Context: The Coronavirus lockdown is threatening to cripple the MSME sector that, as per government numbers, employs about 111 million (about 30% of India’s labour force), and contributes about 28% to gross domestic product (GDP).
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. With 99 percent of MSME sector enterprises categorised as micro, it is clear that a large percentage of the 11 crore persons employed in this sector work in these vastly informal enterprises.
- 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.
How is the lockdown crisis different from the Global financial crisis of 2008-09?
- The sector is thinking on the questions like how to pay salaries when there are no revenues, how to buy raw material when things resume, how long before payments come in.
- About 71% of MSMEs failed to pay wages, fully or partially, for March, according to the All India Manufacturers Organisation (AIMO), a trade body with a focus on the MSME segment.
- The last time MSMEs saw their average receivable days—the time from raising an invoice to receiving the payment—spike from six months to nine months was during the global credit crisis of 2008-09. That time, the cash taps went off, but business was still on.
- A collapse of MSMEs could have a cascading effect. Besides supply chains, a ripple effect might also be felt on the banking sector (for example, the MUDRA loans) and livelihoods.
- In late-March, the Centre allowed MSMEs to delay GST returns for the months of February to April until June, without drawing interest, late fees or penalties. It accelerated settlement of income-tax refunds.
- The RBI has allowed a moratorium on term loans, eased working capital financing and deferred interest payment on working capital facilities without an asset classification downgrade.
- 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 automobiles between January-end and July-end will not attract CRR restrictions.
- Many public sector banks have introduced emergency credit lines whereby a maximum loan amount of up to Rs 200 crore or 10 percent of the existing fund-based working capital limits can be availed by MSME borrowers.
- The Small Industries Development Bank India has announced a concessional interest rate of 5 percent for MSME loans under the SIDBI Assistance to Facilitate Emergency Response against Covid-19.
- Earlier, the govt. 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.
- MSME Samadhan 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): 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.
Problems being faced by MSMEs:
- The lack of accurate information on this sector due to the absence of a dedicated MSME census conducted in recent years (the last MSME census was held in 2006-07), and the absence of a unified (and verified) MSME database could hinder targeted relief delivery and making access to credit easier for enterprises that need it the most
- Liquidity issues arising from delayed payments and unsold goods were cited by U.K. Sinha-led committee on MSMEs as the biggest reason (41% of cases), followed by loss in business.
- 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.
- Meagre formal sector loans: As per U.K. Sinha Committee, the overall supply of finance from formal sources to MSMEs at ₹14.5 trillion, and the credit gap to be ₹20-25 trillion.
- That’s partly because they are not registered as companies—96% are single-person proprietorships, according to a 2017 NSS survey on unincorporated non-agricultural enterprises —and don’t have historical financial information.
- Exclusion from the EPF and Miscellaneous Provisions Act: It is presently applicable to establishments with 20 employees or more whereas most tiny and micro-businesses that comprise 99 percent of all MSMEs are known to have between 5-10 workers.
- 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.
- Low activity in TReDS: As of mid-2019, 3,708 MSME sellers, 604 buyers, 71 banks and five NBFCs engaged in factoring were 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.
- Better grievance redressal: All MSMEs mandatorily upload their invoices above say, ₹1.0 crore, to an Information Utility (IU).
- A designated authority of the MSME ministry can then review this invoice data from the IU periodically and initiate a series of actions, starting with issuing a notice to the buyer and “naming and shaming" the defaulting buyer.
- Facilitating prompt payments: An amendment to the MSME Development Act for facilitating prompt payments
- Reforming TReDS: The MSME Committee recommended opening a “second window" for financing on these platforms, wherein the information on invoices would still be available for underwriting.
- Better integration between the GeM and the TReDS platforms, so that invoices on the GeM that have buyer acceptance can be smoothly listed on the TReDS.
- Recourse options for MSMEs, particularly in cases of low-rated buyers.
- Encouraging opening up these platforms to all NBFCs so that there would be more liquidity. This may need an amendment of the Factoring Act.
- Improving existing credit guarantee funds such as the Credit Guarantee Fund Trust for Micro and Small Enterprises should back transactions for all lenders.
- A process to ensure quick generation of invoices that are seamlessly registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest will be important. It will have a multiplier effect on an MSME revival.
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.
- A wage support or subsidy package would enable employers to pay salaries and other statutory dues to daily wage workers, especially in such units.
- The government can approve compensation subject to demonstration of reduced income, for instance, by way of documented decline in predicted revenue due to cancelled orders, restricted movement of goods and labour etc.
- Deferment or be required to only partially pay property taxes, rent and other utilities in order to avoid further costs and liquidity shortfalls, since payment of personnel salaries should be a priority for enterprise owners.
- Digital finance lending platforms will be better suited to offer unsecured loan products given most enterprises in the micro and small business spectrum will have higher risk profiles.
- The Economic Survey 2019-2020 highlighted the need for PSBs to embrace fintech lenders and collaborate with them to make faster and safer lending choices using the analytics tools the latter utilise to assess the creditworthiness of small businesses.
- Apart from such measures, it is also imperative that a plan be drawn up to allow businesses to reopen activity, in a phased manner, with social distancing norms in force. Regular and surprise checks even may be introduced to enforce state guidelines.