Ministry to work towards bringing down Bank Guarantee costs for MSME Defence Supplies

New Delhi, May 2 (KNN) As a significant  step to facilitate participation of MSME in the huge defence procurement market, the Ministry of MSME  will intervene to minimise the cost of Bank Guarantees.

Chairing a meeting  recently called to encourage defence public procurement from MSMEs, K K Jalan, Secretary, Ministry of MSME, agreed to consider  the request  from Federation of Indian Micro and Small & Medium Enterprises (FISME), the apex body for MSME associations in the country, on the issue.

Bank Guarantees are always asked against defence tenders  to protect the Government from unsatisfactory performance of the  tenderers and often need to cover the entire cost of the contract.

At the meeting FISME Secretary General, Anil Bhardwaj, mentioned that the cost of the Bank Guarantee for MSMEs is huge and almost take away the entire profit of the MSMEs.

Bank Guarantees are provided by the Banks to third parties against possible defaults by its account holders. For this service, banks charge a fee per year depending upon the ‘risk profile’ of the borrower.

No surprise MSMEs are to pay the highest fees, often upto 4% of the Guarantee provided, per annum.

“For a 4 year long project, which is often the tenure of a defence development contract, the cost of the Bank Guarantee alone may be 16% of the contract amount, may be more than the profit expected”, Bhardwaj mentioned at the meeting, as confided by  a source.

In fact, the problem does not end here, Banks  ask for additional collaterals to cover the Guarantee and if the MSME  could not arrange the same, it is adjusted a s a lien to the sanctioned working capital.

“If a large chunk of the working capital is blocked against the Bank Guarantee, how a MSME can do the production” retorted one MSME  defence supplier, at the meeting.

FISME as the pioneer of many ‘ease of Doing Business’ initiatives for the MSMEs, is demanding for an alternate ‘ Insurance product’ to provide guarantees against performance of contracts.

KNN India has learnt that Secretary MSME accepted the seriousness of the issue and assured that  a credit guarantee type instrument will be made available to Bankers to leverage upon and minimise the cost of bank Guarantees.

While this initiative alone will be a great relief to MSMEs, there are other major roadblocks in participation of MSMEs in defence supplies.

To handhold the MSMEs in entering defence market, FISME has already formed a dedicated ‘MSME Defence Suppliers’ Group’ and lobbying with the Government for easing ‘Doing Business in Defence’.

Getting information about the requirements of the defence items is difficult and the technical details are mostly kept under a veil of secrecy.

“How  MSMEs will  develop  their capability to supply defence items, if they do not know the exact specifications” commented one expert on MSME matters.

KNN India has learnt that the Ministry of MSME has constituted a focused Committee to remove the roadblocks in participation of MSMEs in defence supplies. (KNN/ DB)