Cumbersome Guarantees and Insurances for MSEs Need Redress
This Blog was published in the Times of India ( see the link below)
Micro, Small, and Medium Enterprises (MSMEs) are extolled
as the engines of employment, growth, and key to the supply chain management of
medium and large corporate enterprises, leading exporters, manufacture over
6000 products. They have been redefined during the first Covid-19 disruptions
to the economy in terms of investment and turnover, replacing the earlier
definition restricted to investment in plants and machinery. This sector is next
to agriculture which employs the largest number of persons. 98% of enterprises are
micro, mostly owned by proprietors or partners. Even partnerships are to a
large extent family partners.
Access to credit for the sector is the Achilles Heel.
To provide easy and better access the GoI and SIDBI have set up Credit
Guarantee Trust for Micro and Small Enterprises in 2000 (CGTMSE). Even during
the pandemic, GoI introduced Emergency Credit Linked Guarantee Scheme under
Atma Nirbhar Bharat Abhiyan with CGTMSE holding the baby.
But did the sector gain much from the insurances and
guarantees in their existing shape? This needs a probe.
Insurance:
When the small-scale industries of Yester decades used
to take out insurance cover for the plant and machinery against fire, riot, and
risks, through the liability jointly owned by both the credit institution and
the borrowing enterprise. After universal banking was ushered in, several banks
took to Bank Assurance. A transparent joint insurance policy gave place to a
policy that just lists the names of the borrowing MSME firms with the amount insured.
The firms are ignorant of their liability under such policy and its renewal
terms annually.
There is no evidence of any insurance claim of such
bank insurance of enterprise machinery as a primary asset response. On the other
hand, as several MSMEs noted that banks have over-booked insurance premium
amount upfront with every loan sanction – whether term loan or working capital.
Never did such insurance pay off for the MSE in trouble.
Both the MSMEs and the Banks have debated their mutual
deficiencies in several media discussions, and they are plagued by mutual
distrust.
While the redefinition helped many scale up their
enterprises and move to exports quickly, there were lakhs that shut their doors
during the pandemic. The impact of redefining has been such that a negative 1.8% MSE
outstanding loan in FY20 has moved to 4.8% year-on-year by the third quarter as
the existing.
Guarantees:
The 'strength' of a
guarantee that allows credit to the enterprises without collateral or third
party, is context-dependent: it depends on its nature, the legal environments
that are relevant, current practices, and the context when the lender exercises
his right. Yet, for twenty years, institutional credit to the sector leaves a
gaping hole of Rs.279 trillion according to the International Financial
Corporation (2015) study.
RBI mandated Banks to extend
credit to micro-enterprises under CGTMSE up to Rs.10lakhs per enterprise. While
the CGTMSE can extend guarantees to MSEs up to Rs.2crore, the covers range from
75 to 85 percent of the loans. During the last three years (2018-21), even
retail loans and the service sector are being covered with guarantees while the
extent of such guarantees is limited to 50% of retail loans. One hundred
Member-Lending institutions (MLIs) that include 23 NBFCs are availing of the
facility and yet several of them express serious reservations over such
ailment.
Annual Report of CGTMSE
for Fy2021 reveals that 47 percent of guarantees pertained to loan amounts of
less than Rs.10lakhs (mandated by the RBI to extend without any collateral);
18% are in the range of loan amount of Rs.10lakhs-25lakhs; 14% are in the range
of Rs.25lakhs-50lakhs; 12% are in the range of Rs.50lakhs-100lakhs, and 9% are
in the range of Rs.100lakhs-200lakhs. Rs.45,851crore have been provided
guarantee cover during the year 2020-21.
MLI concerns:
The guarantee portfolio
increased after the retail, hybrid-collateral, and NBFCs joined, as these three
constituted 49% of the guarantees extended during FY 21. It is the 1.18crore of
the 6.3crore MSMEs that need a guarantee more than the rest. MLIs opine that the
guarantee premium of 1-1.25 percent involved a lot of paperwork, follow-up for
receiving the claim amount that too, after declaring the asset as NPA.
Banks have to prove that
they have taken all the measures that include issuing legal notices, follow-up
on recovery, provisioning for the loans, and proceeding against the borrowers under
SARFAESI Act where the assets are partially guaranteed. These factors lead to a lack of trust by the CGTMSE both the MSEs and Banks.
The Way Forward
MSEs in manufacturing
that forms an important component of sustainable supply chain management of
Industry 4.0 need different forms of credit acceleration and insurance
mechanism.
While the Banks should
evaluate the credit risks of such enterprises on transparent parameters and
extend credit to MSEs along with counseling, mentoring, and follow-up, the
enterprises should digitize their operations and derive benefits from a large
number of schemes recently floated by the Ministry of MSME, GoI.
Since fourteen states
take 88 percent of MSE outstanding credit, and these MSEs reported less NPAs
than their elder brothers in the corporate sector, each enterprise can be
insured for various risks that include, fire, riot risks, natural calamities,
the pandemic-like situations, plant and machinery, storage, other supply-chain
disruptions, and cash flows on a graded scale. Once the enterprise pays the
premium based on the risk it chooses to cover, and such risks are
well-measured, insurance will ensure that the enterprise will be a going
concern, and banks can extend the needed help duly assessing their risk cover as
well. It is time for a change the guarantee is looked at and replaced it with Insurance,
for which purpose, the GoI may appoint a High-powered Committee.
The policy should be
transparent and discussed with the stakeholders in at least ten of the fourteen MSME-dominant states before
introduction.
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