So where has all the money gone?

Even as the second wave shows no signs of going away in many places, others which had seen some signs of easing — and had just started getting back to business — may be in for a third wave, according to many experts tracking the pandemic.

This is catastrophic news for India’s struggling micro, small and medium enterprises (MSMEs), which account for a bulk of manufacturing activity as well as generate most of the employment in the manufacturing sector.

The government knows this. That is why most of the stimulus measures it has announced during the 18-month rampage of the virus have been ostensibly aimed at this particular segment of the economy.

Take the latest set of measures announced on June 28 by Finance Minister Nirmala Sitharaman. While the package, as has become the practice with the Modi administration, was headlined by a gob-smacking number — ₹6.28 lakh crore in this case — most of it was out of the by now standard playbook. The heavy lifting was to be done by banks, which were ‘directed’ to lend more, while the Finance Minister herself opened up the purse strings only marginally where the government’s own spending was concerned.

Numbers game

And, again, as per usual, several already announced measures, including some actually provided for in the Budget, were also added up again, to arrive at a suitably staggering number. Not to speak of including a proposed additional equity infusion into the Export Credit Guarantee Corporation (ECGC), that too, spread out over five years, as an immediate “stimulus” of ₹88,000 crore!

The question is, are these numbers real? Despite the creative accounting, one would be pardoned for assuming that surely the three stimulus packages announced so far added up to a fair dose of real money in the system, and that as lockdowns ease, it will be back to business as usual for MSMEs.

Unfortunately, the actual situation on the ground appears to be otherwise. MSMEs in particular, seem to be gasping for breath, despite the many lakhs of crores of rupees being flung in their direction.

This is puzzling because it had appeared that several measures had been tailor-made to help MSMEs tide over short-term setbacks. Take the additional ₹1.5 lakh crore announced in the June 28 package under Emergency Credit Line Guarantee Scheme (ECLGS) would help trade and businesses especially in the MSME sector to tide over the liquidity crunch. This was the biggest chunk of the ₹2.67 lakh crore package aimed at stepping up credit flow to the MSME sector.

In addition, the Finance Minister had also announced an additional ₹1.1 lakh crore worth of loan guarantees for sectors impacted by Covid-19. Even if one assumes for argument’s sake that there aren’t too many MSMEs in the healthcare infrastructure space, which had ₹55,000 crore reserved for it, there is still some handy change available for other Covid-hit sectors, almost all of which had MSMEs as the worst sufferers. So has this money actually reached anybody’s pockets? Not so, going by credit slippage numbers. According to a report published last week in this paper (Public sector banks report sharp slippages in MSME loans in Q1, August 13), fresh slippages of SBI jumped more than four times to ₹15,666 crore in the first quarter of the current fiscal, with over 40 per cent of SBI’s total slippages coming from the MSME sector.

Default worries

Similarly, other state-owned lenders also reported a high number of MSME loans turning defaulter. Major PSU banks like Bank of Baroda, Indian Bank, Punjab National Bank and Union Bank of India have all witnessed a substantial jump in fresh slippages from the MSME sector, as high as 60 per cent of all the net additions to NPAs in the first quarter of the current fiscal.

This is a double whammy as far as the stimulus is concerned. As history has shown, banks are reluctant to take on additional exposure in an uncertain climate. With the modus operandi of the stimulus actually being delivered being left to the RBI and the banks, lenders have erred on the side of caution, ring-fencing most of the additional credits to borrowers with a “clean” record. Since most MSMEs have been struggling since the first set of rolling lockdowns started in 2020, this has meant that a bulk of the relief measures have been grabbed by big businesses, leaving stressed MSMEs stranded.

Some surveys by industry bodies have shown that 88 per cent of small borrowers were simply unable to avail themselves of any of the benefits announced by the Finance Minister, thanks to the cautious conditions insisted upon by banks.

By now, it should be amply clear to the government that an over reliance on the banking system to bail out the economy is unwarranted. Banks are lending institutions, and lending always comes with strings attached. Moratoriums on loan repayments and credit guarantees delay the inevitable, while increasing the debt burden of already stressed businesses.

The solution is for more direct spending by government, which continues to be a significant customer for MSMEs. Further, since a bulk of MSMEs are actually sub-contractors or suppliers to larger, organised businesses, a faster settlement of what is euphemistically called “trade credit” can really help open up blocked cash flows for MSMEs. In this context, the passing of the Factoring Regulation (Amendment) Bill, 2020 was one of the few positives of the washed-out Monsoon session of Parliament. The new law will bring an estimated 9,000 NBFCs into the factoring business, which ought to significantly improve volumes and ease up cash flows for MSMEs.

But these will all remain palliatives until the formal banking system actually reaches out to MSMEs and embraces them. According to a 2018 IFC estimate, 84 per cent of the credit requirement of MSMEs is still being met by the informal sector — moneylenders, family and friends, etc. Unless this is reversed, no matter how large the number in any stimulus package, it is likely to remain just that — a number on paper.

The writer is a senior journalist

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