New Year leaves many in hope with the MSMEs no exception. Their share in GDP at around 8% currently has prospects of moving to 15% by 2020 according to a KPMG-CII Study in October 2014. Hopes are built on the double digit growth of a few manufacturing sectors by that time and the FDI interventions in defense, pharma and infrastructure sectors. Not so encouraging, however, is the decline in credit growth in the manufacturing sector from 13.7% a year ago to 7.3% in December 2014.
The Government has no doubt infused some confidence building measures, like a few start-up Funds for SC entrepreneurs, revisiting the definition of the MSMEs and credit policies. Action seems to be far slower than announcements. Even earlier there were 32 Funds announced for the sector at different points of time that did not create the impact one would expect.
At least ten things need to be done by the Government if the MSMEs should move to building brand image for India and they will be all in any case, Make-in-India only.
1. Segregate the Micro and Small from medium Enterprises by redefining the sector without delay so that the incentive structure would be geared to promote the entrepreneurship in a big way for the micro and small start-ups for the following reasons:
There are three distinct categories in the MSME sector that deserve careful inquiry and out-of-the-box solutions.
1) The Micro enterprise sector, largely unorganissed, consisting of artisans, village craftsmen, micro entrepreneurs and small service operators function from cultural domains and inherited skills and locally available raw materials.
2) Manufacturing sector in the micro segment: the carpenters, the cobblers, the black smiths, gold smiths and copper smiths in villages. Several of these two categories are in the proven inefficient KVIC umbrella. KVIC as intermediary financier is the biggest single NPA in the MSE lending portfolio of the PSBs. This political outfit needs cleansing sooner than later.
3) Manufacturing SMEs: These are the core small and medium manufacturing enterprises requiring structured finance products and export finance with banks investing their good time in due diligence and careful supervision. Both enterprise specific and entrepreneur specific credit support is required.
Action rests with the Central Government and the financial sector.
2. Start-up MSMEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would boost this sector. Industrial work space should be made available on leasehold basis for 15-20 years with permission to mortgage leasehold rights in favour of lending institutions. Existing urban industrial estates currently existing should be up-scaled and modified to provide all the logistic facilities closer to the MSEs under PPP mode.
3 District Industries Centre for the MSEs as a delivery window is most inefficient in most States, save exceptions. Restructuring DICs comprehensively brooks no delay. Skill building has to take place in the DICs as well. States have to take action on this front.
4. Credit and guarantee mechanisms should be made mandatory for certain thresholds for each subsector among the manufacturing micro and small enterprises. Any collateral obtained beyond the rule shall be declared as ineligible for lending institutions to proceed against in the event of failure of the unit. Valuation of mortgaged securities should be done annually by the banker to pare with the outstanding credit. Trade receivables and credit exchange recently set up by the RBI should be monitored for results at the SLBCs.
5. All the MSEs should be provided credit at no more than 9% for meeting their working capital requirements. They should be all cash flow based lending. The work order should be the basis of lending instead of a balance sheet and ratio based lending.
6. Incipient failures should be treated with expedition by the lending institutions – say, no more than six weeks of noticing the same. If the borrower does not cooperate, it should be treated as willful default and dealt with accordingly.
7. Government being the owner of industrial workspaces in industrial estates, should be able to re-allocate to another entrepreneur once the existing entrepreneur is given the exit chit, with due notice. Such allocation should be unrelated to the liabilities of the existing failed entrepreneurs, who should be dealt with on independent platform.
8. SIDBI should prove its supremacy over the other primary lending institutions and should be seen as a guide and benefactor to the MSEs and the small banks. It should also be restructured to cater to the sophisticated medium enterprises and mid-corporate enterprises distinct from the MSEs. Its current micro finance lending window should be operated through a separate subsidiary to give focused attention to the MSEs.
9. RBI should reorder its priority sector categorization and modify its MIS for effective monitoring of the growth of the MSE sector.
10. Bankruptcy Law/Exit Law has to be enacted with no further loss of time.
Humanising the lending process drawn on a public sense of commitment is critical to MSME growth and the time is ripe now.
Innovation holds the key for inclusive entrepreneurship. If ‘Make in India’ were to succeed it should happen in rural India as well. In several States rural entrepreneurship is very backward mainly because of the following reasons:
1. Land, the key input has become scarce and is highly overvalued for any rural enterprise to access. Affordability distances the enterprise set-up.
2. The entrepreneur cannot access the needed infrastructure with full compliance to regulations because he is ignorant of the latter. He realizes the cost of compliance is going to exceed the cost of avoidance.
3. (S)He lacks proper guidance in packing and packaging his product. Even when the product meets the quality standards, his ability to incur marketing costs to put it to effective sale is extremely limited.
4. His ability to store it for a better price is thwarted by inadequate bank finance.
5. Most often non-collateral based credit is unavailable from institutional lenders. This drives him/her to high cost credit that makes the product up front uncompetitive. Finally, market throws him out and lenders strangulate him.
6. He realizes that he has no exit route. He suffers ignoble exit.
Government of India announced recently MSME Venture Funding to the extent of Rs.10000crores. The rules of administering this Fund have not yet been made public. Most funds in the past as well were announced in non-transparent manner. This makes it inaccessible. If such funding goes in tandem with the state governments’ initiatives and makes the incremental benefits enhance, rural entrepreneurship would benefit.
Coming to specifics,
Telangana Government’s most progressive industrial policy should focus on promoting new start-ups in rural hinterland. This requires change in mind-set of the officials of the DICs that should move from mere compliance to compassion; from doles to extension; and from arm-chair approach to facilitation. Having a good policy is only the first policy. Its implementation rests on culturing the deliverance and effective quarterly monitoring for results at different levels.