Access to Finance – the Achilles Heel for the MSMEs
Economic
restructuring followed by financial deregulation has brought in its wake the
need for a change in the very mindset of credit analysts. Infusion of liquidity
into banks has strengthened confidence in depositors more than the borrowers.
Share of MSMEs in
GDP was of the order of 29 percent with a credit flow constituting 15% of the
total credit disbursal of Banks and NBFCs. This amounts to approximately
Rs.17trn. Government of India in its overreach to $5trn economy by 2022, has
proposed that the share of MSMEs in GDP should reach 50%.
We have seen the
most enticing schemes under Atma Nirbhar Bharat Abhiyan Scheme 1 reached only
55% in terms of disbursements, which targeted incremental credit of 20% working
capital to the pandemic-struck standard assets in the MSME sector. In regard to
the second scheme that targeted the sub-standard and NPAs for revival and
provision of equity banks are shy to move fast – in a once bitten, twice shy
mood.
It is unfortunate that we should be discussing
this issue for decades despite a number of initiatives taken by the RBI and
GoI. Priority sector guidelines have been modified allowing banks to co-lend
with all NBFCs with no restrictions in order to push lending to this sector.
The measure should enhance the risk appetite among banks by co-sharing the
risks with the NBFCs. During the years 2015-20, borrowers’ accounting practices
moved to the regulatory conformance zone. This should actually rebuild the lost
trust among lenders and borrowers.
In Telangana, as many
as 8,435 MSME units have commenced their operations since formation of the
state, with an investment of about Rs.11,487crore. Since January 2015, MSMEs
have provided additional employment opportunities to approximately 1.59 lakh
persons.
While micro
industries account for approximately 58.07% of total units, their share of
investment and employment generation is comparatively less—11.92% and 30.12%,
respectively. Small units account for 63.44% of total MSME investment and
55.41% of total MSME employment—the highest for both categories.
Telangana is the only State to have set up a
separate institution to revive and restructure the manufacturing micro and
small enterprises, viz., Telangana Industrial Health Clinic Ltd with a seed
capital of Rs.100mn.
A couple of case studies would be in order where
the TIHCL have been successful in not just reviving the enterprise but also
substantially scale up their operations, save the lock-down period.
In times of uncertainty as now, investors
hesitate to start new enterprises except in greenfield areas like the IT and
Pharma. We should not allow the existing viable enterprises to shut their doors
for want of some critical funding or margin money or buttressing his equity.
M/s. Deccan Pulverisers Private Limited promoted by two women
entrepreneurs, engaged in manufacturing mineral powder from
quartz/feldspar mineral stones, availed a term loan from SFC to the extent of
Rs.6.2mn without any arrangement for working capital. State Government has sanctioned
Rs.2.1mn as investment subsidy and other incentives.
The
machinery was ordered as soon as the Financial Institution (FI) sanctioned the
loan, but the installation of machinery was delayed from vendors end. The
business did not receive expected export orders and the promoter searched for
buyers in the local markets. In initial stages could not
find an appropriate buyer who can pay in 60 days due to this the
receivables were delayed and the payments to the FI were also delayed, FI
started charging penal interest for the delayed payments.
In the meantime, the constructed factory shed was damaged due
to heavy rains and cyclone, the entrepreneur repaired the shed from his own
funds. The project was not feasible with one machine as the
margins were too low in the local markets the promoter has installed a second
machine with his own funds and increased the unit’s production
capacity.
Due to irregularities in the repayment, FI has issued demand
notice on 6th September 2019 asking the unit to pay overdue interest and instalments
amounting to ₹ 20 lacs by 1st October 2019, failing which they
will take further steps like legal action etc., The
promoter and the company were in the great stress as it shattered their goals
and dreams.
After a detailed
diagnostic study and discussion with the SFC, we arrived at a revival package
for the unit. We noticed that the high interest rate of 17% p.a., and delay in
arrival were the principal reasons for the unit to turn incipient sick.
TIHCL has extended
critical amount funding that enabled him to regularise his term loan account
with the SFC. We also arranged for the priority release of incentive blocked
for a year. The sword on their necks has been removed and they started
production in January this year. But the pandemic struck, and they could
restart production only in July this year. At present they attained 80% of
their capacity utilization and a turnover of Rs,8.2mn. One of the PSBs agreed
in principle to sanction working capital as well.
