PM Narendra Modi's government is working on good schemes for small businesses (Reuters)

Prime Minister Narendra Modi is considering offering cheap loans and free accidental insurance coverage to millions of small businesses, two government sources with direct knowledge of the matter said, as he tries to placate a key voter bloc ahead of a general election due by May.

Small business groups have been critical of the Modi government in the past year after many firms were squeezed by a shock move to ban high-value currency notes in 2016, followed by a hasty implementation of a nation-wide goods and services tax (GST) that raised their compliance costs.

In a bid to win them back, and following election losses in five states last month, the government run by PM Modi's Bharatiya Janata Party recently announced GST concessions and tweaked an ecommerce policy in favour of small traders.

More measures are now being planned, said the sources, who declined to be named as the information was not public.

A spokesman for the Ministry of Finance did not immediately respond to an email seeking comment.

The sources did not quantify the amount the series of measures would cost the government, as details are still being worked out.

The government is working on offering a discount of 2 percentage points on loans for businesses with annual sales of less than Rs 5 crore, the sources said, and would compensate banks for costs.

Small businesses with a top credit rating can get loans from banks at about 9-10 per cent, while lower-rated businesses can be charged around 13-14 per cent.

But only about 4 per cent of the 70 million small enterprises in India have access to bank credit, said Praveen Khandelwal, secretary general of the Confederation of All India Traders.

He said 30 per cent of their loans come from the country's shadow banking sector, while more than half are provided by private money lenders at rates as high as 25 per cent a month.

One of the sources said the government may also ask banks to open a special window for increasing the credit flow to small businesses, which will ensure greater availability of loans.

The government is also planning to provide free accidental insurance coverage of up to Rs 10 lakh to small businesses with annual sales of up to Rs 10 core rupees, the sources said.

"Employees of small traders may also get discounts on opting for state-backed insurance schemes," one of the sources said.

The government has not yet decided if the moves would be announced before the interim budget on February 1, the sources said.

The government is also considering a pension programme for retired traders registered with the government, and a further discount on interest rates paid on loans to women traders.