FIX­ING MSMEs

Some of the gov­ern­ment's out-of-the-box so­lu­tions go a long way in bring­ing growth back to the be­lea­guered MSME sec­tor.

India Business Journal - - CONTENTS - IBJ RE­SEARCH BU­REAU

Some of the gov­ern­ment's out-of-the-box so­lu­tions go a long way in bring­ing growth back to the be­lea­guered MSME sec­tor.

These are tough times for the coun­try's mi­cro, small and medium en­ter­prises (MSMEs). The worst fears of the ill ef­fects of de­mon­eti­sa­tion and Goods and Ser­vices Tax (GST) have come true. The twin dis­rup­tions of the econ­omy, com­ing in quick suc­ces­sion, have bled MSMEs - which con­trib­ute over 28 per cent to the coun­try's Gross Do­mes­tic Prod­uct (GDP) - white.

A Re­serve Bank of In­dia (RBI) re­port of Au­gust, ti­tled the Mint Street Memos, shows how the de­mon­eti­sa­tion of Novem­ber 2016 and flip-flops around the GST since July 2017 pushed small en­ter­prises into deep cri­sis. The re­port notes that the ban on high-value cur­rency notes led to fur­ther de­cline in the al­ready-fall­ing credit to the MSME sec­tor - mak­ing up around 45 per cent of the coun­try's man­u­fac­tur­ing out­put. In­ci­den­tally, the share of credit to MSMEs in the over­all bank credit has de­clined steadily to around 14 per cent - a lit­tle over Rs 12,40,000 crore of the over­all bank credit of more than Rs 86,50,000 crore - by the end of March 2018 from about 17 per cent in March 2007, re­veals the RBI re­port.

Just as MSMEs were re­cov­er­ing from the im­pact of de­mon­eti­sa­tion, they were sucked into a vor­tex of woes caused by the GST. The biggestever, in­di­rect, tax re­form re­placed more than a dozen Cen­tral and State levies and tried to unify the sprawl­ing econ­omy. But the com­plex­i­ties of the new regime led to in­crease in com­pli­ance costs.

It is only re­cently af­ter many changes were brought about by the GST Coun­cil - the supreme, pol­i­cy­mak­ing body of the GST regime - that some san­ity has re­turned to the GST regime. How­ever, the changes seem to have come far too late. Many small en­ter­prises have been driven out of busi­ness and hun­dreds of thou­sands of their em­ploy­ees have lost their

jobs. More­over, de­spite nu­mer­ous mea­sures to sim­plify the sys­tem, ex­porters, es­pe­cially those in the MSME sec­tor - small busi­nesses ac­count for over 48 per cent of In­dia's ex­ports are bat­tered by de­layed re­funds and are woe­fully short of work­ing cap­i­tal.

There is no spe­cific, re­li­able and of­fi­cial data to quan­tify the pain in the MSME sec­tor. But the tex­tile hub of Pa­ni­pat; hosiery in­dus­try of Tirup­pur; auto parts and ma­chin­ery clus­ters of Coim­bat­ore, Pune and Nashik; di­a­mond and tex­tile in­dus­tries of Su­rat; leather fac­to­ries of Kan­pur; and brass­ware in­dus­try in Mo­rad­abad; among oth­ers, have been re­count­ing the same sad story of busi­nesses shut­ting shop and em­ploy­ees be­ing laid off.

Ac­cord­ing to an es­ti­mate by Cen­tre for Mon­i­tor­ing In­dian Econ­omy (CMIE), nearly 50,00,000 work­ers have lost their jobs over the past year. The Mum­bai-based con­sul­tancy adds that un­em­ploy­ment rate in the coun­try has risen to 6.4 per cent in Au­gust this year from 4.1 per cent last July. Ac­cord­ing to the Union Labour Min­istry, which puts out jobs data once in five years, the un­em­ploy­ment rate was 5 per cent in 2015-16.

