India’s
Micro, Small and Medium Enterprises (MSME) viewed as the lifeblood of the Indian
economy, contribute 30 percent to GDP and of them micro enterprises
alone are estimated to employ 23 percent of India’s total workforce, according
to the data of the Union Ministry of MSME. Access to credit has been the most
contentious issue discussed on public platforms and IMF estimated that only 23
percent of the total number of enterprises in this segment got formal access to
credit.
Post-pandemic,
government of India has been laying lot of emphasis on the growth of micro,
small and medium enterprises and extending incentives and products for easing
the conduct of their business. The Union Finance Minister, in her usual
meetings with the bankers, draws her untiring attention to the need for increase
in credit to these enterprises. Banks, on their part, do not lose the
opportunity to exhibit their fancy to lend to such enterprises.
Trust
deficit
was the major contributory factor from the lenders’ perspective. It is
therefore considered expedient to look at the risk profile of such enterprises
and see the possible mitigating factors.
Latest
Profile of the Sector
Interestingly,
TransUnion CIBIL-SIDBI MSME Pulse Report for July-September presents a very
hopeful perspective presenting a growth of 24 percent year-on-year (Y-o-Y).
Credit to ‘micro’, viewed as unmoving window of Banks for five continuous years
since 2017 and even on the negative window, reported a 13 percent growth in
credit outstanding y-o-y as of September 2022 versus 10.6 percent y-o-y for all
the MSMEs y-o-y. Growth in disbursements for micro, small, and medium
enterprises had been at 54 percent, 23 percent, and 9 percent respectively
during the period.
According to RBI’s
Financial Access Survey, 72.83 percent of MSME Credit is concentrated in ten
states: Maharashtra, Gujarat, Tamil Nadu & Pondicherry,
Uttar Pradesh, Delhi, Karnataka, Rajasthan, West Bengal, Telangana, and
Haryana. Maharashtra takes the major slice of 26.19 percent. This obviously
means that government assistance to the sector also reached these states in a
significant measure, at least proportionately viewed.
Very
small (with aggregate credit exposure not exceeding ₹ 10 lakh), micro1 (with
aggregate credit exposure between ₹ 10-50 lakh) and micro2 (with aggregate
credit exposure between ₹ 50 lakh-1 crore) experienced growth of 20 per
cent, 15 per cent and 11 per cent y-o-y respectively
showing sudden spurt in micro lending, which is not just a post-pandemic bounce
back, it added.
Delinquency
rates dropped y-o-y across all the three lender categories (public sector
banks/PSBs, private sector banks(PVBs) and NBFCs); the highest drop was in
PVBs segment (from 2.8 per cent in FY22-Q2 to 1.5 per
cent in FY23-Q2).[i]
Street Vendors’ financing programme, MUDRA loans (Rs.3.4cr sanctioned during
FY21-22), 59-Minute loan programme for the MSMEs contributed to the steady
uptick that was presented apart from the Union Finance Minister dinning into
the ears of bankers that credit to MSMEs has been sluggish. There was a
pressure on the banks to perform.
This
positive vibration whittles down suddenly when we hear the Union Minister of
State for MSME submits to the Parliament, duly reported in the Financial
Express dated 23.02.23: “The number of Udyam-registered MSMEs closed in the
current financial year has nearly doubled from the last financial year’s count,
showed official data. From 6,222 MSMEs shut during FY22, the count has jumped
to 12,307 as of March 9 in FY23 while only 175 units were closed between July 1
(when the Udyam portal was launched) and March 31 in FY21, taking the total
number of MSMEs closed to an all-time high of 18,704. Maharashtra had the
highest number of casualties with 4,871 Udyam-registered MSMEs shut since July
2020 followed by Tamil Nadu (2,326), Uttar Pradesh (1,568), Gujarat (1,558),
Rajasthan (1,297), Bihar (1,075), and more.”
Gross Non-performing
Assets ratio (the ratio of total gross
NPAs to the total advances made during a particular period by the lender) in
MSME loans in FY22 stood at 7.6 per cent, 7.3 per cent in FY21 and 8.9 per cent
in FY20.
