The central bank, Reserve Bank of India (RBI), in a recent announcement of three-month moratorium on payment of installments of term loan outstanding, deferring of interest rate on working capital and also not considering the deferment for NPA is expected to benefit a lot of borrowers including the MSMEs. The RBI’s measures are estimated to inject Rs 3.74 crore liquidity in the economy. Is it safe to assume that RBI is hoping India to come out of COVID-19 pandemic by then? By the same yardstick, is it being assumed that the businesses that have and are suffering will be back on track in three months?
It is feared that MSMEs—the key pillar of the Indian economy and the second largest provider of jobs—will no longer enjoy the same status post COVID-19. Continuous lack of access to credit has led to closure of facilities and layoffs. The pandemic has posed an existential crisis for the MSMEs. It is time that the government provided specific relief measures to the small businesses, which are amongst the worst hit. While the people at the bottom of the pyramid and large corporates stand to benefit from what was announced by the Finance Minister, how about the middle layer? Some RBI’s measures are intended to help the small businesses. However, unless an enabling system is put in place, it would not have much impact on the ground. Also, the need for working capital and cash flow lending is more pronounced during these times than ever before.
Here are five policy suggestions that the government must implement on a priority to help MSMEs in this hour of crisis:
Definition of MSME
Currently, the MSMEs in India is categorised based on investments made in plant and machinery (excluding investments in land and building) if they are operating in the manufacturing sector and investment in equipment for service sector companies.
As per the Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, manufacturing enterprises with investment in plant and machinery up to Rs 25 lakh is classified as Micro, between Rs 25 lakh to Rs 5 crore is classified as Small and from Rs 5 crore to Rs 10 crore is categorised as Medium. In the case of services sector, enterprises with investment in equipment up to Rs 10 lakh is categorised as Micro, Rs 10 lakh to Rs 2 crore as Small and Rs 2 crore to Rs 5 crore as Medium.
Although the Cabinet had cleared replacement of investment based definition with one based on turnover, yet the Act could not be amended through the Parliament. There is an urgent need to look into change in criteria of definition. As it holds today, it so appears that the manufacturing industry has hijacked the MSME policy. While a manufacturing unit may still have investments in plant and machinery, what about the services or trading companies, who have close to nil investment in plant and machinery, question experts. Therefore, what is recommended that the definition is based on turnover keeping in mind GST filing rather than investments, which generally are depreciating assets. This investment based categorisation is plagued with multiple issues and act as a barrier to the new enterprises.
There is an urgent need to allow Aadhaar based e-Sign in all situations requiring a customer signature – whether the customer is an individual, a partnership or a private limited firm. Currently, signatures involve visiting a branch or an agent visiting the customer and hence requires physical contact. Given the current crisis, when the physical movement is restricted and still the contracts are to be executed, e-Sign can come as a breather. Also the cost has to be zero so that all the business transactions by MSMEs including non-NBFC FinTechs can be done sitting at home.
In January 2020, the RBI allowed video-based authentication as an alternative to the accepted e-KYC practices. Such verification will be Aadhaar-based, either online or offline, RBI said. This was proposed in the report of the Expert Committee on MSMEs headed by U K Sinha. Such video KYC can be done through Google Duo or Apple FaceTime, the committee had recommended.
Video KYC so far has remained a cumbersome process according to many MSMEs. This, in fact, necessitates that e-KYC in its digital avatar can be used by all the other financial institutions. While technology has enabled it and it is possible to do one single e-KYC that can be equally accessed by anyone so that the small enterprises are not hassled for either multiple KYCs or Video KYC. All financial institutions – banks, NBFCs etc – should be allowed to use KYC of existing bank via digitally signed bank statement of existing bank as a valid e-Doc.
UPI based payments are extremely low cost but limits enforced have reduced its practical adoption and acceptance. UPI can be used for making and collection of payments as well. As of now, the UPI collection product enables collection, but it is limited to Rs 2,000 only. If it is increased, the lenders can lend as well as collect money easily. It is therefore recommended that UPI-based recurring mandates could be allowed and increase limits to Rs 2 lakh with immediate effect to help ease the situation.
With Direct Benefit Transfer (DBT) system and Jan Dhan in place, India had the advantage to move with alacrity as far as the COVID-19 relief package announcement is concerned. Indeed, India has been ahead of the curve to implement technology at a scale. The same needs to be done for MSMEs. Technology can help to connect the dots and move with equally great speed.
Just as Aadhaar DBT programme supports multiple programmes and schemes for individuals, it can use existing infrastructure, Direct Tax, Indirect Tax, GSTN, RBI, Credit Bureau etc to create an MSME-Bridge, which could be used to deliver similar stimulus or other revival packages for targeted customers. It is to follow use of digital, smart, data driven approach instead of ‘spray and pray’ approach. It will have an option to disburse small amounts across a large number of MSMEs to provide working capital relief; and, option to use multiple schemes or products, viz., loans, cash grants, subsidies etc.
Implementing the above can be the first use case for the government during this fight for COVID-19, targeting liquidity infusion to the distressed small businesses.