The importance of micro, small and medium enterprises (MSMEs) keeps getting reiterated in all policy documents. The Budget has been cognisant of the challenges facing the sector, where resolution is admittedly an ongoing process as there are no quick fixes. In the last month or so there have been some new pointers that are worth examining on both the financial and operational levels.
The Budget looks at the operational side, where it tries to fix the problem of delays in payments to MSMEs. The government has spoken of creating a payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself. The UK Sinha Committee had made similar suggestions on ensuring timely payment, calling for naming defaulters to SMEs on a common portal so that the information publicised acts as a deterrent to would-be defaulters. Therefore, this synchronisation in view is welcome.
The committee has spoken about creating SPVs (special purpose vehicles) that will enable crowd sourcing of funds and the model closely resembles the fintech structure, which deals with online platforms. The issue here is one of cost, which can be as high as 16 per cent, when compared to what banks charge.
The approach to enabling finance is quite robust and well-fenced. The outlay in the Budget for interest rate subvention is now ₹350 crore and has been linked to the GST filing which serves a dual purpose as the MSMEs get assimilated into the mainstream. The extension of the 59-minute loan scheme to new entrepreneurs will fit well with the government’s emphasis on startups.
The limit for collateral-free loans has been raised to ₹20 lakh from ₹10 lakh after inflation indexing. Further, there is a suggestion that priority sector limits for lending to SMEs should be specified and any shortfall should be deposited with SIDBI (like NABARD for farm loans).
Institutional changes are also envisaged as SIDBI is to be elevated as a market maker for funding of MSMEs. SIDBI will be involved in getting MFIs (micro-finance institutions) and NBFCs (non-banking finance companies) to finance MSMEs, and VC funds would be an integral part of the system that is linked to potential borrowers.
There is talk about reinventing MUDRA so that SIDBI becomes more effective in its operations as it gets into underwriting, risk management and fund-raising on its own.
To make lending effective, credit guarantee of loans to MSMEs is important. The UK Sinha panel stated that all these schemes should be regulated and brought under the RBI. This is positive because, at present, they run independently which make them less cohesive. So the CGTMSE and NCGTC schemes would come under the purview of the RBI. Linked to credit guarantee is insurance for MSMEs, where an extension of various insurance schemes to SMEs would make MSMEs more secure.
The issue of potential default is relevant for MSMEs as delinquency rates can be high and here the idea is to treat such defaults differently given their nature. The class of entrepreneurs is different from those in the corporate sector and the size of the loan is much smaller. Hence, using the normal 180-day rule and forcing restructuring may not be appropriate as the one-size-fits-all rule cannot be applied here.
Further, to address distress there is a proposal to create a ₹5,000-crore distress relief fund for MSMEs. This can address issues of clusters when regulatory changes like the one made on the use of plastic bags affects their viability. The Budget has, however, not made an allocation for the creation of such a fund.
Clearly, the committee report has covered all the aspects and left it to the authorities to implement the same depending on the priorities. Taking the report and the Budget together there is still one lacuna that has to be filled: governance.
Most of these units are run by families which do not require such structures. Once they are inducted into the formal financial structures, it is important they function in an orderly manner and this is something that could be made conditional so that some level of professionalism enters the management. Lenders would always be keen to know about the management, especially if one is talking of VC funding or crowd-sourcing. Hence it would work in favour of MSMEs to have such structures in place.
The writer is Chief Economist, CARE Ratings. Views are personal