBFCs in incremental lending has grown in recent years, necessitating interventions to improve NBFC liquidity in order to preserve funding flows to MSMEs.16 In view of uneven applicability of loan moratoriums to NBFCs and rising funding costs for NBFCs, it was important to implement dedicated liquidity facilities for NBFCs. These liquidity facilities were channeled through banks, DFIs and a newly introduced SPV, which would on-lend the funds accessed from RBI to NBFCs, with eligibility criteria for NBFCs, based on credit rating, among others. 23. The liquidity facilities for NBFCs were implemented with a targeted partial or complete government guarantee for both liabilities and assets. NBFCs often sell their high-quality assets to banks to raise funding for their balance sheets, in addition to issuing bonds that are purchased by banks, mutual funds and others. The government incentivized banks to purchase both NBFC assets as well as bonds by expanding the scope of an partial credit guarantee scheme for assets and bonds (for which low rated NBFCs were eligible) and introducing a new guaranteed liquidity facility for purchase of bond issuances by NBFCs (for which only higher rated NBFCs were eligible). Pillar 3: Incentivizing the use of Fintech and digital channels in MSME lending and payments 15 RBI decreased the policy rate by around 115 bps between February and June 2020, and also decreased reserve requirements and enhanced borrowing limits. 16 The share of NBFCs in MSME credit increased from 10.5 percent in December 2017 to 14 percent in March 2019, before declining slightly due to a liquidity crisis in late 2018. Page 9 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 24. The government, sector specific DFIs and other stakeholders identified increased adoption of fintech as a focus area for MSME lending. Banks and other lenders focused increasingly on digitalization of credit underwriting processes, as well as innovative scoring models using alternate data. The RBI operationalized the Regulatory Sandbox (RS) in order to implement fintech solutions for payments, digital lending etc. in a controlled environment, with real time monitoring by the regulator. The government introduced a new digital platform for paperless sanction of loans to MSMEs and other and integrated the new platform with taxation and other databases for seamless flow of data which in turn allowed faster processing of loans. The government also addressed the issue of delayed payments to MSMEs, by mandating that Central Public Sector Enterprises (CPSEs) register their MSME vendors on receivable financing platforms, to enable factoring of invoices which otherwise would remain unpaid for a long time. B. Significant Changes During Implementation 25. There were no significant changes to the program during implementation. The PDO and prior actions remained unchanged during implementation. However, there were a few changes in policy between June 2020 and June 2021 which impacted the eligibility of beneficiaries of schemes supported by the program: a. Revised definition of MSMEs. The government modified the definition of MSMEs from the previous definition based only on the level of investment in machinery and equipment, to a composite criterion based on investment in machinery and equipment, as well as turnover. 17 The revised definition also expanded the limits of both investment in machinery and turnover, for firms to be categorized as MSMEs. This revised definition, implemented in July 2020, meant that more firms were now eligible for MSME emergency measures, including the fully guaranteed emergency credit facility. b. Expansion of the GECL scheme. The GECL scheme was launched in June 2020 and was originally applicable only to firms, with a guarantee amount cap of Rs.3 trillion, set to expire in October 2020. Recognizing that many individuals borrow in their personal capacity to fund their business, the scheme was extended to individual loans for business as well. The scheme was expanded again twice, in late 2020 and in June 2021, to allow larger loans and stressed sectors to be covered under the scheme. The scheme was also expanded to Rs.4.5 trillion and will now expire in March 2023, owing to the success of the original scheme in improving flow of credit to firms. II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES Prior Actions Results Indicators (original and revised) PILLAR 1: Channeling financing flows to MSMEs Prior Action 1: The Borrower through the Ministry of Result Indicator 1: Number of MSMEs reached Finance, Government of India, has notified the through incremental credit facilities Guaranteed Emergency Credit Line (GECL) Facility, Baseline (year): 0 (June 2020) supported by a 100 percent guarantee scheme, Target (year): 1.5 million (June 2021) Emergency Credit Line Guarantee Scheme (ECLGS). Current status (year): 11 million (June 2021) Fully met. Result Indicator 2: Volume of incremental financing to MSMEs provided Baseline (year): 0 (June 2020) 17 As per the MSMED Act 2006 Page 10 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Target (year): Rs.1 trillion (June 2021) Current status (year): Rs.2.1 trillion (disbursed) Rs. 2.7 trillion (sanctioned) (June 2021) Fully met. Result Indicator 3: Number of new guarantees provided Baseline (year): 0 (June 2020) Target (year): 1 million (June 2021) Current status (year): 11 million (ECLGS), 619687 (CGTMSE), Total 11619687 (June 2021) Fully met. Result Indicator 4: Volume of new guarantee covers extended Baseline (year): 0 (June 2020) Target (year): Rs.350 billion (June 2021) Current status (year): Rs.2.7 trillion (ECLGS), Rs.313.50 billion (CGTMSE), Total Rs.3.01 trillion (June 2021) Fully met. Result Indicator 8: Awareness campaign by NCGTC/SIDBI for women entrepreneurs on the schemes under the government’s economic recovery program Baseline (year): No campaign (June 2020) Target (year): Campaign completed (June 2021) Current status (year): Not met. Prior Action 2: The Borrower through the Ministry of Result Indicator 3: Number of new guarantees Micro, Small and Medium Enterprises, has taken provided various steps to strengthen the already existing Credit Baseline (year): 0 (June 2020) Guarantee Scheme (CGS) managed by the Credit Target (year): 1 million (June 2021) Guarantee Fund Trust for Micro and Small Enterprises Current status (year): 11 million (ECLGS), 619687 (CGTMSE) to incentivize MSME lending: (i) by (CGTMSE), Total 11619687 (June 2021) Fully met. withdrawing the cap on utilizing guarantee cover and Result Indicator 4: Volume of new guarantee covers permitting utilization multiple times within the overall extended limit of Rs.20 million and (ii) by including fintech NBFCs Baseline (year): 0 (June 2020) in the scheme. Target (year): Rs.350 billion (June 2021) Current status (year): Rs.2.7 trillion (ECLGS), Rs.313.50 billion (CGTMSE), Total Rs.3.01 trillion (June 2021) Fully met. PILLAR 2: Strengthening NBFCs Prior Action 3: The Borrower’s central bank, the Result Indicator 5: Volume of incremental funding to Reserve Bank of India, (i) has launched a liquidity Non-Banking Financial Companies (NBFCs) (through window that utilizes long-term repo operations SIDBI and PSB purchases of MSME loan pools, RBI) (TLTROs) to channel liquidity through banks to Baseline (year): 0 (June 2020) investment-grade debt issuances by corporates, and a Target (year): Rs.500 billion (June 2021) second liquidity window (TLTRO 2.0) of Rs.500 billion Page 11 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) exclusively for NBFCs, with specific targets for issuances Current status (year): Rs.369.51 billion (TLTROs), by small and medium NBFCs and (ii) has approved a Rs.277.94 (PCG 2.0), Rs.72.27 billion (Special Liquidity liquidity support facility of up to 1 year for Scheme), Rs.198.23 billion (Refinance facility), Total NBFCs/Banks/ MFIs for on-lending to MSMEs during Rs.917.95 billion (June 2021) Fully met. the crisis; and (iii) the Ministry of Finance, Government of India, has launched a Special Liquidity Facility to guarantee the liabilities (short term investment grade debt securities) of NBFCs/HFCs /MFIs. Prior Action 4: The Borrower through the Ministry of Finance, Government of India has approved amendments to strengthen the already existing Partial Credit Guarantee facility by (i) including new eligible funding instruments such as bonds and commercial papers issued by NBFCs in the guarantee facility; (ii) increasing the risk coverage for PSBs to up to 20 percent (for the newly included debt securities); and (iii) including lower-rated NBFCs in the scheme. PILLAR 3: Incentivizing the use of Fintech and digital channels in MSME lending and payments