MSMEs revival rests on Banks and Government, seeking for an action.

Minister of Micro, Small and Medium Enterprises (MSMEs), Nitin Gadkari referred to the sector as the ‘backbone of Indian Economy”. In these crucial times of COVID-19 pandemic and post pan India lockdown, the government is heavily relying on the MSME sector to climb out of the economic swamp. The government has taken several initiatives and announced various schemes to boost the MSME segment. However, the sector is still in the need for a helping hand to survive through these critical times. 

The 3 lakh-crore collateral-free emergency credit line guarantee scheme (ECLGS) was announced by the finance minister Nirmala Sitharaman to ensure the working capital for MSMEs. However, this revival strategy for MSMEs came with baggage for the existing customers of banks and NBFCs. 

In India, the problem is with the execution of any scheme announced by the government. To ensure that its benefits reach the maximum people is a challenge as a high portion of small businesses are not registered here. The loan terms need to be reassessed and eased by the government to promote more borrowings. Currently, it states that you need to be an existing borrower to take a loan.

Another problem is the timing of the announcement of the scheme and other benefits. Even before the government announced the package, many small businesses in the country had already suffered irreparable losses. Benefits like interest and GST waivers which are of easy access and more immediate were to be announced at the beginning of the crisis. While the government also needs to work on the time taken for the process of disbursal of the loans. Comparatively, the sanctioning of the loans happens fast. 

Banks are keeping it safe because of the NPA situation over the past few years and the burnt bad loans. Due to this, the government’s revival strategy is failing to work and presenting unsatisfactory results. According to data released in October, banks have sanctioned nearly Rs 10,000 crore under ECLGS, however of which only 27% of the amount has been disbursed. This is happening in spite of knowing that compared to big companies, MSMEs have fewer NPAs. 

Various government representatives have been asking banks to lend more, however, the banks have preferred to stay cautious. Chief economic advisor, K. Subramanian, advised to NBFCs to ”take financial inclusion to the bottom of the pyramid,” however he also warned them that “Forbearance is necessary during this time, but zombie lending can come back to bite later,” at a FICCI event. 

Experts believe that Technology can prove to be a rescue from the crisis. Many small businesses following the conventional supply chain, can be aided with increased digitization and by leveraging the e-commerce marketplaces. For example, the recent festive sales on Flipkart and Amazon witnessed hundreds of new traders and suppliers joining the platforms. 

Flipkart in its press release statement post the completion of the sales mentioned that “As Big Billion Days 2020 drew to an end, it has yet again reaffirmed the role e-commerce plays in uplifting consumer sentiment and catalysing growth for local MSMEs”. Flipkart individually had 50% more sellers on their website, with more than half of them belonging from smaller towns. 

MSME sector contributes to 30% of India’s GDP and employs almost 11 crore people. Therefore, along with digitization, cash should also be highly prioritized for this sector. Government’s intervention is essential as the sector has market demand but is facing a shortage of cash and labour. 

The government needs to promote and incentivize technology adoption and work on easing of compliance pressure in the immediate future. Along with this, the government must encourage entrepreneurship and ease the process of starting new businesses to increase income and employment in India. For the faster revival of the economy, a single-window clearance scheme must be in action. 

Banks must lend more to MSMEs and the government to work on easing compliance pressure. With this, we hope for MSMEs to be a saviour for India through economic distress. 

Read the full news here.