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Union Minister for Micro, Small and Medium Enterprises (MSME) Nitin Gadkari told the Rajya Sabha that the government would come out with a new definition of MSMEs, which are currently defined on the basis of investment in plant and machinery.

Background:

  • The MSME sector currently contributed 24% of the GDP growth and 48% of exports, with an annual turnover of Rs. 1 lakh crore this year. A target of Rs.5 lakh crore in five years had been set.
  • There are suggestions that the MSME units should be defined on the basis of turnover as it would increase compatibility with the Goods and Services Tax (GST) system.

About MSME:

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

Enterprises engaged in the manufacture:

  • A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;
  • A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;
  • A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

Enterprises engaged in providing or rendering of services:

  • A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;
  • A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore;
  • A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Govt initiatives: 

  • It had accepted 39 suggestions by the U.K. Sinha committee appointed by the Reserve Bank of India, including the setting up a “fund of funds” for the sector.
  • Relaxation of CRR for lending to key sectors: The RBI has announced that any incremental lending (retail loans) by banks for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) to automobile between January-end and July-end will not attract CRR restrictions.
  • MSME Samadhaan Portal: Ministry of MSME has taken an initiative for filing online application by the supplier MSE unit against the buyer of goods/services before the concerned MSEFC of his/her State/UT.The Mudra Bank and Start-up India initiatives are illustrative of its keenness to promote a million new enterprises.
  • Credit Guarantee Fund Trust for Micro and Small Enterprises: Government of India launched Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of credit to the MSE sector. 
  • Trade receivables discounting platforms (TReDS)
    • The objective was to enable multiple lenders to bid for invoices accepted by the buyer and thereby provide financing to the MSME seller on a non-recourse basis—transfer the risk from the MSME seller to the financier against the strength of a validated trade invoice. 
    • These platforms play a vital coordination role between the buyer (often large corporate or PSU), the seller (often an MSME), and the financier (banks and non-banking financial companies or NBFCs), and also enable the upload, acceptance, discounting and trading of invoices.
  • Government e-Marketplace (GeM) meant to facilitate transparent government procurement of goods and services across departments. Its back-end infrastructure is quite sophisticated. 
  • The MSME ministry is also working on a portal called Bharat Craft in cooperation with the Government e-Marketplace (GeM) portal to market goods produced by MSMEs across the globe.

Concerns with MSMEs: 

  • Significant delays in receiving payments from buyers, particularly public sector undertakings (PSUs): It is happening despite laws mandating a 45-day window, resulting in an often unsustainable working capital cycle.
    • It is also a key reason for many of them turning into non-performing assets (NPAs), affecting their sustainability.
  • Lacunae in Samaadhaan facilitation route: the current grievance redressal system to deal with cases of delayed payment to Micro and Small Enterprises (MSEs) does not recognize the power asymmetry between the buyer and the seller. 
    • While it is theoretically possible for an MSME to take a defaulting buyer to arbitration, or use the government’s Samaadhaan facilitation route, most MSMEs are worried about losing business relationships if they take this step.
  • Low activity in TReDS: As of mid-2019, 3,708 MSME sellers, 604 buyers, 71 banks and five NBFCs engaged in factoring was registered on these platforms, and invoices worth ₹66.69 billion had been financed according to the MSME Committee’s report.
    • Buyers lack an incentive to use these platforms, despite the government’s diktat for PSUs to mandatorily enlist.
  • Delay in generating invoices and about multiple-financing of one invoice across different platforms.

U.K. Sinha-led RBI committee recommendations: The UK Sinha panel was set up to review the framework for MSMEs, and suggest long-term solutions for economic and financial sustainability for the sector.

  • The committee had among other things recommended a Rs 5,000-crore stressed asset fund for domestic MSMEs.
  • The committee also suggested forming a government-sponsored Fund of Funds of ₹10,000 crore to support venture capital and private equity firms investing in MSMEs.

About MSMED Act 2006

  • Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions to deal with cases of delayed payment to Micro and Small Enterprises (MSEs). 
  • As per the provisions, the buyer is liable to pay compound interest with monthly rests to the supplier on the amount at three times the bank rate notified by Reserve Bank in case he does not make payment to the supplier for the supplies of goods or services within 45 days of the day of acceptance of the goods/service or the deemed day of acceptance.
  • State Governments are to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments.

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