Prior Action 5: The Borrower’s central bank, the Result Indicator 6: A study undertaken to review Reserve Bank of India, has issued guidelines to lessons learned and outcomes from fintech regulatory operationalize the RBI Fintech Regulatory Sandbox (RS) sandboxes. including the requisite governance arrangements, Baseline (year): 0 (June 2020) eligibility criteria and exit strategies with appropriate Target (year): 1 (June 2021) risk mitigation actions, through circular issued on Current status (year): Fully met August 13, 2019. Prior Action 6: The Borrower, through the Ministry of Result Indicator 7: For better monitoring of CPSEs Heavy Industries & Public Enterprises, has notified that usage of TReDS, the Samadhaan Portal to be updated Central Public Sector Enterprises (CPSEs) should have to track an additional data point with the following their MSE vendors onboarded on the TReDS platform. details: Number of CPSEs vendors onboarded on TReDS. Baseline (year): 0 (June 2020) Target (year): 1 (June 2021) Current status (year): Not met Prior Action 7: The Borrower, through the Ministry of Result Indicator 1: Number of MSMEs reached Finance, has launched the PSB Loans in 59 Minutes through incremental credit facilities (PSB59) platform through the setting up of the PSB59 Baseline (year): 0 (June 2020) company to enable the fast. processing and quick Target (year): 1.5 million (June 2021) disbursal of MSME loans by select banks. Current status (year): 11 million (June 2021) Fully met. Result Indicator 2: Volume of incremental financing to MSMEs provided Baseline (year): 0 (June 2020) Target (year): Rs.1 trillion (June 2021) Current status (year): Rs.2.1 trillion (disbursed) Rs. 2.7 trillion (sanctioned) (June 2021) Fully met. Page 12 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) A. Relevance of prior actions Rating: Satisfactory 26. The program actions were strongly and directly linked to the PDO. The prior actions helped in preserving firms, jobs and livelihoods by unlocking the existing liquidity in the financial sector to channel liquidity to MSMEs. The program actions addressed bottlenecks in MSME financing and ensured that otherwise viable firms had access to liquidity at reasonable rates through multiple channels including NBFCs. The program actions also addressed stress on lenders’ balance sheets and ensured that the financial sector is prepared to support the MSME sector in the recovery phase. 27. Pillar 1 (Channeling financing flows to MSME) was supported by two prior actions (PAs). The two PAs were based on leveraging guarantee funds for MSMEs to address risk aversion of lenders, borrowing costs for borrowers and risk mitigation in the MSME sector. 28. PA 1 focused on the new temporary emergency liquidity facility by the government to support lending to MSMEs and other eligible borrowers. The facility addressed MSME liquidity needs by providing a 100 percent guarantee to additional lending of up to 20 percent of existing exposure by banks and NBFCs to borrowers who were not in default as on February 2020. The maximum rate of interest under this facility was 9.25 percent for banks and 14 percent for NBFCs, which was lower than comparable borrowings outside this facility. The government guarantee for this additional credit was provided through the National Credit Guarantee Trust Company Ltd. (NCGTC), with no guarantee fees charged for this facility. The guarantee for additional credit also ensured that borrowers did not have to provide additional collateral for borrowings under this facility, at a time when their business was stressed due to Covid-19. The additional borrowing had a tenure of 4 years (including a moratorium of 1 year), to allow borrowers to negotiate the stress and operationalize their businesses without having to worry about repayments in the short term. The initial size of the facility was Rs.3 trillion, which was around 20 percent of the total outstanding MSME credit in the banking sector. The government allocated Rs.410 billion in fresh capital for the fund to guarantee losses over the life of this facility. 29. PA2 focused on incremental improvements to a permanent credit guarantee scheme for MSMEs in order to improve its effectiveness. PA2 expanded the scope of the CGTMSE guarantee fund by including fintech NBFCs as lenders covered under this scheme. As the role of fintech NBFCs became more important due to mobility restrictions and limited operation of bank branches, allowing lending by fintech NBFCs to be covered under the scheme made financing more readily available to MSMEs. 18 As these fintech NBFCs grow in significance in context of MSME lending, the inclusion of their loans in the CGTMSE guarantee schemes is expected to be even more impactful in the recovery phase. PA 2 also includes the withdrawal of the one- time cap on utilization of guarantee cover. Earlier, MSMEs were allowed to avail the guarantee cover under CGTMSE only once till the limit of Rs.20 million. This cap was withdrawn to allow MSMEs to access the guarantee cover multiple times, within the overall limit of Rs.20 million. This will improve risk mitigation for lending to MSMEs that are growing and can benefit from the reduction in borrowing costs associated with the guarantee cover. 30. Pillar 2 (Strengthening NBFCs) was supported by two PAs. They focused on mitigating the liquidity shocks for the NBFC sector, so that it could continue to channel funding to MSMEs. 18The CGTMSE scheme provides guarantees to lenders for collateral free loans of up to Rs.20 million to micro and small enterprises. Page 13 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 31. PA3 introduced a series of new liquidity facilities which aimed to improve NBFC liquidity by channeling funds from the RBI through banks, DFIs and a new SPV. NBFC access to liquidity deteriorated immediately after the national lockdowns were announced in March 2020. NBFCs were particularly vulnerable to liquidity shocks since, unlike banks, they do not have access to direct liquidity from the RBI, and because NBFCs did not uniformly receive moratoriums on their own borrowings to counterbalance the moratoriums they were required to offer to their customers. In order to maintain this important channel of funding for MSMEs, the government and RBI introduced a series of dedicated liquidity facilities for NBFCs, with the government partially or completely guaranteeing the funds under this facility. The TLTROs (TLTRO 2.0 in particular) provided long term liquidity (3 years) to banks and required them to purchase investment grade bonds issued by NBFCs. The RBI also provided refinance facilities to sector-specific DFIs which then channeled liquidity to lenders (banks, NBFCs, and MFIs) for on-lending to MSMEs. The government also introduced a special liquidity facility for public sector banks (PSBs) to invest in investment grade bond issued by NBFCs. The purchase of securities issued by NBFCs was be financed by own securities issued by a SPV housed within a large PSB. These securities were initially purchased by RBI and were fully guaranteed by GoI. All of these liquidity facilities allowed NBFCs to access additional borrowings without selling existing high-quality assets, and the government guarantee on borrowings helped reduce borrowing costs. 32. PA4 expanded the scope of an existing partial credit guarantee scheme to channel liquidity to lower rated NBFCs. 19 The existing partial credit guarantee scheme was modified to include purchase bonds issued by NBFCs, in addition to purchase of asset pools. The extent guarantee cover was also increased to 20 percent (from 10 percent) for the purchase of bonds issued by NBFCs. The revised scheme was targeted at lower rated NBFCs (rating below AA), as these smaller NBFCs could not access capital markets or were not eligible for other liquidity measures. At least 50 percent of the funds under this scheme were allocated to NBFCs with a rating below AA. The program recognized that these lower rated NBFCs played an important role in channeling funding to niche sectors and needed support to mitigate liquidity issues. The revised scheme helped provide an alternative to lower rated NBFCs that needed emergency liquidity to survive Covid-19 related shocks and did not have access to other channels of liquidity. 33. Pillar 3(Incentivizing the use of Fintech and digital channels in MSME lending and payments) was supported by three PAs. These PAs focused on leveraging fintech solutions to implement innovative platforms and products to improve MSME credit and liquidity. 