Making MSMEs buzz again

Making MSMEs buzz again

The RBI’s decision to set up a high-level MSME Committee to resolve issues facing the sector gives some hope

Not all has been well with the micro, small and medium enterprises (MSMEs) since demonetisation and introduction of the Goods and Services Tax (GST). Credit declined. Debtors are mounting pressure. Labour is on the exit following aggressive online sales as a recent Trade Body report revealed.

But the intentions of the governments can’t be faulted. The Government of India (GoI) has put in place a robust public procurement policy. The GST led to the creation of Government eMarketplace (GeMs) and trade exchange (Tradex), which are making some inroads to resolve the delayed payments problems.

However, access to credit is still a problem. This has been flagged as an insurmountable problem by the GoI to the Reserve Bank of India (RBI). It is one of the problems that the RBI looked at with a six-month horizon through a high-level committee expected to be announced by the end of December 2018. New Year seems to start with a look at the Christmas Star!!

Defining MSMEs

The sector has multiple regulators but a single law: MSME Development Act 2006. The definition of the MSMEs based on investment was set to move to another single parameter – turnover — but was whittled down by Parliament. The ideal would be a combination of turnover and employment as this sector employs the largest number of people next only to agriculture. But most of the firms falling under the unregistered category mask actual employment. Developed economies like Germany and Malaysia having a large SME sector define them on these two parameters.

Only 16% of the MSMEs is estimated to have access to institutional credit. MSMEs that are self-funded account for 20% and include proprietary firms, private cooperatives, private self-help groups, khadi and village industries, coir industries and artisans providing huge employment opportunities. They also ensure regional balance through industrialisation of rural remote and less developed areas.

Some 98% is still owner-driven – proprietary or family driven partnerships — and a few alone are in the private limited category. Having included services in the defined category of the sector since 2006, manufacturing has suffered heavily.

Looking at the global SME sector one would notice that India does not stand in isolation. While a few countries like Germany, Malaysia, Netherlands and China stand out in resolving problems affecting this sector, India is still in the melting pot striving to create an ecosystem congenial for the growth of MSMEs and providing easy access to credit.

Many Challenges

New schemes like Make in India, Start Up and Stand Up India, Mudra and the latest 59Minute sanctions have not altered the scenario significantly. The services sector crowds out the manufacturing sector. Around 95% of Mudra loans has also gone in favour of the services sector below the credit limit of Rs 5 lakh per enterprise.

Nearly a lakh of enterprises are estimated to be sick or non-functional. Banks that lent to them earlier hardly showed interest in their revival or restructuring despite clear guidelines from both the RBI and the GoI, going by the fact that only 7% are considered potentially viable and just around 2% revived with an average of less than Rs 14-15 lakh per enterprise. Though Industrial Health Clinics provide a ready answer as proved by the Telangana government, there are few takers among banks.

Several studies have brought out that access to credit is a major area that requires reforms. Several banks have been distancing themselves from both entrepreneurs and enterprises due to the multi-layered approach they follow — one markets the loans; the other scrutinises the application and processes; the third sanctions and the fourth at the branch-level finally disburses the loan. In the end, due to inadequate staff and limited knowledge, due diligence, monitoring and supervision suffer. Information asymmetry and adverse selection are the outcomes.

Simple Steps

Informal or unorganised enterprises still dominate the sector and formalising them requires simple documentation and extension of flexible terms of credit based on cash flows. High process costs and turnaround time; demand for excessive collateral; conflict between social objective and profitability; geographical disparities; high cost of funds; low scale-up capabilities; single product lines; and complex product regulation orders are major challenges to provide easy access to credit.

Inconvenient provisioning norms and non-performing loan threshold on a par with their elder brothers followed by poor intent and low ability to pay back the loans compound the challenges. Banks that debit inspection charges to the unit’s accounts can hardly agree to this deficiency in public. The regulator knows the position but has no solution.

Banks invariably insure machinery while extending credit to the MSMEs. However, there is no evidence that there are any claims that are settled save fire accident out of this insurance mechanism although premium is debited to the accounts. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) guarantees are issued in large measure for loans up to Rs 10 lakh mandatorily although such guarantee can be extended for loans up to Rs 2 crore.
Sidbi as an umbrella institution for the CGTMSE has a conflict of interest as the latter also extends guarantee to the loans sanctioned even by Sidbi directly. Sidbi even after 27 years of existence is yet to provide leadership in lending to the sector. Its schemes are thinly spread on the refinance window.

Data Integration

The Public Credit Registry that provides scope for better information flow across credit agencies requires digitisation of the sector that is estimated to have only 27% as digitally literate. If reliable data exists, integration challenges can be addressed when a data beehive is set up. In RBI Empowered Committees of MSMEs and SLBCs, data presented have no coherence. Integrity of data has been questioned many times.

Udyog Aadhaar of the Ministry of MSMEs – the enterprise registration data — does not capture data in full. If systems are to perform, data is crucial. Cleaning up existing data is the first step before new sets of data are put in place for integration of data across clientele bases and institutions with diverse capabilities.

The KC Chakrabarty Committee appointed by the RBI in 2007 and PMO Committee of 2009 were the last two committees that examined the issues in great depth and offered a few solutions. Credit to MSMEs in general, and MSEs in particular, has been looking southwards almost for seven years in a row. Cascading effect of the corporate sector NPAs still hangs on the vendors, viz, MSMEs. Challenges mentioned above still remain. At its November 2018 board meeting, the last of Urjit Patel as Governor, the RBI decided to set up a high-level MSME Committee to resolve several issues facing the sector. The sector as usual lives on hope.

(The author is an economist and senior banker. The views are personal)