What MSMEs Want More?

Micro, Small and Medium Enterprises (MSMEs) are amongst the worst hit because of COVID-19 pandemic lockdown. It has forced most of the small businesses to shut shop and many are staring at existential problems. Only immediate government support in the form of working capital infusion and cash flow financing can help survive the small businesses, an online poll conducted by SKOCH Group as part of the ‘National Consultation with MSMEs’ has revealed. 

In the hullaballoo that follows the budget, three crucial points got missed. One, the presentation by the Chief Economic Advisor stating that 10% increase in new firms in a district yield 1.8% increase in district GDP. Two, significant focus on budgetary investments in districts focused on MSMEs and three, the major announcement on app based invoice financing and changes in Factor Regulation Act to allow NBFCs to offer invoice financing. These three put together can usher in a renaissance for MSMEs. However, as is often the case, best intentioned policies fall victim to champions of status quo through building in points of failure to ensure that the policy is not implementable or enforced. The worst fears of MSME sector are here.

MSMEs fear that such an invoice financing facility may get linked to collateral or made a part of the existing cash credit limits making the entire effort, an exercise in futility. They worry that sanctioning power intermediaries will come in thus opening up rent-seeking opportunities. This is more so as the current credit chain involves various finance intermediaries who may oppose this move to delay and bring credit to people who need it the most.

“Two biggest problems requiring urgent resolution are collateral linked credit and delayed payments”

Based on past two years of ground research, workshops, MSME clinics and conferences, we find that the two biggest problems being faced by MSMEs is a requirement of huge collateral for credit and delayed payments. Even when banks lend against CGTSME scheme that covers 75% of the risk, banks take 125% collateral for their 25% share of risk, getting loans secured against 200% collateral. We have recommended that 25% collateral should be sufficient for MSMEs with a good credit track record. No action has been forthcoming on this.

Our major recommendation has been that of GST trusted invoice financing. India Economic Forum in November 2019 and Public Policy Forum in January 2020 with a body of stakeholders and experts from all across the country endorsed this demand.

The three MSME related announcements in the budget gladdened our hearts as they address large problems. First, it enables invoice based financing which was a significant recommendation of UK Sinha Committee Report. Second, it enables more NBFCs to get active in MSME Finance, a poorly served segment by the banking sector and third, it opens newer business opportunities for MSMEs in the districts specifically in agriculture related industries and health. It also encourages formalising the domestic supply chains, which will improve both efficiency and credit availability.

Our ground level study reveals that the biggest felt-needs of the MSMEs in the country today are the access to credit and delayed payments from buyers. There are various schemes and regulations related to these issues. Are they helpful in addressing the felt-needs of the MSMEs? Our ground level studies show, it is not.

India MSME Forum on 14th March 2020 brings together MSMEs from across the country face to face with the central and the state governments along with stakeholders like Chartered Accountants, industry associations and policy experts. The Forum will return comprehensive recommendations.

Participation is free for MSMEs, Chartered Accountants, Bankers and Government officials. There are a few free seats for students, academia and professionals. Participation is through pre-registration only. We reserve all rights of admission.

Discussion Areas:

Critical Issues for MSMEs

1. Enforcement of MSME Act
2. Turnover Based Definition
3. Friction with the System

Access to Finance

1. Access to Credit
2. Delayed Payments
3. GST Issues
4. Access to Market

Cash Flow Financing

1. How can Invoices be used to finance sellers?
2. How to keep it simple?
3. What could be the pitfalls
4. Suggestions directly related to this subject

“Invoice financing is a good idea but I am skeptical about banks lending to small business vendors without due diligence, CIBIL search, Credit rating and collateral security.”

Mukesh Mohan Gupta, President, CIMSME

“Objections relate to pre-GST, pre-IBC, pre-Aadhaar and pre-digital era. These can be easily addressed as it is now possible to create a financial trail to prevent misuse of funds.”

Anil Bhardwaj, Secretary General, FISME

“In TReDS, lenders are not financing tier-3 & 4 businesses. It is not clear how they would lend to small businesses under a cash flow financing system.”

Madhu Lunawat, Director, Pantomath Advisory Services Group

“The concept is good. Having liability is not a bad sign. The bad sign is the cash flow. If you are not able to repay your commitments that is a problem.”

Rohit Vaswani, President, BVSS & Founder Partner, Raj K. Sri & Co.

“Lenders are not ready to give them the money because it is not operationally viable for them to test the creditworthiness of the small enterprises.”

Priya Kapoor, Independent Consultant

“MSME is not defined in GST. There is no mechanism to identify whether a particular invoice is from MSME.”

P K Singh, Managing Partner, PKS SIMPLY GST

“Just like companies, balance sheets of partnership and proprietorship firms should also be put in the public domain.”

Arun Ahuja, Promoter & Senior Partner, Ahuja Arun & Co & General Secretary, Tax Law Educare Society

“UK Sinha Committee has recommended cash flow based lending to MSMEs. But it has not been implemented yet. Why is it taking so long?”

Yerram Raju, Adviser, Government of Telangana

“Most of the RBI guidelines are aligned for handling lending needs of large corporates. We can’t mindlessly apply those credit evaluation methods for the MSMEs.”

Milan Mehra, Founder, Alternate Finance & Investment

“Receivable discounting has been happening in India for decades. What we are talking about is to be able to digitise it and make it simple.”

Vivek Agarwal, Partner – Government Advisory Practice, KPMG


Team Inclusion

INCLUSION is the first and only journal in the country that champions the cause of social, financial and digital inclusion. With a discernable and ever- increasing readership, the quarterly relentlessly pursues the three inclusions through its rich content comprising analysis, reportage, features, interviews, grassroots case studies and columns by domain experts. The magazine caters to top decision makers, academia, civil society, policy makers and industry captains across banking, financial services and insurance.
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