34. PA5 focused on the operationalization of the Regulatory Sandbox (RS) by RBI for controlled implementation of innovative fintech solutions. The regulatory sandbox provides a regulator-controlled environment, supported by market demand that enables innovation, access and competition in the market while safeguarding from the risks and the uncontrolled growth of the sector. The RBI operationalized the RS and issued guidelines for eligibility, risk management etc in August 2019. The first cohort of the RS focused on digital payments, include easier payments for smaller firms. Improvements in digital payments contribute significantly to ease of transactions for MSMEs, especially in an environment where direct interaction with customers is limited due to Covid-19 related mobility restrictions. 35. PA6 focused on improving accountability and monitoring of the adoption of a digital receivables financing platform by state owned enterprises. TReDS platforms allow online factoring of invoices of MSMEs that 19A partial credit guarantee scheme for banks to purchase NBFC asset pools was initially launched in July 2019, where the government provided a 10 percent first loss guarantee to banks for purchase of these assets. Page 14 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) provide goods and services to larger corporates and state-owned firms. These platforms address the issue of low bargaining power of MSMEs, which often result in long delays in payment of invoices. CPSEs have a large share in the amount of delayed MSME payments. To address these issues, CPSEs have been mandated to on- board themselves, as well as their MSME vendors on the TReDS platforms, in order to allow the receivables to be financed by lenders. However, monitoring of this mandate is low, leading to low participation by CPSEs on TReDS. PA6 improves the monitoring of the performance of CPSEs on addressing delayed payments issues by adding an additional data point to be tracked by the MSME Samadhaan portal20. In addition to the existing data point of status of CPSEs onboarded on TReDS, the portal would also track the onboarding status of MSME vendors of these CPSEs. This will lead to improved monitoring and accountability of CPSEs on the important issue of delayed payments to MSMEs. 36. PA7 focused on providing a digital and seamless loan sanction process to MSMEs through a dedicated portal for digital lending. MSME lending faces constraints such as high origination costs, lack of data and high turnaround time. The PSB59 platform was launched to implement automation of several processes 21 which reduces the need for documentation and led to seamless sanction of credit without MSMEs needing to visit a bank branch. The platform is also integrated with other schemes such as credit guarantee schemes and collateral free loan schemes, thus allowing the platform to act as a one-stop solution for MSMEs to access partially guaranteed and collateral free credit from PSBs within a much shorter period of time. The platform provided an efficient mechanism to partially mitigate lockdown related issues in applying for credit at physical bank branches. B. Achievement of Objectives (Efficacy) Rating: Satisfactory Assessment of Results Indicators 37. Relevance. The Results Indicators (RIs) were substantially relevant to the PDO. RIs 1-4 directly measured the amount of funding and guarantee cover channeled to MSMEs through facilities supported by the program, and RI 5 measures the amount of funding to NBFCs. These RIs thus address the quantitative impact of the program and the measures it supported in helping improve access to liquidity, both for MSMEs directly and for lenders that address the credit needs of the MSME sector. The other RIs are qualitative and focus on improving the MSMSE funding ecosystem through increased adoption of fintech, as well as improved outreach and awareness of various government programs for women entrepreneurs. 38. Measurability. The RIs were largely measurable since they were either related to the quantum of funding and guarantee cover, of the implementation of a program or study. The baseline for all the RIs was 0 since the program aimed at measuring incremental change between June 2020 and June 2021. 39. Appropriateness of Targets. The target was mostly in line with expectations during the turbulent times when the program was approved. There was uncertainty about the extent of credit demand from MSMEs due to the slowdown in economic activity and stringent mobility restrictions in the country. The appropriateness of the target was informed by the innovative nature of the response measures which had not been attempted in the Indian financial sector previously, particularly in response to a crisis. The targets for MSME funding and guarantee measures were determined based on trends in MSME lending and the impact of the shocks 20MSME Samadhaan portal is an online grievance redressal and monitoring platform managed by the Ministry of MSME. 21The solution uses algorithms to analyze data points from various sources such as IT returns, Goods and Services Tax (GST) data, bank statements, etc Page 15 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) from Covid-19. Eventually, the quantitative targets were overachieved as the response measures proved highly successful and were modified and extended to be more responsive and inclusive to the needs of the MSME sector. PDO Achievement PDO: To support the GoI in preserving flows of finance to MSMEs through the COVID-19 crisis and lay the foundations for a stronger MSME financing ecosystem in the recovery phase. 40. Based on the results indicators and stakeholder consultations, the DPF outcomes were substantially achieved, and prior actions were implemented. Some RIs were incomplete but still contributed to the overall achievement of the PDO. 41. There was significant progress in achieving the planned outcomes in Pillar 1, and the quantitative targets for MSME funding and guarantee cover were fully achieved. 42. The GECL scheme channeled credit to over 11 million MSMEs between June 2020-June 2021, significantly higher than the target of 1.5 million MSMEs in RI1. The scheme leveraged additional credit to the tune of Rs. 2.7 trillion between June 2020-June 2021 as compared to the target of Rs.1 trillion in RI2. The emergency credit line was very successful in preserving credit flow to MSMEs while also minimizing the risk of deterioration of asset quality or funding “zombie” firms. This was because the emergency credit line was available only to those borrowers who were not in default pre-Covid (February 2020). Also, the amount of additional credit under this facility was capped at 20 percent of the exposure as on February 2020. The scheme also had a well-defined sunset clause to mitigate the risk of mission creep. The scheme was well received by both lenders and borrowers and was expanded and modified three times between June 2020- June 2021, to become more inclusive and cover a wider set of borrowers and leveraged a total of around Rs.3.1 trillion for MSMEs and other eligible borrowers by February 2022. The scheme proved extremely significant in maintaining credit flows to MSMEs and others, and disbursals under the scheme accounted for around 20 percent of total incremental credit by banks between June 2020 and November 2021. 43. The outcomes of this pillar ensured that viable MSMEs with existing credit lines had access to liquidity needed to meet business expenses and reopen their business after the national lockdowns. The success of this pillar in channeling finance to viable MSMEs is evident from the fact that among all MSMEs with a loan from the formal financial sector in March 2020, more than 30 percent accessed additional credit within the next 6 months, compared to only 7 percent during the same period in 2019. Also, more than 48% of borrowers who accessed additional credit had utilization rates of 78 percent or higher, indicating that the sanctioned credit was actually utilized for reopening their businesses. 44. The schemes supported by Pillar 1 preserved otherwise viable firms, while also persevering jobs and livelihoods for a large number of workers. An analysis on the impact of the GECL scheme22 found that at least 1.35 million MSMEs accounts were saved from becoming NPLs due to this scheme (including the 200,000 restructured accounts eligible for credit under this scheme), during the first wave and second wave of Covid-19 cases in 2020 and 2021, respectively, as this scheme helped to preserve firms for a much longer period than initially anticipated. In absolute terms, MSME loan accounts worth Rs 1.8 trillion (including Rs 120 billion of restructured) have improved during the period. This means that around 14% of the outstanding 22https://sbi.co.in/documents/13958/10990811/060122-Impact_of_ECLG_Scheme.pdf/81078df7-e31a-6f89-6289- f5aecb5b715d?t=1641466592115 Page 16 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) MSME credit (including 2% of restructured) has been saved from slipping into NPLs because of the scheme. Of the 1.35 million MSME accounts that are saved due to this scheme, around t 93.7% are in Micro and Small categories. If these units had turned non-performing, around 15 million workers could have become unemployed. 