MSMES need help again but not the way govt did last time

While players in the financial ecosystem are opening up to the idea of receivable s funding for the sector, this market needs a regulator, which a Parliament panel feels only rbic an provide

Valuations of payment gateways for the micro, small and medium enterprises (MSME) are shooting up. These gateways offer bundled services to the MSMES which include not just receiving payments but also inventory management to help with keeping tax records. As customers even from mid income groups switch to digital payments for dealing with small shops to roadside vegetable traders, the business for the gateways has boomed.

This could be surprising as the package of measures to help the MSMES last year have made little headway. The “Fund of Funds” has not got even one financial institution interested to give it a shot.

In the middle of the second Covid wave, Instamojo absorbed a tech company primarily to build up skills to better cover the 64 million odd MSMES of India. Other payment gateways like Paytm, Razorpay, Ccavenue are all stretching into the same business turf.

Yet, less than a year after suffering the first Covid pandemic, thousands of MSME units are again facing devastation from the next one. The duration of the crisis may be bunched up this time but it shall certainly leave far more wrecks than the first wave. The sector contributes nearly a third of the Indian GDP (31.66 per cent of the gross value add) and totes up more than 10 million in employment. Any shake up here exacerbates inequality like no other sector of the economy, except possibly agriculture.

MSMES need a confidence booster

Business confidence of the MSMES was already low. It has trailed that of the large firms through FY21, reported Bornali Bhandari, Senior Fellow at NCAER on the Business Confidence Survey, the think tank conducts. “It is a gap which widened further in the third quarter of the…financial year”.

Just weeks ago in early April, the central government had cleared an ordinance to allow “pre-packaged” insolvency for MSMES. It was expected that the ordinance will encourage these small units to approach banks with far more confidence to reorder their business. They could begin life anew after seeing off the impact of Covid. Since the threshold level for coming under bankruptcy proceedings is ~1 crore of default, the prepackaged offer cuts under it. An MSME owner can offer her creditors a resolution plan before the latter moves the bankruptcy courts for recovery of money.

It is now conceivable that the ordinance may have to be put in abeyance for some time, while the ministry of corporate affairs takes stock of the damage to the sector. Else the pressure on the owners of these units could be intense as the banks try to protect their levels of NPAS.

No off-take for GOI schemes

Last year, as part of the revival package, post Covid, the finance ministry had announced several measures. These included

~20,000 crore Subordinate n

Debt

~3 trillion collateral-free n automatic loans or Emergency Credit Line Guarantee Scheme

~50,000 crore equity infusion n through MSME Fund of Funds

A new revised criteria for n classification of MSMES

A new registration of n

MSMES through “Udyam Registration” for Ease of Doing Business

No global tenders for procurement n up to ~200 crore

There is a sort of an invisible line between the third and fourth items. All the three below have been executed without fuss. They did not need money and brought up to date archaic systems in the sector.

Above the line, the three schemes have all seen very dismal performance. To make any headway all of them will certainly need a rejig.

Since they have not delivered, the mood in the MSME sector has not particularly improved. Bhandari notes that about 75 per cent of the universe NCAER surveyed were not aware of the Emergency Credit Line Guarantee Scheme as in December 2020. “During the survey and after it, some firms reached out to us inquiring about the details of the scheme and how to utilise it” she noted in an article in Indian Express.

Data from the ministry itself shows the scale of the problem. The Emergency Credit Line is the largest reach out by the government for the MSMES. The ministry had reasons to be pleased that of the total ~3 lakh crore it had offered, 82 per cent had been used up by March this year.

But calculated by another measure, only 87 lakh MSMES have dipped into this pot. It means less than 14 per cent of the total number of the eligible units in the country had been helped by the measure. By any reckoning it is difficult to believe that only such a small percentage of them needed the support especially after a country wide freeze on business, in the first quarter of FY21.

Under the Emergency Credit scheme the government offered a loan to these units to cover their payment obligation to banks if they had become substandard due to the Covid crisis. As the ministry’s own data shows less than one in five such units applied and got the loan. It could be that they realised they shall have to pay back the loans at some stage to the government. It is not surprising. An older credit linked capital subsidy scheme to upgrade technology drew in just 76,759 units from the whole country. When the scheme was wound up last year it had written out cheques for only ~4867.58 crore.

The other two schemes have performed far worse than even this standard. One of these was a ~20,000 crore subordinate debt offered to the promoters as an equity support, so that they qualify for restructuring their loans taken from banks.