But none of these num­bers specif­i­cally spells out job­less­ness in the MSME sec­tor, ex­cept for the fig­ures pub­lished by the Ru­ral In­dus­tries De­part­ment of Tamil Nadu. It es­ti­mates that more than 5,00,000 peo­ple in the State lost jobs af­ter 50,000 small units shut shop in 2017-18, with Tirup­pur and Coim­bat­ore worst hit.

Mean­while, credit flow to busi­nesses, es­pe­cially MSMEs, has fur­ther dropped with many bank scams break­ing out. The in­fa­mous Nirav Modi-Me­hul Choksi-PNB fraud and many oth­ers have led to tight­en­ing of lend­ing pro­ce­dures at banks and thus squeezed the credit flow to small busi­nesses. In­ter­est­ingly, the space va­cated by banks was quickly filled up by non-bank­ing fi­nance com­pa­nies (NBFCs). No won­der, banks' share of to­tal MSME loans in for­mal credit dropped to 90 per cent in 2018 from 92 per cent in 2015. Dur­ing the same pe­riod, the share of lend­ing from NBFCs al­most dou­bled from 5.5 per cent in 2015 to 10 per cent in 2018. How­ever, the past three months have been par­tic­u­larly bad for small en­ter­prises. The loan tap of NBFCs also dried up fol­low­ing the col­lapse of IL&FS and the re­sul­tant may­hem in the stock, bond and money mar­kets.

Booster dose

Pro­longed pain among MSMEs - the ro­bust en­gines of eco­nomic growth has set alarm bells ring­ing in the top ech­e­lons of the coun­try's ad­min­is­tra­tion. In fact, no gov­ern­ment can af­ford to ig­nore the tur­moil in the sec­tor that com­prises around 6.40 crore units and em­ploys over 11.10 crore peo­ple.

Hence, it was not sur­pris­ing that Prime Min­is­ter Naren­dra Modi made an in­ter­ven­tion early last month with 12 booster shots for the ail­ing MSME

"The present cri­te­rion based on in­vest­ment in plant and ma­chin­ery pre­vents small en­ter­prises from in­vest­ing in bet­ter tech­nol­ogy or ma­chines for fear of get­ting out of the mi­cro- or small-scale bracket."

GIRI­RAJ SINGH

MSME Min­is­ter

sec­tor. It seemed as if Di­wali - the pop­u­lar fes­ti­val of lights cel­e­brated all across In­dia - came a few days early for the coun­try's small en­ter­prises as the prime min­is­ter rolled out a se­ries of mea­sures to ad­dress the malaise in the sec­tor. The mea­sures in­cluded easy and cheaper credit, re­lax­ation in labour laws, eas­ier com­pli­ance with en­vi­ron­men­tal rules and changes in com­pany laws.

Mr Modi an­nounced that a ded­i­cated por­tal would be op­er­a­tionalised for sanc­tion­ing loans up to Rs 1 crore in 59 min­utes. He also added that all GST-reg­is­tered MSMEs would qual­ify for a 2 per cent in­ter­est sub­ven­tion on fresh or in­cre­men­tal loans. For ex­porters, in­ter­est re­bate would be higher in the range of 3 to 5 per cent.

Small busi­nesses were also as­sured of re­lief from the dreaded In­spec­tor Raj - labour in­spec­tors vis­it­ing fac­to­ries, ha­rass­ing MSMEs over com­pli­ance of labour laws and of­ten clos­ing the mat­ter af­ter pock­et­ing a hefty bribe. The prime min­is­ter added that fac­tory in­spec­tions would hence­forth be sanc­tioned only through a com­put­erised ran­dom al­lot­ment. Be­sides, in­spec­tors would have to up­load re­ports on por­tal within 48 hours and ac­count for why they had gone to a fac­tory.

A ma­jor is­sue ad­dressed by the prime min­is­ter's in­cen­tives is ac­cess to mar­kets. Ac­cord­ingly, pub­lic sec­tor un­der­tak­ings (PSUs) have been asked to pro­cure 25 per cent - up from 20 per cent ear­lier - of their pur­chases from MSMEs com­pul­so­rily. Of the 25 per cent, 3 per cent would be re­served for women en­trepreneurs.