45. The guarantee schemes supported by Pillar 1 ensured access to credit for the most affected sectors and firms, without a large deterioration in asset quality. COVID-19 and the containment measures implemented had a higher impact on sectors like retail trade, tourism, hotels & restaurants etc. that were heavily dependent on mobility. Of the total disbursements made under the ECLGS scheme till March 2021, the share to these sectors was 75 percent, indicating that the scheme has been able to help in revival of highly impacted sectors. At the same time, the scheme did not lead to a decline in credit quality after the moratorium. NPL levels of March 2021 were at 6 percent for borrowers who availed credit under the ECLGS scheme, compared to 7.5 percent for those who were eligible for the scheme but did not avail additional borrowings. Further, only 2 percent of ECLGS loans have been reported by lenders as NPLs, as of December 2021. The relatively low levels of NPLs under this scheme can be partially explained by the eligibility criteria which allowed only MSMEs that were not stressed prior to the impact of Covid-19 to access additional credit. 46. Credit guarantees emerged as important risk mitigation tools to address risk aversion and low credit growth. The government guaranteed 100% of the additional credit under the emergency credit line mentioned above, through a state-owned guarantee fund. The number of guarantees under the permanent MSME guarantee fund (CGTMSE) declined slightly in FY 2020-21 as compared to FY 2019-20 but complemented the overall MSME funding strategy of the government as part of its Covid-19 response. A total of over 11.61 million guarantees were issued under both the ECLGS and CGTMSE guarantee schemes, much higher than the target of 1 million in RI3. Similarly, the total guarantee cover amount under the ELCGS and CGTMSE guarantee schemes was Rs.3.01trillion, as compared to the target of Rs.350 billion in RI4. The government allocated Rs.410 billion as additional capital for the ECLGS and thus was able to leverage a much higher amount of existing liquidity for MSMEs utilizing these guarantee schemes. 47. The awareness program for women entrepreneurs by SIDBI, as envisioned under RI8, was not implemented as a separate campaign, as originally planned. The implementation of the campaign was delegated to SIDBI, who faced challenges on delivering the campaign as a separate RI, as agreed by the government. The World Bank team supported the design of the campaign through a detail report on the scope, target audience, and communication strategy for the awareness program to the Ministry of MSME and SIDBI. However, SIDBI lacked dedicated funding and resources to implement the proposed scope of the project as a standalone campaign. The World Bank team is exploring the possibility of including the implementation of the awareness campaign for women entrepreneurs as part of the RAMP P4R operation which followed this DPF. During June 2020-June 2021, the government’s emergency credit schemes were communicated through multiple channels, including digital and mobile platforms. SIDBI also undertook outreach activities which target women entrepreneurs, as part of its agenda to improve awareness of the liquidity facilities available to borrowers. Thus, even though a separate campaign under this program was not carried out, the inputs from the report on the awareness campaign were incorporated into its outreach strategy by SIDBI, thus contributing to the achievement of the overall PDO. 48. Pillar 2 was successful in meeting the target for channeling liquidity to NBFCs, for on lending to MSMEs, but higher rated NBFCs benefitted to a larger extent as compared to small and medium NBFCs. Page 17 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 49. The total amount of funding channeled to NBFCs through various liquidity measures between June 2020- June 2021 was around Rs.917.95 billion, higher than the target of Rs.500 billon in RI5. Of the various liquidity facilities, TLTRO channeled the highest amount, with over Rs.615.86 billion being channeled to NBFCs and Housing Finance Companies (HFCs). Of this amount, around 60 percent was channeled to NBFCs. However, over 82 percent of the funding to NBFCs went to large, systemically important NBFCs, while only 2 percent of funding from TLTROs was channeled to BBB rated NBFCs. The concentration of funding in large NBFCs was mostly due to the design of many of the liquidity measures where the eligibility for these measures was based on credit rating, among other factors. Many small and medium NBFCs were unable to obtain the investment grade rating needed to avail many of these facilities despite being profitable and serving important sectors in the economy. This had been an issue even prior to Covid-19 and was further exacerbated due to the impact of Covid-19 as banks and capital markets turned even more risk averse to channeling funding to smaller NBFCs. The extended partial credit guarantee scheme channeled around Rs.277.94 billion, while the special liquidity scheme for NBFCs led to liquidity of around Rs.72.27 billion for NBFCs. The refinance facilities to sector specific DFIs channeled around Rs.198.23 billion to NBFCs. While some of the dedicated facilities for NBFCs were only partially utilized, they were nonetheless successful in improving funding to the NBFC sector. These facilities also had well defined sunset clauses from 3 month to 1 year of the facilities being implemented and were rolled back as per their respective sunset clauses. 50. The liquidity facilities also helped in reducing borrowing costs for the NBFC sector. Increase in yields for NBFC issuances in April-June 2020 led to a sharp decline in issuance of bonds and commercial paper (CPs) by NBFCs. The volume of CPs issued by NBFCs in April-June 2020 was three time lower than the volume in April- June 2019. The liquidity facilities by the government and RBI helped reduce the short- and medium-term funding costs for NBFCs. The average yields for CPs issued by NBFCs declined from 6.50 percent in April 2020 to 3.98 percent in August 2020. The weighted average yield for bond issuances in FY 2020-21 was 6.93 percent, as compared to 8.32 percent in FY 2019-20. The volume of issuances by NBFCs also increased and was higher in FY 2020-21 as compared to the previous year. 51. Pillar 3 focused on policy actions to improve adoption of fintech solutions and payments, and the associated RIs were partially fulfilled. 52. A study on lessons from implementation of Regulatory Sandboxes was carried out, in terms of RI6. The outcomes from the study will be used as inputs for the WBG’s ongoing engagement with the RBI on implementation of the Regulatory Sandbox. The first cohort of RBI’s Regulatory Sandbox focused on digital payments is in the testing phase and RBI has invited applications for the next two cohorts, with the third cohort focusing on MSME financing. The WBG’s engagement with the RBI has supported the implementation of the various cohorts of the Regulatory Sandbox through TA inputs from the WBG on global examples and best practices from other Regulators, workshops on winding up of Regulatory Sandbox cohorts, refining test design, tracking of metrics etc., as WBG’s continued support enables improved design and testing of innovative financial products in the RBI Regulatory Sandbox in 2022 and beyond. 