Micro, small and medium enterprises (MSME) are the backbone of India’s industrial landscape. With about 40 million units employing about 100 million people, directly and indirectly, the sector is the largest job provider in the country. It contributes about 8 per cent to GDP, has a share of 45 per cent in the country’s manufacturing output growth, and contributes 40 per cent to the country’s exports.
The biggest bottleneck to the growth of entrepreneurship in MSME segment is the lack of financial support to this sector. The support from banks to this sector is meagre, with less than 15 per cent of bank credit going to this segment.
A vast part of the non-corporate sector operates as unregistered enterprises. These units do not maintain proper books of accounts and are not formally covered under taxation. Therefore, banks face difficulty in lending to them. Majority of this sector does not access outside sources of finance.
The sector comprises myriad of small manufacturing units, truck and taxi operators, food-service units, repair shops, machine operators, artisans, food processors, street vendors and so on.
Formal or institutional architecture has not been able to reach out to these units with capital. They are largely self-financed or rely on personal networks or the informal credit system. Addressing this need will give a big boost to the economy; else this segment will remain unfunded and a portion of the productive labour force would remain unemployed.
At a time when India Inc’s appetite for credit has turned tepid, bankers seem to have put their shoulders to the wheel in giving loans to small manufacturing units, including shopkeepers, street vendors, and truck and taxi operators, under the Pradhan Mantri MUDRA Yojana.
Banks, including the State Bank of India and its associates (six banks), public sector banks (21), private sector banks (13), regional rural banks (56) and foreign banks (2), have stepped on the gas since the Yojana was launched on April 8.
Under PMMY, loans are given by banks and MFIs under three categories — Shishu (loans up to ₹50,000); Kishor (loans above ₹50,000 and up to ₹5 lakh); and Tarun (loans above ₹5 lakh and up to ₹10 lakh).
They have to ensure that at least 60 per cent of the credit flows to Shishu category units and the balance to Kishor and Tarun categories.
The government came up with PMMY as the formal or institutional architecture has not been able to reach out to the NCBS to meet their financial requirements.
Loans under PMMY are given to micro-entrepreneurs for, among others, purchasing vehicles for goods and personal transport; starting/expanding salons, beauty parlours, gymnasium, boutiques, tailoring shops, dry-cleaning, cycle and motorcycle repair shop, DTP and photocopying facilities, medical stores; for undertaking activities such as papad/pickle/ jam/jelly making, small service food stalls and day-to-day catering/canteen services.
The Yojana got recognition from the Guinness Book of World Records for “most bank accounts opened (1.80 crore) in one week as part of the Financial Inclusion Campaign from August 23 to 29, 2014.
MUDRA is a wholly-owned subsidiary of the Small Industries Development Bank of India. It provides refinance to banks and microfinance institutions against the loans they have provided to micro-enterprises.
Beyond finance, the other key issues plaguing the sector are the dearth of skilled labour, enterprises operating with outdated technology, lack of innovation, inadequate infrastructure, delayed payments, absence of proper marketing and procurement services, lack of proper training and guidance for entrepreneurs.
The government does launch schemes and promotions, such as purchase preference, to support MSMEs. However, another hurdle is the limited number of registered units which have access to those schemes.
Small entrepreneurs often start off with just an idea, with limited capital and little knowledge of the regulatory structures and financing options available.They face difficulties in obtaining working capital and often do not have any collateral to pledge.
Another critical factor is the impact of delayed payments on this sector. Entrepreneurs do not have sufficient working capital and delayed payments significantly hamper the working of the business.
Cumbersome procedures and extensive documentation add to the woes of the entrepreneurs. While big businesses have the staff to deal with them, small businesses do not.
The government often releases extensive schemes, allocating huge sums of money for the development and growth of the sector. However, a scheme is only as good as its implementation. If policy expectations are great, expectations from delivery mechanisms are even more.
In an effort to make the sector robust, Finance Minister Arun Jaitley, in Budget 2016-17, had announced that he would ensure more funds in the hands of the sector. To ensure this, he proposed tax exemptions for small business units with a turnover of up to ₹2 crore, to help them expand.
The threshold limit for turnover for calculating presumptive taxes for SMEs was also raised to ₹2 crore from ₹1 crore earlier, in addition to the higher allocation of ₹1,80,000 crore under the MUDRA Yojana — especially to boost start-ups — with the aim of creating “job creators” rather than job-seekers.
On its part, the Centre is making efforts to give an extra push to sales of MSME products, by making it mandatory for Central public sector units to make 20 per cent of their procurements from MSMEs, including 4 per cent from units belonging to Scheduled Castes/Scheduled Tribes.