Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. News
  2. Explained

Despite Government's Announcements, Why is the MSME Sector Still Unsure About Post-Lockdown Recovery?

Editor, TRANSFIN.
Jun 9, 2020 1:27 PM 5 min read
Editorial

In a previous article, we went through what MSMEs are, how important they are to the Indian economy, the challenges they face, and the government’s recent support schemes in light of COVID-19.

In this piece, we’ll take this conversation a bit further. We’ll do a status update on the relief measures and their progress to-date, along with an assessment of what challenges lie ahead.

 

 

The MSME Credit Crisis

If you recall, as part of the Atma Nirbhar stimulus package a ₹3Lcr ($39.9bn) collateral-free loan facility for MSMEs was announced.

Now, this Emergency Credit Line Guarantee Scheme (ECLGS) wasn’t direct fiscal aid for ailing businesses but rather “credit guarantees” given to banks and NBFCs that should an MSME default on a loan, the Government would step in and repay the dues. 

As of June 5th, the amount of emergency credit distributed under the ECLGS stood at ₹8,320cr ($1.1bn) while the sanctioned amount stood at ₹17,705cr ($2.35bn). The number of MSME accounts that received credit through this facility stood at 1,51,531. Most of the credit was sanctioned by SBI, with MSMEs based out of Tamil Nadu and Uttar Pradesh getting the largest two shares.

 

Despite Government's Announcements, Why is the MSME Sector Still Unsure About Post-Lockdown Recovery?
As part of the Atma Nirbhar stimulus package a ₹3Lcr ($39.9bn) collateral-free loan facility for MSMEs was announced. This is how much has been sanctioned and disbursed as of June 5th by PSBs.

 

The problem MSMEs are facing in availing this facility is that not all of them are eligible. Following the announcement, many companies rushed to register themselves as a micro, small or medium enterprise. But only accounts with up to ₹25cr ($3.3m) in outstanding credit as on February 29th 2020 and less than or equal to 60 days past due as on the same date are eligible to avail. 

Another obstacle afflicting eligible MSMEs is to do with credit access at-large:

  1. ECLGS guidelines are not uniform - different banks are coming up with their own rules, leading to a lot of confusion.
  2. Many banks are reluctant to lend in general, regardless of the Government credit guarantee. They face an uncertain road ahead, and would thus rather park reserve capital with the RBI than risk an increase in bad loans down the road.

Then there’s the problem of informal credit. Most MSME credit demand (85% of it, in fact) was met by informal financial channels before the lockdown, not by banks or NBFCs. The vast majority of these enterprises therefore cannot make use of the Government’s credit facility because it actually has limited relevance for the sector as a whole!

 

MSMEs New Definition: What's in a Name?

The Government also announced a change in the definition of MSMEs. The new definition did away with demarcations between manufacturing and services + added a criterion of annual turnover in addition to investment in plant machinery/equipment + raised the upper limits in each segment. The composite criteria for medium enterprises was further relaxed on June 1st.

The new definition is broad - really broad, actually. Under it, almost 99% of India’s registered companies and nearly 70% of all listed entities would be qualified to enjoy MSME benefits!

As of June 8th, this is how MSMEs are defined:

 

Despite Government's Announcements, Why is the MSME Sector Still Unsure About Post-Lockdown Recovery?
The new definition of MSMEs did away with demarcations between manufacturing and services + added a criterion of annual turnover in addition to investment in plant machinery/equipment + raised the upper limits in each segment. The composite criteria for medium enterprises was further relaxed on June 1st.

 

While there was appreciation for the updating of an outdated definition (the old one was 14 years old) and increase of investment limits, there was confusion over why, if it was important to modernise and simplify the definition, a second criterion (that of annual turnover) was added when only one would have sufficed. Moreover, a complaint against the old definition was that investment is not a reliable metric to measure since data regarding this is not easily available. But it has remained a parameter in the new definition.

 

When Competition is a Crisis

There is also concern over the relaxation of investment and turnover limits for medium units (it is now ₹50cr ($6.6m) and ₹250cr ($33.2m) respectively). This would force smaller medium units (say, those with ₹10cr ($1.3m) in investment and ₹50cr ($6.6m) in turnover) to compete with larger ones. This would no doubt be an unfair burden on the former, who may demand more relief or a further revision of the definition.

Moreover, it has also been decided that all Government procurement orders below ₹200cr ($26.6m) would not require the flotation of a global public tender. So Indian MSMEs can compete for such orders without any competition from foreign companies. This is good news for larger MSMEs, but not so much for smaller units, which have to compete with larger, more well-financed companies.

 

Other Government Measures for the MSME Sector

The Government has also approved the following measures:

  1. ₹50,000cr ($6.6bn) equity infusion for MSMEs (with corpus of ₹10,000cr ($1.3bn) through a Fund of Funds) to help them get listed.
  2. The Government will also reportedly buy equity stakes worth up to 15% in MSMEs that choose to get listed. And once the listed price of the firm’s stock gathers strength the Government will divest its investment, allowing the money to be given to another MSME.
  3. ₹20,000cr ($2.6bn) subordinated debt for stressed enterprises (2L of them). The loan amount will be under ₹75L ($1m) - but, again, the onus falls on banks to actually lend to these stressed units.

 

Is the MSME Sector Satisfied?

It’s not. A survey conducted between May 24th-30th (after the announcement of Atma Nirbhar package) by the All India Manufacturers’ Organisation (AIMO) and involving 46,525 MSMEs shed light on the sector’s apprehensions. 35% of MSMEs saying their enterprises were “beyond recovery”, 32% expected recovery to take six months and only 3% said they would be unaffected.

A major reason for the MSME sector’s downbeat mood may be that its problems predate the pandemic. Demonetisation and the initial days of GST implementation hit small businesses disproportionately. The NBFC crisis and the bad loans calamity further exacerbated conditions. And structural defects like lack of formalisation, cash-dependency, technological handicap, data deficiency and over-dependence on informal credit remain unaddressed.

As with most of the economic challenges COVID-hit India is facing, the virus didn’t cause them: it widened existing fault lines and made them worse.

Going forward, recovery is likely to be painful and prolonged. Many MSME units, especially smaller and stressed ones, may not survive. Fiscal stimulus can only help so much in the absence of structural reform. And even the proper reforms (and their proper implementation) may only help so much if there isn’t a revival in demand.

FIN.

Want more of what TRANSFIN. has to offer? How about our Weekly Quizzes? Subscribe to the Quiz Knock Newsletter and get cracking with questions on the top Business and Finance news of the week!