53. The Ministry of MSME agreed in principle to update the MSME Samadhaan portal to reflect the status of onboarding of MSME vendors of CPSEs on TReDS platforms, as agreed under RI7. In order to facilitate data compilation, the World Bank team held consultations with the three existing TReDS platforms and agreed on a format for data to be shared with the Ministry of MSME periodically. The format was then shared with the Ministry of MSME, and while the portal has not been updated yet, it is expected that the additional data Page 18 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) point will be added to the portal after the Ministry formalizes a data reporting mechanism for the TReDS platforms. C. Overall Outcome Rating and Justification Rating: Satisfactory With the relevance rating of Satisfactory and efficacy rating of Satisfactory, the overall rating is Satisfactory 54. Overall, the program was successful in achieving the intended improvement in MSME credit, while simultaneously addressing liquidity and stability issues for important stakeholders in the MSME funding ecosystem. The emergency credit line supported by the program was highly successful and was directly responsible for reasonable growth in credit to micro and small enterprises between June 2020-June 202123, despite the economic downturn and risk aversion of lenders. The program also supported schemes that resulted in over 1.35 million MSMEs not slipping into NPLs, which in turn led to preserving livelihoods for over 15 million workers. The program was also succeeded in promoting the innovative use of credit guarantees to leverage funding for MSMEs, in order to improve the efficiency of limited fiscal resources. The program also ensured that the NBFC sector, already in the midst of a liquidity crisis pre-Covid, had access to sufficient liquidity at lower rates in order to maintain credit growth to MSMEs, leading to an overall credit growth for NBFCs of 8.8 percent in FY 2020-21. At the same time, the liquidity facilities for NBFCs were rolled back as per their respective sunset clauses, to avoid market distortions. In improving financial sector liquidity and supporting funding only to viable firms, the program ensured that the financial sector was well placed to ramp up lending in the recovery phase. The program also supported the digitalization of the MSME ecosystem through several online platforms and the Regulatory Sandbox, to improve inclusion and efficiency. These initiatives will become increasingly significant in the recovery phase, as lenders look to digitize and automate credit delivery to MSMEs. III. OTHER OUTCOMES AND IMPACTS A. Poverty, Gender and Social Impacts 55. The project contributed to poverty reduction by ensuring continued flow of credit to MSMEs. As part of the PSIA, quantitative analysis demonstrated that firms that received credit as a result of an emergency credit guarantee scheme during the Government’s first Emergency Response were less likely to lay off employees or cut their wages. Analysis of the credit guarantee programs also suggests that they were reaching some vulnerable groups24. Additionally, there is evidence that the ECLGS increased business income derived from profits for MSME households in the six months following the national lockdown measures. By comparing MSMEs that obtained additional credit before and after the implementation of the credit guarantee scheme, the findings suggest that the expansion of credit guarantees seems to have increased household business profits by 65 percent in August-November 2020. There is also suggestive evidence that the credit scheme prevented pay cuts for MSME employees. However, it also led to a decline in MSME owners’ wages by 79 percent in August-November 2020 and by 118 percent in December 2020-March 2021. This is likely due to MSME owners favoring paying suppliers and workers rather than paying wages to themselves. 23 Credit to micro and small enterprises grew by 6.4 percent between June 2020-June 2021, compared to -2.9 percent between June 2019-June 2020. 24 To better understand the impact of COVID-19 and mitigating measures on business owners, a module on MSMEs was added to the CPHS in the January-April 2021 wave. Page 19 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) B. Environmental, Forests, and Natural Resource Aspects 56. The program did not have any significant positive or negative outcomes in these areas. C. Institutional Change/Strengthening 57. The program led to an improvement in fiscal-monetary policy coordination, as well as an improvement in the capacity of the government, SIDBI and other stakeholders in designing and implementing effective liquidity and credit schemes. The overall Covid-19 emergency response package of the government relied significantly on liquidity measures by the RBI25, which necessitated improved coordination. Also, many of the liquidity facilities for NBFCs involved channeling liquidity from RBI through state owned DFIs, SPVs and banks, with the government providing a partial or complete guarantee. NCGTC, SIDBI and other stakeholders became more efficient in designing and implementing guarantee facilities, as well as in handling claims on the guarantee fund. There was an increased digitalization of the guarantee processes, which reduced turnaround time for beneficiaries. D. Other Unintended Outcomes and Impacts IV. BANK PERFORMANCE Rating: Satisfactory 58. The WBG was agile in its response to the government’s request for supporting its Covid-19 emergency response for MSMEs. Owing to the WBG’s deep and sustained engagement with the government, SIDBI and other stakeholders in the MSME ecosystem, the Bank was able to identify potential areas of stress in MSME financing, as well as possible areas on intervention. The design of the program was based on extensive analytical work, both as part of an ongoing TA with SIDBI, as well as long standing engagements with the government, RBI, CGTMSE and others. Analytical work related to the Post FSAP PA had already identified the issues of asset quality deterioration and low credit growth for MSMEs, as well as liquidity and other challenges for non-bank lenders. The World Bank team had also been closely monitoring developments in the financial sector post March 2020, and actively engaged with the government on possible solutions to leverage existing liquidity with low dependence on upfront fiscal resources. Thus, the World Bank relied on its strong partnerships and engagement within the MSME ecosystem to design a rapidly disbursing operation, leading to the choice of the DPL as an instrument that addressed the immediate liquidity needs of MSMEs and NBFCs, and also implemented forward looking policy actions to strengthen the recovery for MSMEs. 59. The team was able to identify potential technical risks to implementation, and limit support to schemes which were well designed. The operation carried significant macroeconomic and fiscal risk due to the unique and unprecedented nature of the COVID-19 pandemic and the consequent downturn in economic activity. As a result, the program faced risks due to extremely high uncertainty about the outcomes of the crisis and the shape of the economic recovery. In addition, there were technical risks related to the design of the emergency facilities that could have limited their effectiveness. In order to address these concerns, the team limited support to facilities that had defined sunset clauses, as well as clear linkages to the PDO. For instance, the government launched a subordinated debt scheme for MSMEs that were stressed even before Covid, as well an equity fund for MSMEs. The program did not support these initiatives as the effectiveness of these measures, as well their linkages to short- and medium-term recovery of the MSME sector were unclear. The 25 Around 40 percent of the total Covid-19 response package consisted of enhanced liquidity facilities by RBI. Page 20 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) program supported facilities with clearly identified beneficiaries and exposure limits to mitigate partially the technical risks of the program. 60. The team collaborated effectively with IFC in designing an effective intervention for the MSME sector through this program. The policy areas and results framework were informed by collaboration with IFC on joint TA programs and knowledge partnerships, among others. The program was also designed as part of a broader medium-term package of interventions supported by planned IFC investments in the MSME sector. The World Bank leveraged IFC’s ongoing engagement on the Regulatory Sandbox with RBI in India, as well as the WB-IFC TA with SIDBI, to inform the design of the third pillar on incentivizing the use of Fintech and digital channels in MSME lending and payments. 61. The team also collaborated with other development partners during the preparation of this DPF. The team held consultations with other development partners to coordinate emergency response measures for the sector. This included discussions with the Asian Development Bank (ADB) on strengthening the CGTMSE scheme to provide guarantees for MSME lending, to complement the interventions by the WBG. 62. The government was highly involved with the implementation of the program and modified the facilities as needed, based on feedback from market participants. The government was responsive to the evolving needs of lenders and borrowers throughout the national lockdowns and subsequent gradual reopening, and modified its support to improve outreach, effectiveness and impact. This was achieved by modifying and expanding the eligibility criteria for the emergency facilities including the GECL, partial credit guarantee scheme and others. The government also extended deadlines for these schemes based on level of utilization. At the same time, the government monitored the level of support it provided through guarantees and its potential impact on increasing contingent liabilities. 