In fact, a GeM (Gov­ern­ment e-Mar­ket­place) a gov­ern­ment-owned spe­cial pur­pose ve­hi­cle set up in 2016 for on­line pro­cure­ment, has been play­ing a vi­tal role in bring­ing in trans­parency in gov­ern­ment pro­cure­ment. It has also fa­cil­i­tated MSMEs to get busi­ness from the gov­ern­ment by pro­vid­ing their goods and ser­vices to var­i­ous de­part­ments and PSUs.

In the past two years, GeM has grown sub­stan­tially get­ting more than 1.5 lakh sup­pli­ers, of which about 40,000 are MSMEs, reg­is­tered with it. Be­sides, trans­ac­tions worth more than Rs 14,000 crore have been made on the plat­form. The re­cent an­nounce­ment of the prime min­is­ter now makes it com­pul­sory for all PSUs to be a part of GeM. Now, a man­date to pro­cure a greater amount - 25 per cent - of gov­ern­ment pur­chases and com­pul­so­rily through the GeM plat­form prom­ises a more busi­ness for MSMEs.

An­other Di­wali gift from the prime min­is­ter goes a long way in solv­ing the de­layed pay­ment prob­lem of small en­ter­prises. Most of­ten, small busi­nesses, which are al­ready con­strained for cash, suf­fer from de­layed pay­ment by their clients. This fur­ther com­pli­cates their cash crunch cri­sis and con­strains them for ex­pand­ing their busi­nesses.

Mr Modi has asked State-owned com­pa­nies to get on board the Trade Re­ceiv­ables Dis­count­ing Sys­tem (TReDS). The on­line plat­form, set up ac­cord­ing to RBI guide­lines in 2014, fa­cil­i­tates fi­nanc­ing of trade re­ceiv­ables of MSMEs from cor­po­rate buy­ers through mul­ti­ple fi­nanciers. MSMEs' in­voices are auc­tioned on TReDS, and MSMEs can select the best dis­count rates of­fered by mul­ti­ple com­pet­ing fi­nanciers on the plat­form. This way, small busi­nesses are able to get their dis­counted pay­ment (a por­tion of the pay­ment is re­tained by fi­nanciers as in­ter­est) - for in­voices raised against their clients - from fi­nanciers im­me­di­ately and are thus able to de­ploy the money as work­ing cap­i­tal.

TReDS, which has been op­er­a­tionalised a few months ago, has seen good par­tic­i­pa­tion from fi­nanciers and pri­vate com­pa­nies. With State-owned com­pa­nies set to join the sys­tem, TReDS is likely to be a pow­er­ful tool in ad­dress­ing the fi­nan­cial needs of small en­ter­prises.

More mea­sures

The gov­ern­ment and the RBI have un­veiled many more re­forms in the past few years to pro­vide re­lief to the be­lea­guered MSMEs. In the Union Bud­get 2018-19, Fi­nance Min­is­ter Arun Jait­ley had cut Cor­po­rate Tax

for units with a turnover of up to Rs 250 crore from 30 to 25 per cent. In a sin­gle stroke, the mea­sure has re­duced tax bur­den for 99 per cent of com­pa­nies fil­ing tax re­turns in the coun­try.

How­ever, this in­cen­tive may fall short of com­pletely al­le­vi­at­ing the prob­lems of MSMEs. "Even though the step is wel­come and will def­i­nitely ben­e­fit the sec­tor, most small and mi­cro en­ter­prises are based on the busi­ness struc­ture of pro­pri­etor­ships and part­ner­ships, which are not cov­ered in the an­nounce­ment," points out Ji­ten­dra Gupta, the pres­i­dent of Laghu Udyog Bharti, an all-In­dia as­so­ci­a­tion of mi­cro and small in­dus­tries in the coun­try.

