COVID-19 and MSMEs
- The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
- The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
- The problem with most small Indian businesses is that they operate on thin margins and don’t have the deep financial resources to survive a significant dip in cash flows.
- So, when an unexpected event like a lockdown happens and MSMEs can’t sell/produce their goods or services, it also means for many they can’t meet their monthly expenses – this includes costs like paying salaries to their employees.
Fiscal stimulus package to MSMEs under Atmanirbhar Bharat Abhiyan
Finance Minister has announced the first tranche of the Atmanirbhar Bharat Abhiyan economic package. The main thrust of the announcements was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them.
What is the package about?
Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs.
1) 100% credit guarantee
- Firstly, it will give a 100% credit guarantee for Rs 3 lakh crore worth of collateral-free loans to MSMEs that were doing fine before the pandemic hit and are now in trouble.
- This deal will only apply to small businesses that already had an outstanding loan of Rs 25 crore or those with a turnover of less than Rs 100 crore.
- This doesn’t mean the government is directly infusing Rs 3 lakh crore into India’s MSMEs.
- Put simply, if an MSME wants to take a loan of Rs 1 crore from a bank now, the Centre is saying that if the business fails to repay that loan, it will step in and make good all of that Rs 1 crore.
- Thus, banks don’t have to worry about potential NPAs – that headache is transferred to the government.
2) Subordinate debt scheme
- The second measure is a ‘subordinate debt scheme’ worth Rs 20,000 crore and is mainly for MSMEs who are already struggling with debt and are unlikely to get fresh funding by themselves.
- This scheme will allow banks and NBCs to give loans to MSMEs which are already deemed as ‘stressed’ and are thus less credit-worthy.
- For these firms, the government will only provide partial credit guarantee support to banks.
3) Availability of Funds
- The final step involves the government creating a Rs 50,000-crore fund which will infuse equity into “viable” MSMEs, thus helping them to expand and grow.
- The Centre will put only Rs 10,000 crore into this and get other PSU institutions like SBI or LIC to help fund the remaining amount.
- The basic idea behind this is that MSMEs who have been forced into a cash-strapped corner by the national lockdown will be able to apply for some working capital that will keep their businesses afloat until they are able to operate at pre-pandemic levels.
- By doing this, the government also hopes to protect the employment that MSMEs create and thus save jobs.
- There are two other MSME policy announcements – one aimed at bringing more firms into the MSME net, while the other is oriented towards providing a level playing field.
- The first is defining what the firm gets to be an ‘MSME’ and avail of all the government benefits that are given to that category of business.
- The criteria have been expanded quite loosely and will mean that companies don’t have to be as small as they were to avail of MSME benefits.
- Put simply, the government will now subsidize more smaller companies than they used to.
- Second, there is a change in the definition of an MSME that was pending for long.
- Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and services MSME.
- FM also extended the initiation period of fresh insolvency proceedings against MSMEs by six months to up to one year depending upon the COVID situation.
Need for such measures
- Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure.
- For instance, experts are already talking about a GDP contraction of 5% to 10% in the current financial year. It will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
- And yet, this is also the year when employees and firms want the government to help them out financially.
- Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
- So the government was facing an odd problem: Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.
- The solution — credit guarantees — finally chosen by the government is not a new one, because this fiscal conundrum is not a new one either (see chart).
Why Rs 3 lakh crore?
- The total outstanding loan to MSMEs by the banking and NBFC sector is around Rs 16 to 18 lakh crore.
- Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore.
- So the government is hoping that this credit guarantee will help those MSMEs take out another loan and recover.
- The hope is that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.
How far will these measures help?
- The Rs 3 lakh crore credit guarantees are the most substantive announcement as it will most likely have a significant impact.
- It will help MSMEs pay salaries and keep their heads above the water even as the economy slows down.
- This measure is expected to help as many as 45 lakh MSMEs.
Issues with the package
1) No banks consulted
- The scheme for MSMEs has left bankers unhappy as the guarantee is not being offered by the government, but from the credit guarantee trust fund for micro and small enterprises (CGTMSE) instead of being a sovereign guarantee.
2) Criteria of availability
- The benefits of the package will not be available to businesses which had repayments overdue by more than 30 days as on Feb 29, 2020.
- Only for the stressed MSMEs and those whose loans have turned bad, a Rs 20,000-crore subordinated debt scheme has been envisaged.
3) Employee’s welfare faintly addressed
- With the package, the government has mandated MSMEs for paying the wages.
- The MSMEs are short of revenues to be able to pay the salaries. It has now become a matter of ability to pay.
- Manpower cost for ancillary suppliers is one of the largest. Not every company has the ability to pay their employees so going forward will be more stressful.
4) Too much of loans
- The package has offered for taking additional loans, but the MSME sector is already leveraged heavily.
- At this point, taking additional loans can help with major short term liquidity, but in the longer-term, the companies or the units abilities for repaying these loans is grossly neglected.
- Also the onus on increasing the competitiveness of MSMEs post the lockdown has been grossly neglected.
- The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market.
- The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
- In general, there is a need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
- More importantly, there is a need for skill formation and continuous upgrade both for labour and entrepreneurs.
- While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
- Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.
Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.
- Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSME. These enterprises are dependent on self-finance. Profit margins are also low.
- The government drive for financial inclusion could benefit such entities.
- The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing a line of credit to firms which are under financial stress.
- The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far.
- A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.