63. The Bank team engaged in regular and in-depth monitoring of the implementation of the program. The Bank team held regular consultations with beneficiaries of the facilities supported by the program including banks, NBFCs, MFIs etc., as well as industry bodies such as the Indian Banks Association (IBA) which was involved with the design and implementation of some of the emergency credit facilities. The consultations revealed some of the limitations of the design of these facilities including short tenure of liquidity support, high rating requirements for eligibility and a demand for larger quantum of support. These concerns were partially addressed during implementation by the government, through review of the liquidity facilities of the program, as mentioned above. 64. Overall, the Bank’s performance was Satisfactory. The Bank responded quickly to the government’s request for support to address a crisis in the MSME sector, with the benefit of extensive analytical work and engagement in the sector. The program was designed to be quick disbursing to provide immediate budgetary support, while also mitigating technical risks by supporting sustainable facilities with well-defined sunset clauses. The Bank team closely monitored the implementation and regularly held consultations with stakeholders, which contributed to review of facilities supported by the program. The achievements of the program are proportionate to the scale of finance and nature of instrument, and most of the Results Indicators were achieved. V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES Page 21 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 65. The risks to sustainability of the outcomes of the program arise from recurring economic shocks due to a second and third waves of Covid-19 cases in 2021 and 2022, as well as an increase in contingent liabilities for the government and state-owned guarantee funds. 66. Slower than expected economic recovery due to fresh lockdowns and mobility restrictions precipitated by a successive wave of Covid-19 cases could lead to decreased repayment capacity for MSMEs and an increase in MSME NPLs. Overall NPLs in the MSME sector increased marginally even before the impact of Covid-19, from 11.4 percent in June 2019 to 12.8 percent in June 202026, partially due to low credit growth in the MSME sector. The six-month loan moratorium between March-August 2020 and the NPL standstill till March 2021 meant that reported NPL levels did not reflect the level of stress in the sector. A new wave of Covid-19 cases in 2021, along with the withdrawal of forbearance measures has led to reports indicating that many banks are already facing slippages in the retail and MSME sectors in FY 2021-22, with some estimates indicating that NPLs in these sectors could rise more sharply in the next two years. The RBI’s stress tests indicate that overall NPLs could rise from 6.9 percent in September 2021 to 9.5 percent in September 2022. Given the uncertainty of the extent of economic recovery, there are risks associated with the nascent recovery in MSME credit and asset quality. NBFCs in particular could face slippages in their higher risk MSME portfolios. Lack of MSME credit growth and further decline in repayment capacity of MSMEs could lead to a fresh round of NPLs in the sector. These risks are mitigated by strengthening and better targeting of existing emergency schemes, as well as launch of dedicated schemes for underserved borrowers, to support MSMEs impacted by successive waves of Covid-19 cases. Some of these measures are being supported as part of a US$ 750 million DPL by the World Bank in FY 22. 67. The government’s dependence on guarantees to leverage funding has increased contingent liabilities. A large part of the government’s Covid-19 emergency response for MSMEs and NBFCs was based on guarantee schemes for additional lending to these sectors. While these guarantee schemes lowered the upfront fiscal costs and leveraged market funding, they also led to a large increase in contingent liabilities for the government and state owned guarantee funds. For FY 2020-21 the contingent liabilities for the announced MSME and NBFC measures was around Rs.3.40 trillion (1.62 percent of GDP)27 at the nominal value of the announced measures, although less than the full amounts may count within a single fiscal year. Also, the size of the ECLGS scheme has been expanded to Rs.5 trillion till March 2023, further increasing potential contingent liabilities. Since a large part of these guarantees are offered through state owned guarantee funds instead of directly the government, they do not count towards the annual contingent liabilities limit of 0.5 percent of GDP for the government. The government allocated additional capital of Rs.410 billion to the NCGTC for the ECLGS scheme over four years, but an expected increase in stress in the MSME sector could lead to fresh NPLs and calls on the guarantee funds. This could lead to additional demands for fiscal resources to recapitalize these guarantee funds. These risks are mitigated through more precise targeting of the latest expansions of credit guarantee schemes, as well as recapitalization and strengthening of the permanent credit guarantee scheme for MSME. These measures, as well as further reforms to the permanent credit guarantee scheme, are being supported through extensive lending and TA engagement including a US$ 750 million DPL and a US$ 500 million P4R operation. 26 The NPL levels for PSBs increased from 17.5 percent to 18.6 percent while those for private banks increased from 4.6 percent to 5.8 percent during the same period. NBFC MSME NPL levels increased from 5.8 percent in June 2019 to 9.7 percent in June 2020. 27 This amount increased to Rs.4.9 trillion in FY 2021-22 due to the expansion of the GECL scheme to Rs.4.5 trillion from its earlier size of Rs.3 trillion. Page 22 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 68. Access to capital market funding for NBFCs might decline post the withdrawal of liquidity measures by RBI. The increase in capital market funding for NBFCs and others in FY 2020-21 was incentivized mainly by low- cost liquidity facilities including TLTROs by RBI for banks, who in turn invested funds from these facilities in investment grade securities issued by NBFCs and others. As a result of these facilities, the borrowing costs for 3-year bonds for AAA rated NBFCs declined from 7.57 percent in March 2020 to 5.93 percent in August 202128. However, the gradual withdrawal of these liquidity measures, as well as a rise in yields of government securities have led to a slight increase in NBFC borrowing costs in 2021. While the growth in overall corporate bond issuances in FY 2020-21 was 13.5 percent, mainly due to liquidity facilities by RBI, issuances in FY 2021- 22 have slowed due to rising borrowing costs. An increase in borrowing costs along with an expected deterioration in asset quality could lead to NBFCs being unable to increase credit growth in the recovery phase. These risks are being mitigated by strengthening other channels of funding, including from banks, by allowing banks to partially meet their PSL targets by lending to NBFCs for on-lending to priority sectors, launching a new guarantee scheme for co-lending by banks and NBFCs, among others. VI. LESSONS AND NEXT PHASE A. Lessons Learned 69. Importance of sustained engagement. The WBG’s strong engagement with the government, SIDBI and other stakeholders in the MSME sector through multiple engagements including TA, knowledge partnerships etc. meant that the Bank team was well placed to be responsive to the government’s request for support. This sustained engagement also allowed the team to select the instrument and nature of intervention, as well as to focus on supporting programs that had the highest impact on achieving the PDO. The Bank was a trusted development partner for the government in the MSME sector whom the government could turn to for immediate support during an unprecedented crisis. 