Ear­lier, the gov­ern­ment had rolled out an in­tel­li­gent in­cen­tive to en­cour­age MSMEs - over 95 per cent of the MSME units op­er­ate in the in­for­mal seg­ment - to shift from in­for­mal to for­mal seg­ment. Ac­cord­ingly, the gov­ern­ment has promised to bear the em­ploy­ers' con­tri­bu­tion of 8.33 per cent of the Prov­i­dent Fund for the first three years af­ter the units come un­der for­mal fold. A shift to the for­mal seg­ment would help small en­ter­prises ac­cess for­mal channels of credit. It would also en­able them to adopt mod­ern tech­nol­ogy and best busi­ness prac­tices and scale up their busi­nesses.

The big­gest push to­wards largescale for­mal­i­sa­tion of the MSME sec­tor is per­haps the gov­ern­ment's de­ci­sion to change the def­i­ni­tion of the sec­tor. The Cen­tre has in­tro­duced an amend­ment to the MSME De­vel­op­ment Act, 2006 - the MSME De­vel­op­ment (Amend­ment) Bill, 2018 - to re­de­fine the sec­tor based on an­nual turnover as the sin­gle cri­te­rion from the present one of in­vest­ment in plant and ma­chin­ery.

Ac­cord­ingly, mi­cro en­ter­prise will be de­fined as a unit with an­nual turnover of up to Rs 5 crore, small en­ter­prise with an­nual turnover be­tween Rs 5 crore and Rs 75 crore and medium en­ter­prise hav­ing an­nual turnover of more than Rs 75 crore and up to Rs 250 crore.

"The change in def­i­ni­tion of MSMEs is to free them from In­spec­tor Raj. The present cri­te­rion pre­vents small en­ter­prises from in­vest­ing in bet­ter tech­nol­ogy or ma­chines for fear of get­ting out of the mi­cro- or smallscale bracket. With the turnover def­i­ni­tion, no in­spec­tor can trou­ble an MSME unit on the ba­sis of money spent on plant and ma­chin­ery," stresses MSME Min­is­ter Giri­raj Singh. Di­nesh Chan­dra Tri­pathi, the presi-

dent of Fed­er­a­tion of In­dian Mi­cro and Small & Medium En­ter­prises (FISME), con­curs with the min­is­ter. He adds: "The pro­posed turnover-based clas­si­fi­ca­tion of MSMEs will sup­port set­ting up of new MSMEs with mod­ern tech­nolo­gies, which so far were be­yond the def­i­ni­tion of MSME due to ar­chaic his­toric in­vest­ment-based def­i­ni­tion."

Mean­while, the RBI too has done its bit to im­prove the con­di­tion of MSMEs. The cen­tral bank has clas­si­fied all work­ing cap­i­tal loans to MSME units as pri­or­ity sec­tor lend­ing, thereby pro­vid­ing a boost for credit flow to the sec­tor. More­over, 180-day NPA norms - in­stead of the cur­rent rule of clas­si­fy­ing a loan as NPA if a re­pay­ment in­stal­ment is missed be­yond 90 days - are ap­pli­ca­ble for all MSME dues be­tween Septem­ber 1, 2017 and De­cem­ber 31, 2018 if the ac­count was stan­dard on Au­gust 31, 2017. This new norm cov­ers both reg­is­tered as well as un­reg­is­tered MSMEs.

Re­al­ity check

Suc­ces­sive gov­ern­ments have rolled out sev­eral ini­tia­tives to em­power the MSME sec­tor. But un­for­tu­nately only a few mea­sures have been help­ful, and a ma­jor­ity of the units in the sec­tor con­tinue to face many hur­dles. This sorry state of af­fairs is partly due to in­her­ent short­com­ings within the sec­tor. More­over, laud­able as the poli­cies may be, their shoddy im­ple­men­ta­tion has also re­sulted in small en­ter­prises lan­guish­ing in their cur­rent state of cri­sis.

All said and done, a ma­jor ob­sta­cle to growth of MSMEs is their in­abil­ity to ac­cess timely and ad­e­quate fi­nance. Credit ap­praisal con­tin­ues to be a ma­jor chal­lenge for most of the coun­try's small busi­nesses as over 95 per cent of the MSMEs op­er­ate in the in­for­mal sec­tor. A lack of ad­e­quate credit leaves most of the sec­tor stranded at the bot­tom of the busi­ness pyra­mid, with ob­so­lete tech­nol­ogy and medi­ocre busi­ness prac­tices.

