The government is looking into a plan for banks to issue credit cards with a £5 lakh limit tailored for micro-enterprises, aimed at addressing immediate working capital requirements at reasonable interest rates. This initiative will also include the first ever credit guarantee cover for such cards.
Currently, credit cards offer an interest-free period ranging from 30 to 45 days, which can differ by card and bank. After this period, banks usually charge interest of about 2-2.5% per month, translating to an annual rate of 25-30%. Some banks may impose even higher charges.
Addresses the cash flow gap in microunits
Many small and medium-sized enterprises struggle with cash flow issues. Often, payments from larger companies can be delayed for over 90 days, which complicates the ability to manage operational expenses, pay suppliers, and maintain payroll, ultimately hindering production.
In light of the recent budget announcement, there’s a plan to roll out specialized credit cards for micro-enterprises that are registered on the Udyam portal, with an aim to issue one million cards in the first year.
“The challenge lies in managing the customer’s credit cycle, interest rates, and the need for financial education,” an official stated. The government aims to minimize substantial liabilities while exploring existing guarantee schemes to help lower interest rates.
It is acknowledged that if a micro-enterprise has a cash flow cycle extending beyond 90 days, it creates complications in paying off a credit card balance within the typical 30-45 day window.
Consequently, discussions with banks are underway to develop a system that allows these small businesses to pay reduced interest rates on balances that extend beyond the interest-free period.
Guaranteed help to reduce costs
However, the government will not directly subsidize credit card issuers as part of this initiative.
“Nevertheless, credit guarantees can be structured to mitigate risk and lower losses for banks. This way, customers can benefit from better pricing and manageable interest rates,” a source remarked.
