(Co-authored with Amrita Pillai)
The government’s initiatives under the stimulus package have been geared towards helping Indian MSMEs maintain liquidity and ensuring greater credit availability. The emergency credit line, subordinate debt provision and the equity infusion measure, apart from the long-awaited reform to the MSME definition, have been significant interventions. It is important however to examine how game changing they have been to the existence of approximately 6.3 crore MSMEs that employ 11 crore people across the country.
A recent nationwide survey of over 46,500 participants, conducted by the All India Manufacturing Organisation (AIMO) has found that 78% of small companies’ owners were not satisfied with the implementation of the package. While the package amount has been considered sufficient, the survey suggests that transmission at the ground level is slow, moreover 85% of the sector may not benefit from it. Another survey by FICCI-Dhruva Advisors finds that feedback from over 100 CEOs, especially on the stimulus package is conservative. 79% respondents believe that the Emergency Credit Line Guarantee Scheme (ECLGS) has not yielded the desired results while 70% also say that they haven’t availed the benefits of loans and interest moratorium. As of July 4, 2020, Rs. 1.14 lakh crore worth of loans have been sanctioned in total, to 36.2 lakh loan accounts. However, a lag in disbursals is recorded as only close to half of loan amount sanctioned has been disbursed (Rs. 56, 091) to 15.24 lakh accounts.
Even before Covid, the MSME sector was marred by rampant informality, stunted growth and bore a heavy share of compliance burden. It is important to periodically assess and identify measures that could ease these challenges exacerbated by the pandemic and provide relief to these businesses. Despite financial and regulatory support offered to the sector, there is a clear operationalization and implementation gap that needs immediate attention. The Global Alliance for Mass Entrepreneurship (GAME) National Task Force on MSMEs recommendations hold promise in providing not just short-term survival but also of helping MSMEs thrive.
This entails ensuring credit reaches those who need it the most. Credit growth to the MSME sector in particular has declined - a clear sign of risk averse bank lending that has only become worse since the onslaught of the pandemic. Lending to micro and small enterprises has contracted 3.4% while for medium enterprises, it has contracted 5.3% during the same period.
The Reserve Bank of India has clarified that Member Lending Institutions (MLIs) shall assign zero percent risk weight on credit facilities extended under the scheme since these are backed by an unconditional and irrevocable guarantee provided by the GoI. Despite this, a lag in loan disbursals is seen, especially with private sector banks still hesitant to lend overall but even when doing so, preferring to disburse larger loans.
In light of these highlighted trends and drawing upon the GAME sponsored Task Force recommendations, a few changes to the current system of credit support are proposed herewith.
First, set aside credit for new-to-credit MSMEs with a focus on bringing them into the formalised fold. The current scheme is open only to MSMEs who have Rs 25 crore loan outstanding and upto Rs 100 crore turnover. This implies that fresh borrowers cannot avail this scheme - such MSMEs need to be targeted in order to bring them into the formal credit ecosystem. The Task Force has recommended that Rs 1 lakh crore could be set aside for disbursing small ticket size loans of Rs 1 lakh to first time MSME borrowers.
Second, mandate a definite percentage of credit guaranteed loans to be released to micro and small businesses. Ninety-nine percent of enterprises in the MSME sector are micro enterprises that are largely informal. These 6.30 crore micro enterprises comprise one person businesses/self employed persons and units that employ less than 10 workers. Small enterprises at an estimated 3.3 lakh are the next highest in number. Post the upward revision in turnover limits of medium enterprises, a greater number of enterprises will be eligible for benefits enlisted for this sector. To ensure that micro and small enterprises are not crowded out in such a situation, mandating a certain percentage of credit guaranteed loans in the form of to micro and small enterprises could offer them necessary succour.
Third, bridge the gap between total amounts sanctioned and disbursed by banks under the ECLGS. It could be that state owned banks are under pressure to show that the scheme has received a good response hence they are giving automatic sanctions to all eligible borrowers. Disburesments, however depend on the actual credit needs of the borrower. Another reason could be that a borrower can avail only 20% of the outstanding loan amount. For those MSMEs who have repaid their loans, the window of fresh loans is very small. Such prescriptions need to be examined to ensure that MSMEs in genuine need of credit are not left out.
Fourth, scheme eligibility, application processes and benefits need to be conveyed more simply. While the CHAMPIONS portal has a comprehensive information base and exhaustive FAQs, these need to be disseminated in multiple languages, through various channels.
Radhika Pandey and Amrita Pillai are Fellow and Research Fellow, respectively, at the National Institute of Public Finance and Policy (NIPFP), New Delhi.
The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.
This article was published in Indian Express, dated July 14, 2020.