The government’s initiatives announced in the stimulus package have been geared towards helping MSMEs maintain liquidity and for ensuring greater credit availability. The emergency credit line, the subordinate debt provision and the equity infusion measure, apart from the long-awaited reform to the MSME definition, have been significant interventions. It is important, however, to examine how game-changing they have been to the existence of approximately 6.3 crore MSMEs that employ 11 crore people across the country.
A recent nationwide survey, conducted by the All India Manufacturing Organisation (AIMO), found that 78 per cent of small companies’ owners were not satisfied with the implementation of the package. The results of the survey also suggest that transmission on the ground is slow, moreover 85 per cent of the sector may not benefit from it. In another survey carried out by FICCI-Dhruva Advisors, 79 per cent of respondents believed that the Emergency Credit Line Guarantee Scheme (ECLGS) has not yielded the desired results, while 70 per cent say that they haven’t availed the benefits of loans and interest moratorium. As of July 4, Rs 1.14 lakh crore worth of loans have been sanctioned. However, only close to half that amount sanctioned has been disbursed.
Even before COVID, the MSME sector was marred by rampant informality, stunted growth and bore a heavy share of the compliance burden. It is important to periodically assess and identify measures that could ease these challenges that have been exacerbated by the pandemic and provide relief to these businesses. Despite financial and regulatory support offered to the sector, there is a clear operationalisation and implementation gap. The Global Alliance for Mass Entrepreneurship’s (GAME) National Task Force on MSMEs recommendations hold the promise of not just short-term survival but also of helping MSMEs thrive.
This entails ensuring credit reaches those who need it the most. Credit growth to MSMEs, in particular, has declined — a clear sign of risk-averse bank lending that has only become worse. Lending to micro and small enterprises has contracted 3.4 per cent, while to medium enterprises, it has contracted 5.3 per cent. The RBI has clarified that Member Lending Institutions (MLIs) shall assign zero per cent risk weight on credit facilities extended under the scheme since these are backed by an unconditional and irrevocable guarantee by the government. Despite this, a lag in loan disbursals is seen, especially with private sector banks still hesitant to lend, but even when doing so, preferring to disburse larger loans.
In light of these trends and drawing upon the GAME-sponsored task force recommendations, a few changes to the current system of credit support are proposed herewith.
First, set aside credit for new-to-credit MSMEs with a focus of bringing them into the formalised fold. The current scheme is open only to MSMEs who have a Rs 25-crore loan outstanding and a turnover of up to Rs 100 crore. This implies that fresh borrowers cannot avail of this scheme. Such MSMEs need to be targeted to bring them into the formal credit ecosystem. The Task Force has recommended that Rs 1 lakh crore be set aside for disbursing small ticket size loans of Rs 1 lakh to first-time MSME borrowers.
Second, mandate a definite percentage of credit guaranteed loans to be released to micro and small businesses. Ninety-nine per cent of enterprises in the MSME sector are micro-enterprises that are largely informal. These 6.3 crore micro-enterprises comprise of one-person businesses/self-employed persons and units that employ less than 10 workers. Small enterprises, at an estimated 3.3 lakh, are the next highest in number. Post the upward revision in turnover limits of medium enterprises, a greater number of enterprises will be eligible for benefits enlisted for this sector. To ensure that these enterprises are not crowded out in such a situation, mandating a certain percentage of credit guaranteed loans to micro and small enterprises could offer them necessary succour.
Third, bridge the gap between the amounts sanctioned and disbursed by banks under the ECLGS. It could be that state-owned banks are under pressure to show that the scheme has received a good response, and hence are giving automatic sanctions to all eligible borrowers. Disbursements, however, will depend on the actual credit needs of the borrower. Another reason could be that a borrower can avail only 20 per cent of the outstanding loan amount. For those MSMEs that have repaid their loans, the window of fresh loans is very small. Such prescriptions need to be examined to ensure that MSMEs in genuine need of credit are not left out.
Fourth, scheme eligibility, application processes, and benefits need to be conveyed more simply. While the CHAMPIONS portal has a comprehensive information base and exhaustive FAQs, these need to be disseminated in multiple languages through various channels.
This article first appeared in the print edition on July 14, 2020 under the title ‘A Better Lending’. Pandey and Pillai are Fellow and Research Fellow at NIPFP. Views are personal
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