Resilience
and sustainability of industrial growth is inextricably linked to the healthy
growth of the manufacturing micro and small enterprises (MMSEs), that happen to
front-end the supply chains of the industry at large. The data and analysis of
the Transunion report does not provide information on how much is the share of
growth of manufacturing MSEs. September 2022 PMI data shows that industrial
growth has not kept pace with the overall growth of the economy. The growth
obviously occurred in the services sector, due to the digitization of the
highest scale, entry of FINTECHs, formalization of the MSMEs, widely dispersed
200-odd incentive schemes from the Union Ministry of MSME, and the unique
success of unified payment interface system (UPI). Despite the U.K. Sinha
Committee Report calling for cash-flow based lending of working capital to the
MSMEs, RBI creating public credit registry, and pushing the banks to move to
data-based lending instead of security-based lending, MMSEs did not catch the
eye of the banks. Hence, risk profiling of the MMSEs would be necessary to
understand the reasons for the trust deficit in the manufacturing sector.
Definitional
Risk:
Manufacturing
and Services have been combined in the way the MSMEs are defined. The changes
to the definition adopting the twin criteria of investment and turnover to
redefine them have given an escape window for the banks to keep at bay the
MMSEs with investment below Rs.1crore (Rs. Ten million). The turnover threshold
for such enterprises is five times the investment level – Rs.5cr per annum.
While this definition coupled with the insistence of any new enterprise shall
register on Udyog-Aadhar portal of Government of India, has enabled only the
organized to have access credit and
incentives, it is yet to bring many unorganized MMSEs into the organized fold.
Lenders still have their own definition – micro enterprises are those that have
outstanding credit of less than Rs.1cr. The law of proportionality demands that
the micro enterprises be brought under a separate statute so that the benefits
meant for them reach without infringement.
By
nature, micro manufacturing enterprises are owner-led proprietary or family
partnerships. They do not distinguish their firm expenditure from family
expenditure. Their books of accounts are also not well organised. Their
maintenance of record of stocks of raw materials and finished products is less
systematic than their counterparts in the small and medium enterprises even.
They are mostly sub-contractors as their scale of production does not permit
them to participate in private or public tenders directly. But their working
capital cycle accommodates this unorganised way of running their enterprises.
They lack counselling and guidance from their lenders as the later have little
time for these large numbers in their books of accounts that tend to slip to
non-performance at the turn of the hat. Thus, these enterprises have
origination risk. Information asymmetry and adverse selection, the two factors
that adversely affect the credit risk need mitigation.
Covenant
Risks: These MMSEs in their eagerness to borrow money sign
on the dotted line before their lender. They do not understand the implications
of the covenants they are agreeing for. Earlier they were not knowing even the
rates of interest. At least now, thanks to the widely publicised monetary
policy interventions periodically, they know the interest rates. But they are
ignorant of the insurance clauses and their implications. They do not, in many
a case, know that their machinery and stocks are jointly insured with the
lender and the premium is directly deducted annually from their working capital
account. The extent of insurability is least known to them. Such insurance is
invariably made with the insurance arm of the Bank that lends the enterprise.
But the covenants of the policy are little known to them as the Banks do not
share any copy of the insurance policy. This is a grey area.
Compliance
Risk: MMSEs fail to comply with the regulations relating
to products, processes, and finance more out of ignorance than out of own
volition. Neither the regulatory institutions nor the financial institutions
spare time to explain the implications of non-compliance of the rules and
regulations. Environmental regulations and financial regulations are the most
breached. Labour Code that has four components are least explained to the
MMSEs. It is not uncommon to find that these enterprises fail to maintain even a
muster roll and even where maintained does not agree with the reality. The
number of persons actually engaged and the number in the roll rarely tally.
There is a cost involved in compliance and such cost is felt onerous by the
micro manufacturers. When the cost of compliance is more than the cost of
avoidance, they prefer the latter. Transparency in the cost of compliance is
also found wanting. These are areas of immediate correction to take these
enterprises to the globally competitive levels.
Human
Resource Risks: MMSEs employ on average 8-10 workers including the
owners. They invariably depend on migratory labour instead of labour because of
the low wages they demand and reliability. Many studies have indicated that
they spend little resources on skilling, re-skilling, and up-skilling as the
cost of such human resources development is beyond their capacity to absorb. In
fact, these MMSEs act as providers of skilled persons to the Small and Medium
Enterprises as the labour learn their art of working on the machine duly
trained by the proprietors. Some States have insisted on engaging locally
available skills and their experience with such persons on the production front
has become counter productive and costly. They cannot afford to train their
labour in reputed institutions. They require peripatetic trainers who are
rarely available.
