MAKING THE NEXT NORMAL WORK FOR TELANGANA MSMEs

Making the Next Normal Work for MSMEs:

NSS 73^rd Round estimated 63.4mn non-agricultural enterprises in July-June 2016 with 84.2% as own-account enterprises, that is, entirely run by the promoters or their family members. They employ 111.3mn workers and remain as the second largest employer next to agriculture. 40% of the employment is with 11.4% of such enterprises. This formidable driver of the economy started shaking in the pre-covid slow down. Covid-19 compounded the problems. Several of them, known to be in the unorganized sector, often do not have regulatory compliances as their focus and this has mostly led to lack of trust between them and their lenders.

Several Surveys, CII, FICCI, Skoch Foundation, RGICS reveal that near about 70% had adverse effects on their businesses. Only 4-5 percent mentioned that their businesses improved. The sector has the resilience and entertains optimism in going forward.

Telangana, the fastest growing State in India with good and consistent EODB rankings has many things to ponder post pandemic as the markets and the world are not going to be as before. Preparing for the future has to be on strong foundation.

Economic growth engines of State of Telangana - the real estate, infra and construction, Pharmaceuticals, IT and ITeS are likely to be on tardy growth for the next six months. Tourism, entertainment, event management that have seen phenomenal growth during the last four years will have to wait for almost a year to come back to their glory. All these have strong supply chain linkage with the MSMEs at the front-end.

Telangana State, with around 33000 MSMEs (with 7842 sick or incipient sick), the steady growth can be expected from only 10% of them in pharmaceuticals, biotechnology, electronics and defence-oriented industries. Aeronautics will be on slow gear for a year.

Contribution of Mining, a fast growing sector, emerging from Nizamabad, Warangal and Khammam, Nalgonda districts is unlikely to recover because of the low footfall of Chinese buyers of granite in February due to Covid-19.. Marketing pitch through select Indian embassies showcasing Telangana strengths in raw granite and the incentives they offer for setting up processing investments and pollution clearances faster than any other country, should be a strategy worthy of pursuit.

As one of the leading growing States in the country, we have the unique advantage of Make-in-Telangana brand for all the food and aqua manufacturing industries. Packing, packaging, logistics should back-end the efforts of agro-industrialisation of the State. If we can keep safety standards in place we can really replace Philippines, Vietnam, Australia, Taiwan and Indonesia in agro-based industries. We should develop them in small village clusters and not aim big clusters. It is good to have large number of well-integrated small clusters around villages and have well-developed logistics at each Mandal level.

HR mapping is extremely important. Every industry would like to optimise on time and resources. Work from home may become the new normal. After all, industry having tasted human meat in tough times, would like to continue. New wage norms will also come in to being. Focus will be more on leadership challenges and quick deliverables. Job losses will stare at the State.

All the skill development centers should be developed in consonance with the requirements of the agro-industrial and agri-business clusters. Post-school education should be integrated with the requirements of the industry. Telangana will thus be the largest employer as well.

New enterprises should be built on knowledge and skills. Forward integration in Markets and Backward integration in raw material supply with strong value chains built, the State will bejewel the country. Focus more on employing 75 to 85 % of both rural and urban working force.

Effective mobilization on global funds may be cost effective beyond FRBM norms for agricultural and allied sectors and for SME's to be globally competitive. It is time that the State should have its own Small Finance Bank not that it will have freedom to do as it likes beyond the RBI norms but will have the scope to leverage its priorities and timely deliveries on its own call.

When it wants more FDIs and FPIs to come in, it should be strong in MSMEs. The present near 25-26 percent of sick MSMEs will not certainly be able to attract the global investments. Hence Telangana Industrial Health Clinic Ltd needs to be strengthened with better inter-linkages with the existing lenders and NBFCs and greater resources – both by way of grants and loans.

MSME growth is debt driven thus far and not equity driven. Atma Nirbhar Bharat Abhiyan targeted release of 20% of additional collateral free credit and the State’s share is estimated at Rs.12,000 cr. Of this, as per the data of Ministry of Finance, GoI as of 9^th June 2020, of the Rs.1129.69cr sanctions to 19,965 accounts, Rs.633cr has been disbursed to 11,133 accounts. Banks will go for safe target and provide credit to not all those who need and who had adverse Covid impact, but to those who will reverse their NPA path. The subordinate debt to the stressed enterprises with Rs.20000cr fund backed by CGTMSE to the extent of around 23% default rate, is yet to benefit stressed enterprises due to delayed release of operational guidelines.

We need a strong and unwavering banking sector. State can think of having its own Small Finance Bank with public equity participation. Coupled with Telangana State Cooperative Bank, Srinidhi Bank and TIHCL the State’s credit infrastructure has potential to address the future needs of the state economy.

Tough times requires more tough solutions and we should be part of solution and not of the problem as Sadguru mentioned. The State has no room for complacence.