Another
enterprise, Suresh Textiles, a sole proprietary unit similarly shattered was assisted
by the TIHCL. This entrepreneur with 20 years of weaving experience has set up
40 semi-automatic power looms initially. Later he converted them to fully
automatic looms to produce shirting cloth in the year 2017. He started
commercial production in 2019, the year of slow growth of the economy. The unit
stopped its operations during the period of upgradation for nearly six months.
During this stress period he approached the TIHCL for a solution.
Problems Identified by
TIHCL-
· Ab Initio sickness
detected due to inadequate financing
· Introduction of GST
post-sanctioning of loan caused additional burden on proprietor as equity
parked for working capital was utilized for GST payments on machinery.
·
Subsequently
this caused cash crunch for production and unit became sick within one year from
establishment.
Revival
Package-
TIHCL
has conducted diagnostic study and found that the unit has suffered shortage of
working capital due to external factors.
It has proposed to the primary lender for enhancing the limits for
operating the unit.
As
proposed, primary lender has sanctioned additional loan of ₹14 lakhs and TIHCL
has sanctioned margin loan of ₹3.73 lakhs along with the primary lender for the
revival of the unit. TIHCL now
handholding and reviewing the unit periodically for efficient business
operations and to control the stress in the unit.
Overall,
post revival and rehabilitation by TIHCL, the unit is performing well and
improved chances of growing the business.
From nil capacity, the unit has reached 50% capacity utilization during
the last three months and is confident of reaching 100% capacity in the next
four months. His experience taught him
that raw material bought from outside the State would save the input costs by
15%. He is prompt in repaying the instalments and is now poised for growing
big.
Both
the units have digitised their operations and installed ERP solution that
enabled the TIHCL to monitor off-site the units’ performance regularly and
guide the entrepreneurs.
In
more than 80% of the units that knocked our doors for support, we noticed that
their working capital eroded with the banks debiting the instalments on the
retail loans sanctioned to them – either for buying a car or home or both.
Where the housing loan is taken this automatically collateralized the otherwise
CGTMSE guaranteed loan. Their failure to repay due to the eroded working
capital, turned them NPA and proceedings against their securities followed as a
natural course. MSMEs were the first option of banks to lure them to retail
loans, that became their thrust area. It is advisable for the MSMEs to take
retail loans from banks other than those that granted them the working capital
and also have proper financial planning for their personal assets and
enterprise assets for growth.
Transunion
CIBIL has also announced a MSME Health Index based on two parameters – growth
and development. Growth is based on the enterprises ability to access credit
while development is assessed on the basis of NPA status in banks.
Rating
institutions are yet to come out with rating specifically targeting the manufacturing
MSMEs. There are several issues in rating mechanisms and also the extension of
guarantee by the CGTMSE. These need resolution for easy access to credit.
Digitization
of all enterprises does not brook delay. Telangana Government entered into an
arrangement to provide free accounting software to 20000 enterprises to
accelerate digitization. This will certainly bring transparency,
accountability, and better compliance of the lending institutions’ terms and
conditions of sanction thus rebuilding the lost trust among the banks and
MSMEs.
TIHCL
is a co-lending institution and the banks that are interested to speed up their
processes of revival and restructuring and take assistance for monitoring and
supervision of their MSME assets are welcome to seek our support. Nothing comes
free. But the costs that the enterprises and banks incur in their collaborative
efforts with us are far minimal and we assure that their NPA portfolio would
turn performing with their association with us.
TIHCL
has tailor made loan products for various types of stress faced by the MSEs and
for women start-ups and for cluster-based units. Margin loan assistance,
Critical amount finance, Margin money for start-ups, working capital
requirements for the other types of enterprises. Every enterprise is digitised
for its operations under our direction and support. It is for the units and
banks to take advantage of our presence. Rates of interest range between 9 and
10 percent.
TIHCL
is keen on ensuring sustainability of enterprises through timely counselling,
mentoring and advisory services on a continuing basis and this is our USP.
(This is the text of my address at the MSME Summit held by the CII-Hyderabad on the 7th November, 2020)
"Public Perceptions: