Editorial

Helping MSMEs

| Updated on July 07, 2019 Published on July 07, 2019

The Budget proposes a slew of steps, but endemic concerns remain

When IL&FS defaulted on its debt repayments in September 2018, it led to the banks and mutual funds freezing loans to NBFCs in general, as a result of which India’s small and medium enterprises took a huge hit, slowing down the economy. The share of public sector banks in MSME credit has dipped from close to 60 per cent five years ago to well below 50 per cent now, thanks to their emphasis on prompt corrective action — with the private banks and NBFCs accounting for a growing share of MSME lending from the formal sector during this period. But post September 2018, the NBFCs vanished from the scene, leaving the MSMEs more dependent than ever on informal sources. In an effort to break this deadlock, the Budget has proposed bank recapitalisation of ₹70,000 crore and a one-time guarantee for purchase of ‘high rated’ NBFC assets. Prompted by an interest subvention for GST-registered MSMEs, it should lead to a reinfusion of funds into an ecosystem that, according to the recent RBI report on MSMEs, accounts for 28 per cent of the GDP, 45 per cent of manufacturing output, 40 per cent of exports and employs about 111 million. Steps for including MSMEs into the formal fold should most importantly include defining them on the basis of turnover rather than plant and machinery value, and reducing the GST rates on the goods and services provided by them.

The Budget has announced a number of facilitation measures, such as creating a payment platform to resolve delays and streamlining the process of government procurement. Collateral free loans have also been pushed in recent times, as has the MUDRA refinance scheme. But access to low cost finance and the problem of locked up working capital, remains an endemic concern. An attitudinal shift within banking staff is finally what will make a difference. As for the flow of funds to NBFCs, the Financial Stability Report claims that a firewall of sorts has been erected between NBFCs with asset-liability mismatches and the good ones, but it remains to be seen whether banks and refinance agencies finally loosen their purse strings, or adopt the right parameters in doing so. The Budget’s proposal to extend the scope of Reserve Bank regulation to the NBFC sector could not have been better timed.

The Finance Minister has also sought to address other MSME concerns. An amnesty scheme to resolve tax disputes is welcome, as formalisation in the wake of GST has already imposed transaction costs on small units. It does not help that export-oriented MSMEs still run from pillar to post to claim policy benefits. A cluster development approach to innovation, involving collaboration with research institutes, should be promoted. MSMEs in high tech areas need a set-up that takes their mind off other managerial headaches. The Budget has made only a modest start.

Published on July 07, 2019
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