Ac­cord­ing to a new re­port by the Omid­yar Net­work and BCG, MSMEs still find ac­cess to for­mal credit a chal­lenge. The re­port re­veals that nearly 40 per cent of lend­ing to the sec­tor still hap­pens through in­for­mal sources. The re­port pegs the to­tal MSME credit de­mand in 2018 to be around Rs 45,00,000 crore and adds that only Rs 25,00,000 crore will be met through for­mal channels. It points out that the re­main­ing Rs 20,00,000 crore of un­met credit de­mand will be fi­nanced through in­for­mal channels at very high in­ter­est rates, at least twice as high as in the for­mal mar­ket.

How­ever, there is a shin­ing ray of hope on the hori­zon. A new set of fi­nanciers, such as fin­tech com­pa­nies, peer-to-peer lend­ing plat­forms, mi­cro­fi­nance com­pa­nies, small fi­nance banks and new-age dig­i­tal fi­nance com­pa­nies throw up un­lim­ited op­por­tu­ni­ties for fund­ing the MSME sec­tor. In the past two years, in fact, tra­di­tional NBFCs have shown how they can be an­other sup­ple­men­tary source of fund­ing to small busi­nesses along with banks. This grow­ing ecosys­tem of MSME fi­nanc­ing can re­ally do won­ders for the sec­tor.

The Omid­yar-BCG re­port in­ter­est­ingly notes that there is great po­ten­tial for dig­i­tal lend­ing of MSMEs. It re­veals that dig­i­tal lend­ing to the sec­tor can grow by around 15 times to touch about Rs 7,00,000 crore in an­nual dis­burse­ment by 2023. The re­port rec­om­mends that dig­i­tal lenders align them­selves with the needs of MSMEs through mea­sures, like lever-

"The cut in Cor­po­rate Tax to 25 per cent will def­i­nitely ben­e­fit the sec­tor. How­ever, most MSMEs are ei­ther pro­pri­etor­ships or part­ner­ships and are not cov­ered in the an­nounce­ment."

JI­TEN­DRA GUPTA

Pres­i­dent, Laghu Udyog Bharti

ag­ing sup­ply chain ecosys­tems and e-com­merce plat­forms and em­brac­ing next-gen­er­a­tion data an­a­lyt­ics.

"We could ac­tu­ally see a real op­por­tu­nity for dig­i­tal lend­ing to MSMEs. You can do this busi­ness at 30-40 ba­sis points lower than the tra­di­tional way of lend­ing to the sec­tor. Not only can one do bet­ter qual­ity busi­ness with more data, it can also be done in a more ef­fi­cient man­ner at a far lower cost," stresses Omid­yar Net­work Part­ner and Manag­ing Di­rec­tor Roopa Kudva. "The cur­rent pro­grammes do not serve the riski­est, new-to credit MSME seg­ment, where sup­port is most needed, while dig­i­tal lenders can ad­dress this seg­ment ef­fi­ciently," adds Ms Kudva.

The gov­ern­ment can al­ter its pro­grammes and fund the sec­tor on the lines of in­no­va­tive schemes of this new class of fi­nanciers. How­ever, it should clearly steer away from some pop­ulist schemes, like the Prad­han Mantri Mu­dra Yo­jana (PMMY) and the re­cently-an­nounced Rs 1-crore loan in 59 min­utes. Crassly pop­ulist by na­ture, such schemes do not serve the pur­pose they claim to serve. At the same time, they will wreck the al­ready-sink­ing bank­ing sec­tor.

Bankers are wor­ried by loan schemes, such as PMMJ and the 59minute credit, which they be­lieve could lead to higher NPAs of MSME loans. The Mu­dra scheme, launched in April 2015, aims at pro­vid­ing loans up to Rs 10,00,000 to non-cor­po­rate, non-farm, small and mi­cro en­ter­prises. It is not manda­tory to seek col­lat­eral se­cu­rity from ben­e­fi­cia­ries un­der the Mu­dra scheme.

