MSME revival may only be possible from the next fiscal

From securing funding to reviving demand, MSMEs face long-term challenges

Representational image | Salil Bera

Despite revival measures by the government that have gradually unlocked the Indian economy following coronavirus-induced lockdowns, the revival of Micro, Small, and Medium Enterprises (MSMEs) is unlikely anytime soon, with prospects for recovery only by the next fiscal year.

The segment is expected to continue to face demand challenges as well as payment issues and labour uncertainty. Though the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs started well, disbursements have not kept pace with sanctions due to the cautious availing of facilities by the MSMEs—since demand in the market has not completely revived, their capital utility is restricted. As a result, MSME players are adopting a cautious approach and are delaying availing of the full amount until demand revives to a certain extent to avoid excess interest costs.

It will need to be seen as to when this demand revival in the economy happens, which will play a crucial role in the revival of the segment.

According to Brickwork Ratings, before the implementation of the ECLGS, MSMEs faced severe liquidity issues amid difficulties in getting funds from banks. Outstanding credit to MSMEs declined by 4 per cent yearly as on 22 May 2020, even as overall bank credit was up by 6 per cent and credit to industries went up by 2 per cent.

The decline in credit outstanding to MSMEs was on account of the low-risk appetite of the banks in lending to MSMEs. Hence, the ECLGS provided a much-needed liquidity boost to these players to start operations post the lockdown. However, once the Rs 3 lakh crore under the scheme is exhausted by October 2020, further measures will be required to incentivise banks to continue lending to MSMEs, given that MSMEs’ performance is expected to be a slow grind up until demand is back in the economy.

“There are multiple challenges affecting the MSME segment in India. The demand in the economy has slumped and the ability of these MSMEs in getting labour back to work is proving to be challenging. These MSMEs do not have the ability to attract labour back to work when compared to the large companies who can provide them with transport and accommodation etc. Further, borrowing from the NBFCs has also been affected and the products such as loan against property have reduced. There are a lot of payment issues which they are facing as large companies are not releasing their payments—as they are facing financial stress,” says Rajat Bahl, chief rating officer, Brickwork Ratings.

“It is high time that the government should step in to revive the demand in the economy by spending more. If the government spends more then the people will also be encouraged to spend more and it will help shape up the revival,” he adds.

There is no doubt that MSMEs have been an engine of growth and job creation in India. Over 90 per cent of the 63 million enterprises in India are MSMEs. During the COVID-19 pandemic, MSMEs particularly had been hit hard. Their costs have continued to stay as high as 70-80 per cent, while the revenues had trailed by 20-25 per cent of the pre-COVID era. Delayed collections had also compounded the situation.

The government has already announced several measures to infuse liquidity into the economy. It is important to focus on expeditious execution of announced packages through state governments and local industry bodies, with clear communication of scheme details to MSMEs and banks.

“Additional funds specifically directed at nearly Rs 1 crore new-to-credit MSMEs with a condition to formalize informal businesses should be set aside. In addition, there should be an increase in uptake of supply chain financing and bill invoicing. Large corporate and Government should focus on quick disbursement of payables in line with MSMED Act, 2006,” pointed out Rishi Agrawal, CEO -Avantis Regtech Pvt. Ltd, a TeamLease Company.

MSMEs also face multiple compliance challenges as India's complex regulatory environment and perceived tax of formalisation have created a disproportionate number of economic dwarfs.

“MSMEs have traditionally preferred to stay small and informal. It is often assumed that MSMEs do not have to worry about compliances. However, it could not be farther from the truth. The burden of compliance for MSMEs is disproportionately high while their resources are limited. They need to deal with 27 licenses, registrations, permissions and consent orders. They can be pulled up by at least 20 different inspectors under various Acts. They have to deal with at least 364 compliances in a year i.e. almost one compliance a day. Consequences of non-compliance include severe financial penalties or even jail terms. To meet these obligations they need to work with multiple consultants. A conservative estimate of the annual cost of compliance for a typical MSME is around Rs 12 lakhs i.e. Rs 1 lakh per month,” added Agrawal.

A few experts feel that since the MSMEs contribute to 45-50 per cent of the country’s exports and 30 per cent of the GDP they can be prime beneficiaries of the pool of opportunities created by the government's Aatma Nirbhar Bharat movement build self-reliance.

“To help the MSMEs in the country, industry stakeholders need to reimagine finance and solve the working capital problems of the sector. Additionally, while announcing the next Foreign Trade Policy, the government should also do away with a subsidies based scheme and introduce a WTO-complaint policy. The government can also look at mirroring the success of the Technology Upgradation Fund Scheme of the textile industry to other export sectors and link Pradhan Mantri Kaushal Vikas Yojana to upskill labours to help MSMEs create globally competitive products,” remarked Pushkar Mukewar Co-CEO and CO-Founder, Drip Capital.

A few economists are also of the opinion that the MSME revival may take more than a year as the impact has been severe on the segment.

“The pandemic is expected to have a significant impact on household income levels that may regress to FY18 levels, wiping out around three years of progress. Besides that uncertainty has risen to a record high in recent days. Perceptions on the length of the outbreak will play a major role in shaping up the consumption pattern. All of this will affect the MSME segment severely. Recovery is expected to be uneven across sectors as some sectors will rebound quickly while some sectors such as MSMEs will take longer than many months,” pointed out Dr Arun Singh, Global Chief Economist at Dun and Bradstreet India.

With all these challenges, the recovery of the MSME will certainly be a gradual process rather than in a hockey stick pattern. With a gradual opening up of the economy, business seems to be limping back to normalcy.

“Though MSME business has been badly disrupted, there is a silver lining in the government’s efforts to boost the MSME sector by providing the much needed financial support and leniency. From collateral-free loans for restarting the business to moratoriums on existing loan EMIs can prove to be very helpful for the sector to bounce back,” said Raj N., Founder and chairman—Zaggle.

Some market experts feel that looking at the past few months, MSMEs are now more prudent about their cashflows and spending avenues. MSMEs are looking for quick working capital to keep themselves sustained and keeping their workforces safe as well. This is an overarching trend across all industries, at our exchange alone, we have noted a 100 per cent up-tick of MSME registrations since the lockdown began.

|While reinstating the pre-COVID-19 levels of the supply chain will take some time, operations are bouncing back as organizations are finding innovative and digital-first solutions for a lot of problem areas. We have also observed that large corporates that were earlier reluctant, are now utilising the Trade Receivables Discounting System (TreDS_ platform to repay their MSME suppliers and conserve their cash. The fact that TReDS offers a win-win proposition to all the participants has resulted in the transaction levels returning to pre-COVID levels,” says Ketan Gaikwad, MD and CEO of Receivables Exchange of India Limited.

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