*Published this invited paper in the CII-Telangana News Letter MARCH-MAY 2020 ISSUE.

Making the best of the situation - Ten Point Plan for MSMEs in Pandemic

MSMEs – Think Anew and Act Afresh

A Ten Point Plan

MSME Surveys done by various organizations revealed that the packages released by the FM under Atma Nirbhar Abhiyan are not going to benefit them much. Now is the time to think afresh and move fast to be back on rails without expecting much from the Government over and above the guarantees announced. There is full realization among the MSMEs that they should live in debt, survive and if God helps, grow.

If there were perverse incentives earlier that only made them perpetuate small in size and not grow, now they will have to contend with no incentives but to grow with their own ingenuity. In a debt syndrome, this can happen only when there is a strong environment of mutual trust between the lender and borrower. Some State Governments are trying to create a better ecosystem and help the MSMEs.

What you should do as a MSME in this emerging scenario?

Covid-19 in a way opens a chapter in their enterprises. You are an important link in the supply chain and it is time that you make the government come to you and not you stand before them with a begging bowl. You should be able to dictate your supply terms instead of bemoaning that you are after all a cog in the wheel.

There have been surfeit of ideas and strategies but the question that stands in front of you, is: how to respond to their work force who were forced on holiday under lockdown and incentivize them to work for the Company?

All that the Bank wisemen would do is to give a moratorium for principal and interest if their credit record held you good – a standard asset in bank language – by January 2019, a la March 2020, the beginning of lockdown.

1.    

Make a reasonable assessment of receivables by discussing with the debtors. This will measure up the duration risk of receivables.

2.    Take full count of the stock available and see if there is any redundancy. Clear up all the useless stock.

3.    Assess the demand for the product in the context of sluggishness around in Consumption and the steep fall in Consumption index. It is very likely that the product required either a makeover or change in complexion.

4.    Set up a digitization environment – have a desktop or laptop and buy a ERP solution if you are beyond Rs.1.5cr turnover. Up to 1.5cr turnover, you have Zoho ERP solution offered by the MSME Ministry free of cost. Avail it. Incorporate every aspect of your data – from buyers to sellers, buy to sale, cash to credit, stocks to receivables and enable GST compliance. This will save you the bother of compliance. Any regulatory requirement either from the Bank or the Government, you can pull out.

5.    Take work force into confidence: Discuss with them how they would like to be paid their arrears given the firm’s predicament. Place before them your increased obligation to the Bank and tell them what would it mean to pay wages and salaries from the Credit window of the Bank and how much dip would be there for the firm. Disclose your own financial position.

6.    Present the future market scenario before them and the prospects it holds both within and outside the country. You may also discuss with them whether they would like to partner with you in the future of the enterprise taking into account the new dynamics of the market. Give them an undertaking that their wages and salaries will be packaged as mutually agreed after paying at least one month’s arrears.

7.    Strategize for attaining a brand value for your product within a set timeframe.

8.    Discuss with all the other units engaged in producing similar products to gain advantage of (a) a co-working space; (b) co-branding; (c) rational pricing of the product; (d) clusterizing for purchase of raw material in bulk on a shared e-commerce platform; (e) rediscovering the price of the final product taking the logistics into consideration.

9.    Rework your Business Continuity Plan and arrive at viability of your enterprise in the emerging post-Covid environment.

10. Place your cash flow position for the next 3, 6, 9, and 12 weeks and seek your Bank’s support.

In States like Telangana you have Industrial Health Clinic to help you out. In other States you have some responsible outfits of Associations like FISME in New Delhi, TANSTIA-FNF centre, KASSIA in Karnataka, etc., that would be happy to suggest right strategies. There would be little purpose in wasting your time any longer waiting for things to happen since the economy is opening up.

*The writer is Adviser, Government of Telangana, Telangana Industrial Health Clinic ltd and author of the Story of Indian MSMEs.

https://knnindia.co.in/news/newsdetails/msme/msmes-think-anew-and-act-afresh-a-ten-point-plan

The Sweet and Sour Package for MSMEs

Following the PM’s thunderous announcement of Rs.20trn constituting 10% of GDP, the highest by any government post-pandemic, the Finance Minister came up with a six-point package sounding big relief for the MSMEs. When the final figures came for counting the five-day pack whittled down to bare 2% of GDP. Will the relief be long lasting or comfort, lasting for short time?

MSME sector is soar over the package as it did not provide virtually any relief for either payment of wages or immediate payment of bills pending with the government itself ( approximately Rs.5trillion – both the GoI, PSUs and State Governments) and even forbearance of the loans for at least 180 days.

The initial moratorium on the term loan instalments and working capital and the deferment of working capital were just a breather in pandemic. Since the units were under lockdown, most of those availed, have no output to support the additional working capital. They are now offered relief in the margin. This would mean that the Banks would give more working capital loan against deficient stocks, wages to the labour for the lockdown period etc.,- knowing it as an unsustainable debt because there is a National Credit Guarantee Trust and there is pressure to deliver by September 2020. Against this, Cabinet provided Rs.41,600cr over a three year period. Banks are not happy with this type of guarantee dispensation since they still have to provide for likely capital erosion.

