The announcement of a slew of measures by Finance Minister Nirmala Sitharaman to boost the badly stressed MSME sector is likely to pave the way for additional liquidity for their growth and stability.
The package, while providing more liquidity, also raises the threshold for investment and turnover by which a business can be considered micro, small or medium. It also redefines MSMEs by removing the distinction between the manufacturing sector and the service sector.
The announcement of Rs 3 lakh crore collateral-free automatic loans and the availability of an emergency credit line for MSMEs with Rs 25 crore outstanding or Rs 100 crore of turnover will provide the MSMEswith much needed relief. Interestingly the MSMEs will have a greater opportunity for government tenders up to Rs 200 crore in value, as foreign bidders have been disallowed from the same.
The broad aim of these different measures is to revive the vulnerable MSME sector that was the hardest-hit by the lockdown. MSMEs contribute to more than a third of India's GDP and provide employment to more than 100 million people.
“The government guarantee announced in the package is sure to help the liquidity transmission, which is badly required by the MSME sector. While government guarantees will not impact fiscal deficits, they will impact the credit rating and may increase the cost of borrowing. While the sentiment of not allowing global tender is understandable, one does hope that this will not come at the cost of competition and efficiency. However, from where will the funding come still remains to be answered.,” remarked Dr Partha Chatterjee, Dean-International Partnerships, professor and head of the Economics Department, Shiv Nadar University.
A sizable moratorium period for principal repayment may also help businesses to plough cash flows back into their operations. The measures announced in the financial package will go a long way in instilling confidence in banks, financial institutions and investors in supporting the MSMEs which actually require aid. However, the slew of measures for the MSMEs is more towards reviving the supply side.
“The measures are more of supply-side and there is very little that is on the demand side. Probably, the future announcements may contain a more balanced coverage of demand and supply-side factors. Demand-side factors generally tend to work faster as it is oriented towards the consuming unit directly,” says Dr. Joseph Thomas, Head of Research, Emkay Wealth Management.
Some MSME associations have welcomed the move to redefine MSMEs as it may help many smaller enterprises. “Change in definition of MSMEs has been a long-standing recommendation of Automotive Component Manufacturers Association of India (ACMA). With this new classification, a significant number of ACMA members stand to benefit as the sector is dominated by smaller enterprises. That apart, infusion of liquidity through the collateral-free automatic loans and the subordinate debt scheme, will ease the severe challenge of working capital being faced by the sector,” remarked Deepak Jain the President of ACMA.
The sops to MSMEs could help their lenders—banks and NBFCs—improve their recoveries, write back some write-offs and postpone slippages or recognition of NPAs. However, concerns remain as market experts feel that markets could, on the one hand, get disappointed because the immediate spend out of the big fiscal stimulus is relatively small and hence there could be doubts on whether economic growth will revive soon and in proportion to the large number touted in the stimulus.
“Sectors such as banks and NBFCs, power generating companies and sectors that have high linkages with MSMEs could see an uptick in their valuation, though a partial impact was already visible. Worries about rating downgrade could get postponed. We may have to see the next set of announcements by the Finance Minister to get a better handle on this,” points out Dhiraj Relli, MD and CEO, HDFC Securities.
