12-point Agenda for the RBI Committee on MSMEs

Pain points for the MSME sector

MSMEs Credit woes in stock

The RBI has its task cut out as it sets about addressing the sector’s credit and viability concerns.

A debate on MSMEs has come alive due to the Centre’s insistence on a regulatory reprieve for the beleaguered sector post GST and post demonetisation. The RBI at its last Board meeting that Urjit Patel chaired, promised to set up a Committee on the MSME sector by the end of this month.

There is an estimate, authenticated by the Centre, that there are around 50 million MSMEs, both registered and unregistered, employing 120 million, second only to agriculture.

Credit crunch

MSMEs contribute 6.11 per cent of manufacturing GDP and 24.6 per cent of services GDP. They also account for 16 per cent of bank lending. Around 8 per cent of credit to manufacturing micro and small enterprises and 13 per cent to medium enterprises are estimated to be gross NPAs.

MUDRA (Micro Units Development and Refinance Ageny) and the ‘59-minute loan sanction’ promises enhanced credit reach to the sector with SIDBI in the lead for both. MUDRA helped banks to push the services sector lending below Rs. 5 lakh significantly.

Field studies reveal that MUDRA loans have been used by several banks to swap a good number of failing micro service sector loans. There is also evidence of moral hazard following adverse selection as several enterprises are non-traceable at the location mentioned in the applications.

In the band of Rs. 5-10 lakh the percentage of loans is less than 20 per cent, indicating preference for a risk free portfolio and lack of interest in the manufacturing sector.

The government has put in place e-Invoice, TReDX, Samadhan, GeM to ensure prompt payment of bills from public sector undertakings and central government departments. Even so, the State PSUs and state government departments continue to delay the bills of MSMEs, leading to NPAs.

A procurement policy has been put in place to provide for preferential purchase from MSMEs, without sacrificing the conditions of quality of goods and services supplied to the buyer.

The process of loan disbursal is also cumbersome. Quite a few banks follow a multi-layered approach to lend to the sector and as a result due diligence suffers. The branch that disburses is also expected to monitor and supervise the credit but does not have the time or manpower for that.

There is hardly any communication between the entrepreneur and the credit authority until an irregularity in the account surfaces.

So given declining credit and growing NPAs, the following 12-point Agenda is a way ahead for the RBI panel:

* Thresholds in priority sector portfolio.

* Credit risk assessment of the MSMEs

* Thresholds for declaring the MSMEs as NPAs — 98 per cent of the portfolio in the fold of proprietors/family owned enterprises in the shape of partnerships, have no exit route of the sort facilitated under the IBC code or the Industrial Disputes Act.

* Revival and restructuring of sick enterprises — Innovative institutional interventions like the Industrial Health Clinics in States that carry the highest numbers of enterprises in this category.

* Cluster Development — Additional lending incentives.

* SIDBI’s Role — Review and Redefine for assuming real leadership role.

* The guarantee mechanism in the shape of the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) needs to be reviewed and redefined.

It has a role conflict with SIDBI as the latter is its promoter and at the same time secures its guarantee for the enterprises financed directly by it. CGTMSE premia rates were found to be high by their primary lending institutions and the claim settlement process unacceptably late.

* Role of credit rating agencies and effectiveness of internal credit rating tools.

* Recommendations to the Centre on policy initiatives.

* Digitisation of MSME lending and managing its transition.

* Setting up of Movable Asset Registry — Operational issues and directions.

* Setting up of Public Credit Registry — Roadmap for data integration without sacrificing data

privacy and data security.

Given the cascading effect of the large corporate manufacturing and services enterprises on the MSMEs, their healthy growth is crucial for employment and growth of the manufacturing sector as a whole.

Since MSMEs are still largely debt driven and not equity driven, it is important that access to credit should be easier, cleaner, and faster.

The writer is Adviser, Government of Telangana on Micro and Small Enterprises

Published on December 27, 2018, The Hindu Business Line

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)