MSMEs that received the incremental credit during the quarter Mar-June 2020 post-Covid at 7.4% p.a., are now told that they have to pay 9.25% for Emergency Credit Relief Package extending over four years with a moratorium of one year!

The other measure is a follow-up of Budget 2020-21. The FM announced sub-ordinated debt  (SOD) at the hands of the same banks that have all along been winking at the revival of micro and small enterprises and on easy and timely credit access as part of Covid relief package.  

Banks that do not have a subordinated debt in their balance sheets thus far, should now look for providing it under investment category and that too upfront labeling it as NPA!! They should develop standard operating procedures and help the clientele know of the nuances of availing it. To embrace innovation for a sector that is always viewed with suspicion, will they fall in line with the thinking of the FM?

Subordinated debt in simple terms is defined as a debt subject to subordination when there is creditor’s default. If ‘A’ Bank has offered a subordinated debt to a micro, small or medium enterprise, and this enterprise goes bankrupt after a certain period, and therefore becomes a defaulter. Bank cannot claim the money it has given as a loan from the enterprise’s earnings or assets.

After the senior debts are paid off in full, the left over will accrue to the clearance of the subordinated debt. Singular advantage however is that in case of Companies (this category is just 2 to 2.5% of the total MSME borrowers) bank will receive its SOD claim ahead of preferred and equity shareholders. Banks will be able to recover their usual unsubordinated debt in the shape of term loans and working capital ahead of sub-ordinated debt.

This simply means that SOD is riskier than the normal term loan and working capital loan offered either as cash credit or overdraft. Banks that have been lurking to grant loans against CGTMSE guarantee to the extent of Rs.2 crores cannot be expected to grant SOD again at the same guarantee window!

Sub-ordinate debt, by definition, stands higher in risk and lower than the principal loan in terms of claims by the Bank. For Rs.20000cr infusion, CGTMSE is being given Rs.4000cr. It would have been a fairer had she extended the Rs.3lakh sovereign guarantee cover to these set of borrowers too. Offering this high-risk product to already declared NPAs could trigger lot of problems in operationalising this product.

It will be now for the Banks to roll out the product. Standard operating procedures for releasing this SOD will be very tough if not tricky for the Banks. On top, the CGTMSE guarantee with which the banks are already unhappy is supposed to provide guarantee. Quite likely, several of the 2lakh MSMEs pitted out this benefit may have already been covered by the CGTMSE and the claims must be hanging at one end or the other for consideration in order that the banks concerned will close the NPA accounts!!

It is advisable instead to offer equity to micro and small manufacturing firms – proprietary or partnerships, most of them – up to 50% of their total financial requirements and the balance as debt. This equity should be left untouched by the Banks for a period of five years. The purpose for which such equity is rolled out shall be for buying a leasehold right/outright sale in the site where the manufacturing unit is set up and or purchase of machinery/technology or acquiring of intellectual property rights. Once it is given as equity, Banks will be forced to become the development partners that may provide route for scaling up the enterprises from the micro to small and small to medium.

Assessment of revenue stream and monitoring it continuously is extremely important to culture the enterprise in apportioning some percentage towards the equity contributed by the Bank. There are two ways of ensuring this: 1. Banks physically monitor the functioning of the enterprise as its partners to its committed capacity; 2. Set up a consent-based ERP architecture to monitor their debtors, creditors, sales and cash flows on the system. The purpose is to ensure that any aberrations are remedied timely.

Such equity can flow across the enterprises but shall be on sound credit risk assessment and effective follow up and supervision.

Banks with their limited manpower can hardly be expected to do the former. Handholding, mentoring and counseling continuously and ensuring that the enterprise makes seamless transition from unorganized to organized, Banks may have to outsource these services to competent and State Government accredited professional institutions. Even regarding the second step, Banks should be able to re-engineer their work- spaces and train their executives to catch up with the task.

Relief package is at best a pack of intentions. The relief is additional loan burden. MSMEs’ cost of production will go up at a time when they are totally uncertain about the demand. They also become uncompetitive compared to any other SME across the globe that has received cash relief and interest-free loan to rebuild their manufacturing business.

Neither RBI nor GoI has issued operational guidelines for the treatment of existing NPAs. Without revival of the viable micro and small manufacturing enterprise and carving out a definitive future, Banks taking part in equity of such firms through sub-ordinated debt route will be a wild goose chase.

But for the risky NPAs, sub-ordinate debt to roll out is a future, worthy to watch. Banks may innovate, who knows? In essence, the package is sweet in words and soar in delivery.

https://telanganatoday.com/sweet-on-words-sour-in-delivery