MSME and Markets
Micro, small and medium enterprises (MSMEs) remain the mainstay of the Indian Economy and create jobs across the board throughout the length and breadth of India. However, the pandemic induced economic shutdowns have not fared well for the financial health of the MSMEs. The shutdowns hit the informal economy the hardest and micro-enterprises had to bear the worst brunt of the economic slowdowns. This leads us to the question of what are the major issues ailing Indian MSMEs and what can be done to remove the systemic hurdles that reduce ease-of-doing-business for our micro, small and medium enterprises to ensure their survival.
The biggest operational difficulty that these MSMEs face is the access to working capital, since a large number of these businesses fall in the informal sector it becomes difficult for them to access the credit through formal channels such as banks and NBFCs. This is related to the fact that financial institutions are reluctant to provide any working capital loans without collateral and a large number of MSMEs have no fixed assets to offer as collateral. Systemic challenges such as these deprive MSMEs of much-needed working capital and stop their business growth. These were some of the issues regarding MSMEs that were discussed at the session on MSMEs and Markets at India Economic Forum and LitFest organised by the SKOCH group on 9th March 2022. The esteemed panellists discussed the multitude of issues plaguing the MSME ecosystem and gave their recommendations.
MSME and Markets- Key Issues
There is no doubt that the Indian MSMEs want easy access to capital to fulfil their operational requirements. But unfortunately, that has not been the case for most of these small enterprises. Out of the 6.5 Crore registered MSMEs in the country only 1.5 Crore MSMEs can access credit from the formal channels. This highlights the fact that even in 2022 the majority of MSMEs lie outside the umbrella of lending by banks and NBFCs. The lending system has relied heavily on collateralization of assets leading to the non-availability of credit for MSMEs. Even when there are alternatives for MSMEs to raise money by going to the markets, there are deterrents such as excessive forms of compliance that stop MSMEs from raising adequate capital.
The hesitancy of financial institutions to lend to MSMEs leads to visible credit gaps for smaller firms. There are concerns in the financial institutions about the debt servicing capabilities of MSME which leads to stricter compliance norms for these firms. In a lot of cases, MSMEs simply do not have the technological and financial capacity to deal with increased compliance. This results in a loss of avenues for raising working capital and diminished opportunities for business expansion. And the hesitancy to lend to MSMEs does not lend from a lack of liquidity standpoint banks are flush with liquidity as of now. But the problem at hand can be described as a crisis of credit distribution.
Any solutions to solve this issue will require dedicated efforts by the Government as well as adoptive behaviour by the banks to suit the needs of the MSMEs. There is also a need to enhance financial literacy for MSMEs so that they can take an advantage of the opportunities presented by the markets to raise capital and become aware of government support initiatives. Only efforts from Government and Industry associations can solve the complex issue of MSME financing. There is also a need to ease and digitalise compliance requirements so that small businesses can avail of faster loans and credit facilities without running from pillar to pillar.
The issues of finance are also exacerbated by the increased compliance burdens on MSMEs. All the regulatory and compliance regimes such as GST have an added cost to them that might become unaffordable and too complex to navigate for smaller businesses. There is a need to recognise that there are several issues that small businesses face when it comes to regulatory compliance and there have to be proactive steps to solve these issues. MSMEs need several dedicated steps to solve their issues and the esteemed panel came out with the following recommendations:
- There is a need to promote cash-flow based lending instead of collateral-based lending, there can be an income and expenditure assessment based on the regularity of cash flow and loans/ credit lines can be advanced on the basis of that.
- Banks have to get rid of antiquated processes and unnecessary paperwork to smoothen out the roadblocks MSMEs face while accessing credit
- The Industry Associations need to take a lead in educating MSMEs and enhance their financial literacy
- There is a need for improving communication with the MSMEs to inform them about the ways of raising capital and supportive government initiatives
- There are high costs associated with taxation and regulatory compliances, there is a need for thorough discussion on this topic and analyse if these costs are affordable for MSMEs
- Initiatives such as Guaranteed Emergency Credit Line (GECL) helped a lot of businesses in the aftermath of the pandemic, extending these provisions for more time should be looked into
- There are divergences at the Union and State level about how the MSME act is implemented, there needs to be uniformity to improve the ease of doing business for MSMEs
- By the Bankers and NBFCs, there should be faster adoption of digital platforms such as account aggregator and OCEN APIs. These infrastructure switches will make it possible to make collateral free cash flow based lending possible
- At the government level, there is a need to ease compliances and make it easy for MSMEs to fullfill them
- There is a need for more PSUs to come on board for TReDS, Because the government and PSU payments are inhibiting the cash flow of the MSMEs
- There is potential in the co-lending model where Banks and NBFCs can leverage each other’s reach to offer better-designed credit products to MSMEs