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Indian MSMEs faced with $240 billion credit deficit: Report

Access to credit remains hurdle for Indian MSMEs

Hosiery-industry-textile-MSME-industry-Salil Representational image | Salil Bera

Micro, Small and Medium Enterprises (MSMEs), which contribute 28.8 per cent to the country's GDP, continue to bear the brunt of the COVID-19 pandemic and its subsequent wave of lockdown.

MSMEs continue to lack access to formal credit, besides other challenges such as getting better market access and improving their overall productivity. As per a recent report by the Association of Chartered Certified Accountants (ACCA), the Indian MSME sector faces a credit deficit of $240 billion. Due to poor demand, market uncertainties, and the high-risk profile of the sector, banks are cautious about lending to them. 

The report observes that all MSMEs require adequate financing, just like their larger counterparts. The report points out that MSMEs typically depend on payments from customers, especially large corporate buyers, due to their small balance sheets. A delay in payment by larger entities will adversely impact the cash flows of small businesses, resulting in a further liquidity crunch and financial struggles for MSMEs.

The report further states that MSMEs often do not maintain official business documents, account statements, and tax returns that banks require to check for potential credit risks. Early-stage startups who are, in most cases, first-time borrowers find it even more challenging to access capital, in the absence of borrower credit history and other documents that lenders require. At the same time, MSMEs are extremely vulnerable to market slowdown and changes in consumer preferences which has been further aggravated by the COVID-19 pandemic. 

It is a fact that multiple reforms have come to the sector such as earlier MSMEs with turnover of Rs 1 crore and above had to face tax audits. However as per the Budget 2020-21, now the turnover threshold for audit for MSMEs has been raised to Rs 5 crore, provided the businesses do less than 5 per cent of their business transactions in cash. 

This is expected to allow MSMEs falling within this turnover to avail of the presumptive taxation scheme under Section 44AD of the Income Tax Act. Besides this, the corporate tax rate had also been reduced to 15 per cent for new MSMEs in the manufacturing sector and 22 per cent for existing companies. Additionally, in order to provide relief to MSMEs, the GST Council has also doubled the GST exemption limit to Rs 40 lakhs in annual revenue wherein the MSME with an annual turnover of Rs 40 lakhs or less are not required to pay GST for products and services. 

The ACCA report points out that the COVID-19 crisis has further exposed the vulnerabilities in the MSME sector and there is tremendous stress on their cash flow, new safety norms, and government regulations, increase in online business model coupled with an increase in cyber threat, restriction on travel and movement, the slowdown in the local and the global economy, etc.

On the other hand, as per a recent survey conducted by Dun and Bradstreet, the COVID pandemic posed an unprecedented impact on small businesses with more than 82 per cent of small businesses getting negatively impacted by COVID. The major brunt was faced by the manufacturing sector and the services sectors among small businesses. This survey points out that small businesses are confronted with challenges of getting proper market access, improving their overall productivity and getting access to more finance. The survey report points out that small businesses need better credit facilities, better marketing support and better adoption of technology during these challenging times. Most of the small businesses which were surveyed by Dun and Bradstreet cited lack of market access as one of the major challenges in scaling up their operations. 

The survey report pointed out that a majority of small businesses in India had digitized their daily operations during this pandemic. Digitisation had reduced their operational cost, enhanced their competitiveness and had helped them in understanding their customer behaviour better.  The Dun and Bradstreet’s survey also found that the majority of small businesses in India are also willing to leverage next-generation technologies such as Artificial  Intelligence (AI), Machine Learning (ML), Industrial IoT to their business operations. 

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