70. Emergency facilities should have clearly defined eligibility criteria and sunset clauses to avoid potential distortions to credit and risk management. The government and RBI implemented a series of emergency credit and liquidity facilities on a significant scale to address the needs of the MSME and NBFC sector. These facilities avoided potential distortions to credit allocation and funding of “zombie” firms by having clearly defined eligibility criteria that served only those firms which were stressed due to Covid-19 but were otherwise viable. All the liquidity facilities had clearly defined sunset clauses which were adhered to during implementation29. The guarantees by the government and state-owned guarantee funds were also funded separately with no funding from the permanent guarantee facility for MSMEs, and the temporary guarantee schemes will expire as funds under emergency facilities are repaid. 71. Crowding in market financing through innovative use of guarantee mechanisms. The shocks emanating from Covid-19 resulted in increasing pressure on fiscal resources. The program was able to leverage existing liquidity through innovative guarantee mechanisms that had low upfront fiscal costs and unlock liquidity for the MSME sector. While these schemes did result in an increase in contingent liabilities, the impact of claims on the guarantee funds will be spread over a few years when economic growth is expected to improve in the recovery phase. 28https://www.careratings.com/upload/NewsFiles/DebtMarket/Debt%20Market%20Review%20-%20August%202020.pdf 29The deadline for the GECL scheme was extended multiple times but each extension was associated with a well defined expansion of the scheme. The scheme was only applicable to borrowers who were not in default. Page 23 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) 72. Design gaps in government schemes could lead to the exclusion of beneficiaries who need support the most. The emergency credit line used its eligibility criteria of funding existing borrowers who were not in default to prevent the proliferation of “zombie” firms. But at the same time, there was no support for MSMEs which did not already have borrowings from the formal financial sector. These firms typically have low levels of formality and were severely affected by the impact of Covid-19. Lending to firms which had no prior linkages with the banking sector dropped sharply during April-June 2020, and the emergency response by the government did not address this issue. Similarly, for the NBFC sector, most of the liquidity from the government’s emergency measures was channeled to a small number of highly rated NBFCs which already had access to funding from capital markets, while hundreds of smaller NBFCs which could not access capital markets were ineligible for support from the government’s liquidity facilities due to rating requirements and other issues. Also, the tenure of support for many of the NBFC liquidity schemes was low (from 3 months to year), and thus funding could be utilized only to refinance short term liabilities and not for fresh lending to MSMEs. B. Next Phase 73. While this program was a single tranche operation, the outcomes have provided a solid foundation for sustained engagement with the MSME sector in the recovery phase. The Bank is already engaged in a US$ 500 million P4R operation on improving MSME productivity. The access to finance pillar of the P4R operation focuses on some of the policy areas addressed in this DPF including strengthening the CGTMSE guarantee scheme and enhancing the utilization of TReDS platforms to improve financing of invoices for MSMEs. In addition, the upcoming DPL on catalyzing private financing for sustainable recovery also supports the revamp and expansion of some of the guarantee schemes supported under this DPF. The work on innovative guarantee mechanisms will support a planned intervention by IFC on the possibility of a market led risk sharing facility based on the contours of the facilities supported in this DPF. The planned India Investment Vehicle (IIV), which would work in coordination with existing MSME funding and risk mitigation mechanisms, would aim to leverage private sector funding to provide market-based lending and guarantee facilities for MSMEs as well as for MSME asset pools by banks and NBFCs. This initiative is expected to play an important role in addressing the large MSME funding gap in India, and the need for risk capital, without additional stress on fiscal resources during the recovery phase. Additionally, a new phase of engagement with SIDBI will focus on reimagining SIDBI’s strategic priorities and role in the MSME ecosystem in India, through a detailed diagnostic of SIDBI’s operational and economic performance. The engagement will also focus on leveraging private sector funding through innovative instruments, to improve the impact of fiscal resources. The MSME sector is also expected to be an important focus area for future financial sector DPFs and other operations in India. The World Bank’s support to the financial sector reform agenda in India is continued through a US$ 750 million DPL in FY 22 which focuses on long term finance, developing green finance markets, in addition to continuing support to the MSME sector. Page 24 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) ANNEX 1. RESULTS FRAMEWORK . RESULTS INDICATORS Pillar: Channeling financing flows to MSMEs Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Number of MSMEs reached Number 0.00 1,500,000.00 11,000,000.00 through incremental credit (Thousand) facilities 01-Jun-2020 30-Jun-2021 30-Jun-2021 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Volume of incremental Number 0.00 1,000,000,000.00 2,100,000,000.00 financing to MSMEs provided (Thousand) 01-Jun-2020 30-Jun-2021 30-Jun-2021 Comments (achievements against targets): The Target is fully met. Rs.2.1 trillion of the Rs. 2.7 trillion sanctioned has been disbursed as of Jun e 2021. Page 25 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Number of new guarantees Number 0.00 1,000.00 11,620.00 provided (Thousand) 01-Jun-2020 30-Jun-2021 30-Jun-2021 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Volume of new guarantee Number 0.00 350,000,000.00 3,010,000,000.00 covers extended (Thousand) 01-Jun-2020 30-Jun-2021 30-Jun-2021 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Awareness campaign by Text No Campaign Campaign completed Not met NCGTC/SIDBI for women entrepreneurs on the schemes 01-Jun-2020 30-Jun-2021 30-Jun-2021 Page 26 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) under the government’s economic recovery program Comments (achievements against targets): Pillar: Strengthening NBFCs Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Volume of incremental funding Number 0.00 500,000,000.00 917,950,000.00 to Non-Banking Financial (Thousand) Companies (NBFCs) (through SIDBI and PSB purchases of 01-Jun-2020 30-Jun-2021 30-Jun-2021 MSME loan pools, RBI) Comments (achievements against targets): Pillar: Incentivizing the use of Fintech and digital channels in MSME lending and payments Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion A study undertaken to review Text 0.00 1.00 Fully met lessons learned and outcomes from fintech regulatory 01-Jun-2020 30-Jun-2021 30-Jun-2021 sandboxes. Comments (achievements against targets): Page 27 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion For better monitoring of CPSEs Text 0.00 1.00 Not met usage of TReDS, the Samadhaan Portal to be 01-Jun-2020 30-Jun-2021 30-Jun-2021 updated to track an additional data point with the following details: Number of CPSEs vendors onboarded on TReDS. Comments (achievements against targets): . Prior Actions Results Prior Actions under DPF Indicator Name Baseline Target Pillar 1 --- Channeling financing to MSMEs 1.5 million (June 2021) Results Indicator #1: Number of MSMEs Current status 0 (June 2020) reached through incremental credit facilities 11 million Prior Action #1: The Borrower through the Ministry of Finance, Government of India, (June 2021) has notified the Guaranteed Emergency Credit Line (GECL) Facility, supported by a 100 Fully met percent guarantee scheme, Emergency Credit Line Guarantee Scheme (ECLGS). Rs.1 trillion (June 2021) 0 (June 2020) Results Indicator #2: Volume of incremental financing to MSMEs provided Current status Rs.2.1 trillion (disbursed) Page 28 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Prior Actions Results Prior Actions under DPF Indicator Name Baseline Target Rs. 2.7 trillion (sanctioned) (June 2021) Fully met 1 million (June 2021) 0 (June 2020) Current status Results Indicator #3: Number of new guarantees provided 11.62 million (June 2021) Fully met Rs.350 billion (June 2021) 0 (June 2020) Current status Results Indicator #4: Volume of new guarantee covers extended Rs.3.01 trillion (June 2021) Fully met Campaign Results Indicator #8: Awareness campaign completed No campaign (June 2021) by NCGTC/SIDBI for women entrepreneurs (June 2020) on the schemes under the government’s Current status economic recovery program Not met (June 2021) Prior Action #2: The Borrower through the Ministry of Micro, Small and Medium Enterprises, has taken various steps to strengthen the already existing Credit Guarantee Scheme (CGS) managed by the Credit Guarantee Fund Trust for Micro and Results Indicators #3 and #4 will apply Small Enterprises (CGTMSE) to incentivize MSME lending: (i) by withdrawing the cap on utilizing guarantee cover and permitting utilization multiple times within the overall limit of Rs.20 million and (ii) by including fintech NBFCs in the scheme. Page 29 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Prior Actions Results Prior Actions under DPF Indicator Name Baseline Target Pillar 2 --- Supporting NBFCs Prior Action #3: The Borrower’s central bank, the Reserve Bank of India, (i) has launched a liquidity window that utilizes long-term repo operations (TLTROs) to channel liquidity through banks to investment-grade debt issuances by corporates, and a second liquidity window (TLTRO 2.0) of Rs.500 billion exclusively for NBFCs, with specific targets for issuances by small and medium NBFCs and (ii) has approved a Rs.500 billion liquidity support facility of up to 1 year for NBFCs/Banks/ MFIs for on-lending to (June 2021) MSMEs during the crisis; and (iii) the Ministry of Finance, Government of India, has Results Indicator #5: Volume of incremental Current status launched a Special Liquidity Facility to guarantee the liabilities (short term investment funding to Non-Banking Financial 0 (June 2020) grade debt securities) of NBFCs/HFCs/MFIs. Companies (NBFCs) (through SIDBI and PSB Rs.917.95 billion Prior Action #4: The Borrower through the Ministry of Finance, Government of India purchases of MSME loan pools, RBI) (June 2021) has approved amendments to strengthen the already existing Partial Credit Guarantee Fully met facility by (i) including new eligible funding instruments such as bonds and commercial papers issued by NBFCs in the guarantee facility; (ii) increasing the risk coverage for PSBs to up to 20 percent (for the newly included debt securities); and (iii) including lower-rated NBFCs in the scheme. Pillar 3 --- Incentivizing and streamlining the use of fintech in MSME lending and payments Results Indicators #6: A study undertaken to Prior Action #5: The Borrower’s central bank, the Reserve Bank of India, has issued review lessons learned and outcomes from 1 (June 2021) guidelines to operationalize the RBI Fintech Regulatory Sandbox (RS) including the fintech regulatory sandboxes. 0 (June 2020) Current status requisite governance arrangements, eligibility criteria and exit strategies with Fully met appropriate risk mitigation actions, through circular issued on August 13, 2019. Results Indicators #7: For better monitoring of Prior Action #6: The Borrower, through the Ministry of Heavy Industries & Public CPSEs usage of TReDS, the Samadhaan Portal* 1 (June 2021) Enterprises, has notified that Central Public Sector Enterprises (CPSEs) should have to be updated to track an additional data point Current status 0 (June 2020) their MSE vendors onboarded on the TReDS platform. with the following details: Number of CPSEs Not met vendors onboarded on TReDS. Page 30 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Prior Actions Results Prior Actions under DPF Indicator Name Baseline Target Prior Action #7: The Borrower, through the Ministry of Finance, has launched the PSB Loans in 59 Minutes (PSB59) platform through the setting up of the PSB59 company to Results Indicators #1 and #2 will apply enable the fast processing and quick disbursal of MSME loans by select banks. Page 31 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES A. TASK TEAM MEMBERS Name Role Preparation Mehnaz S. Safavian, Marius Vismantas Task Team Leader(s) Ishtiak Siddique Procurement Specialist(s) Manoj Jain Financial Management Specialist Arvind Prasad Mantha Financial Management Specialist Venkat Bhargav Sreedhara Team Member Tushar Arora Team Member Vidya Venugopal Counsel Ifedolapo Mary Borisade Team Member Savita Dhingra Team Member Venkata Rao Bayana Social Specialist Tapas Paul Team Member Urvashi Narain Environmental Specialist Loic Chiquier Team Member Supervision/ICR Mehnaz S. Safavian, Marius Vismantas Task Team Leader(s) Ishtiak Siddique Procurement Specialist(s) Manoj Jain Financial Management Specialist Arvind Prasad Mantha Financial Management Specialist Loic Chiquier Team Member Urvashi Narain Environmental Specialist Tapas Paul Team Member Page 32 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) Venkata Rao Bayana Social Specialist Savita Dhingra Team Member Ifedolapo Mary Borisade Team Member Vidya Venugopal Counsel Tushar Arora Team Member Venkat Bhargav Sreedhara Team Member . B. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY20 26.350 123,019.83 Total 26.35 123,019.83 Supervision/ICR Total 52.70 246,039.66 . Page 33 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) ANNEX 3. BORROWER, CO-FINANCIERS, AND OTHER DEVELOPMENT PARTNERS’/ STAKEHOLDERS’ COMMENTS Borrower has not provided any comments. Page 34 of 35 The World Bank MICRO, SMALL AND MEDIUM ENTERPRISES EMERGENCY RESPONSE (P174292) ANNEX 4. SUPPORTING DOCUMENTS I. Study on lessons from Regulatory Sandboxes A study undertaken to review lessons learned and outcomes from fintech regulatory sandboxes was undertaken in terms of the RI6. The objective of the study was to highlight examples and lessons from Regulatory Sandbox approaches globally. An executive summary of the study is provided below, with the main study document attached. Executive Summary Indian financial sector regulators have initiated several initiatives to encourage new fintech instruments and promote usage. However, the growth of the Fintech sector also presents a range of new challenges and risks to the financial sector and its prudent regulation. The recent spread of COVID-19 heightens the need to find a balance that can enable rapid innovation, flexibility and efficiency and reduce financial and economic vulnerabilities. Unless the thinking of agencies and their regulatory frameworks are coordinated, it is possible for Fintech companies to find exceptions from rules or pursue regulatory arbitrage, defeating the purpose of regulation and oversight. A potential area for such coordination to take place would be through the implementation of fintech regulatory sandboxes. The study provides an overview of types sandboxes, approaches to implementing regulatory sandboxes, potential risks of regulatory sandboxes etc., along with case studies from across the globe on implementation of fintech regulatory sandboxes. II. Quantitative analysis of Impact of Credit Guarantee Schemes to Support MSMEs through the Covid-19 Crisis As part of the PSIA analysis for the DPL, a quantitative analysis of the impact of guarantee schemes was carried out. Data was collected for this analysis through a dedicated MSME module that was added to the CMIE CPHS survey in the January-April 2021 wave of the survey. A summary of the resulting paper is below, with the paper and detailed results attached. Summary The Covid-19 pandemic and containment policies have led firms to face unexpected liquidity constraints, prompting governments to trigger large credit guarantee schemes. The paper analyzes the effects of the pandemic on micro, small and medium-sized enterprises (MSMEs) in India and assesses the impact of the government’s Emergency Credit Line Guarantee Scheme (ECLGS) on MSMEs. This is done by analyzing a large, nationally representative household panel and restrict the analysis to households with at least one business owner. Using district-level variation in the stringency of lockdown policies, the paper shows that households’ business income dropped sharply in zones with stricter restrictions, although total income and consumption do not vary with lockdown stringency. The paper then employs a difference-in-differences approach, comparing MSMEs that obtained additional credit, before and after the implementation of the credit guarantee scheme, to estimate the policy’s impact on MSME households. There is evidence that the ECLGS increased business income derived from profits for MSME households in the six months following the national lockdown measures; however, it also led to a decline in MSME owners’ wages over the same period. This is likely due to MSME owners favoring paying suppliers and workers rather than paying wages to themselves. Page 35 of 35