Product
Risk: According to a number of studies, 60-70 percent of
the MMSEs may conform to the quality of the product requirements but fail in
packing and forwarding requirements. This puts the buyers at risk and
therefore, the related payments.
Pricing
Risks: Several manufacturing MSEs adopt neighbourhood
pricing of their products as they would not like to lose out in competition
with the peers. They lack abilities to cost their products. They also do not
much understand the leakages that occur in their supply chains. The product is
not priced cost plus. Since debt is their major source of capital they always
look to loan swaps and interest subsidy as a major source to beat the pricing
competition.
Technology
Risks: While several enterprises are aware that new technologies
have the potential to increase their efficiency, their ability to finance those
new technologies is very limited. Quite many are scared to approach their
lenders as they would have been in arrears already either of the interest or
principal payment. They must have already availed one or two name-sake
restructuring of their loans. Their ability to calculate return on investment
in technology is also extremely limited. Banks hardly find time to spend time
with the entrepreneur and guide him.
Payment
Risk
Global
Alliance for Mass Entrepreneurship (GAME) estimated that the problem of delayed
payments to MSMEs is in the magnitude of Rs. 10.7 lakh crore, with 80 percent
of this being attributable to delays to micro and small enterprises (MSEs). The
problem of delayed payments is exacerbated by the lack of credit, specifically
working capital facilities, that are available to these businesses. Reports
such as the IFC’s 2018 Financing India’s
MSMEs estimate that the total addressable debt requirement of micro and small
enterprises was Rs. 24 lakh crores in 2018, with an estimated 70 percent
attributable to the elevated working capital needs of these businesses.
Sovereign
Risk: Industrial policies, Budgetary announcements,
Export-Import policies, Trade Policies and not-so-enriching interface between
various government departments that deal with the MSMEs and the Union Ministry
of Finance, inter-state coordination issues are the various factors that
impinge on sovereign risk. Enterprises have to adjust themselves and
accommodate for the changes in the way they function rather than seeking
instantaneous remedies to their business dealings.
Policy
formulation for the MSMEs is at risk because of lack of reliable data. There
has been no census of the units since 2004, the year of last Census. The data
on the Union Ministry of MSME portal is that of 2012. While the data on Udyam
registration is captured in isolation, its integration with the existing data
did not take place. There is no data of mortality in the figure of 6crore-odd
enterprises mentioned on the website.
While
several state governments and union governments announce a host of incentives,
the reach is suspect due to a variety of constraints: 1. Expediency decides the
allocated budget for release to the sector and the first hit is the MMSEs, the
most vulnerable. 2. There is invariably lack of information relating to the
cost of securing these incentives – in terms of number of visits the
entrepreneur has to make to the concerned department; the cumbersome approach
to the person who actually decides on the sanction and release of the
incentives. 3. Weak negotiating ability of the Industrial Associations over the
incentive releases, etc.
Digitalization
of enterprises, Account Aggregators (yet to mature in its access and use), Open
Credit Enablement Network (OCEN), Co-lending with NBFCs, Factoring, Trade
Related Exchange System (TReDs), have lately entered the Risk Mitigation
instrumentality. Yet, the ability of the MMSEs to take advantage of these
mitigants is way behind both in terms of awareness and the skills.
Therefore,
there is a need for developing a separate framework for the MMSEs and a
broad-based ecosystem involving policy makers, institutions that act as policy
instruments, RBI, Indian Banks Association, NBFCs, Ministry of Agriculture and
Cooperation, Ministry of Electronics and Information Technology, Ministry of
Environment, Ministry of Energy of the Union Government and the ten state
governments that have the major share in MMSEs. This framework should be
discussed with the stakeholders in the leading ten states before firming up.
Separate line of budget should be provided to meet the announced incentives and
institutions like the NIMSME, NIRD, Central Universities and those that are
licensed to run technology hubs should monitor the working of the framework.
*The
author is an economist, risk management and SME Turnaround Specialist.
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