Ac­cord­ing to of­fi­cial data, al­most 13 crore peo­ple have been given loans un­der the scheme with a lit­tle over Rs 6,00,000 crore sanc­tioned up to May 2018. The gov­ern­ment has been hail­ing the scheme as a game-changer. But ex­perts point to flaws in its de­sign. They opine that waiv­ing off manda­tory col­lat­eral clause may be good pol­i­tics but bad eco­nomics.

Be­sides, av­er­age loan sanc­tioned un­der the scheme works out to Rs 46,530. This amount can­not in any way pro­vide jobs to oth­ers let alone launch a start-up. More­over, in­for­ma­tion sourced through a pe­ti­tion filed un­der the Right To In­for­ma­tion Act re­veals that num­ber of large-size loans ex­ceed­ing Rs 5,00,000 dis­bursed un­der the scheme by banks are mere 1.3 per cent. There is po­ten­tial of these loans turn­ing sour due to pres­sure from the gov­ern­ment. More­over, there are re­ports of some bankers and bo­gus ben­e­fi­cia­ries col­lud­ing and de­fraud­ing banks.

Be­yond credit, small busi­nesses in In­dia are ham­pered by very poor in­fra­struc­ture and a lack of proper ac­cess to mar­kets. High rentals of in­dus­trial plots, bad roads and con­gested ports, among oth­ers put In­dian MSMEs at a dis­ad­van­tage com­pared with their coun­ter­parts else­where in the world. Small en­ter­prises are hence rightly ask­ing the gov­ern­ment to fix in­fra­struc­ture, pro­vide ac­cess to land at com­pet­i­tive rates, lower power tar­iff, eas­ier rules for in­ter-State busi­ness, di­rect and in­di­rect tax breaks and sup­port for adop­tion of mod­ern tech­nol­ogy and world-class busi­ness prac­tices.

In fact, some of the gov­ern­ment's out-of-the-box so­lu­tions, such as TReDS, GeM, gov­ern­ment's con­tri­bu­tion to­wards PF of newly-for­malised units and a new def­i­ni­tion of MSMEs, go a long way in bring­ing growth back to the MSME sec­tor. In­dia has made con­sid­er­able progress in the ease of do­ing busi­ness (EoDB) rank­ing. How­ever, this score is lim­ited to large busi­nesses in Mum­bai and Delhi. A bet­ter EoDB ecosys­tem down to the last rung of the coun­try's busi­ness pyra­mid can make a world of dif­fer­ence to small en­ter­prises. It is only then that the real en­gines of growth can power the In­dian econ­omy to a roar­ing start.

"The pro­posed turnover­based clas­si­fi­ca­tion of MSMEs will sup­port set­ting up of new MSMEs with mod­ern tech­nolo­gies, which so far were be­yond the def­i­ni­tion of MSME due to ar­chaic his­toric in­vest­ment-based def­i­ni­tion."

DI­NESH CHAN­DRA TRI­PATHI

Pres­i­dent, FISME

Prime Min­is­ter Naren­dra Modi's Di­wali gift to em­power MSMEs

MSMEs are slowly re­cov­er­ing from the twin dis­rup­tions of de­mon­eti­sa­tion and GST.

"The cur­rent gov­ern­ment pro­grammes do not serve the riski­est, new-to creditMSME seg­ment, where sup­port is most needed, while dig­i­tal lenders can ad­dress this seg­ment ef­fi­ciently."ROOPA KUDVAMD, Omid­yar Net­work

A re­cent re­port re­veals that nearly 40% of lend­ing to small en­ter­prises hap­pens through in­for­mal sources.

A ma­jor ob­sta­cle to growth of MSMEs is their in­abil­ity to ac­cess timely and ad­e­quate fi­nance.

In­no­va­tive schemes, such as TReDS and GeM, go a long way in bring­ing growth back to MSME sec­tor.

A new set of fi­nanciers, such as fin­tech com­pa­nies, throw up un­lim­ited op­por­tu­ni­ties for fund­ing MSMEs.

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