On Wednesday Finance Minister Nirmala Sitharaman outlined a slew of measured for MSMEs, which included setting up a collateral-free automatic loan provision worth Rs 3-lakh crore. To provide stressed MSMEs with equity support, the Government will also facilitate provision of Rs. 20,000 crore as subordinate debt and a Rs 50,000 crore equity infusion for MSMEs through Fund of Funds. The Government also took the opportunity to change the definition of MSMEs in the country.
The measures may seem big on numbers, but many are skeptical if it can translate into meaningful gains. However, before getting into what keeps small businesses anxious, there are some positives from the announcements.
According to Ashwini Anand, Founder and CEO, Monsoon Creditech, the announcement addresses the problem of lack of credit to a reasonable extent. “To put the Rs 3 lakh crore figure into context, it is interesting to note that as of the end of FY 2019, banks and NBFCs had about Rs 17.4 lakh crore outstanding to MSMEs. So, this sum of Rs 3 lakh crore is roughly 17% of the total credit outstanding to MSMEs – not a small number.”
Anand adds that it is also interesting to note that since the government seems to be guaranteeing these loans and not actually lending this money from its own books, the impact on the fiscal deficit is not nearly going to be as bad as the top-line number suggests. “NPAs on MSME loans have historically been over 10% at an aggregate level. For example, according to TransUnion, June ’19 NPA rates for MSMEs (at a pan India level) were 16.1% for loans disbursed by PSU banks, 3.8% private banks and 5.4% for NBFCs.”
According to the Economic Survey, despite a decrease in policy rates, the credit growth in the economy has been declining since the beginning of 2019. Bank Credit growth (YoY) moderated from 12.9 per cent in April 2019 to 7.1 per cent as on December 20, 2019. The main contributor to this slowdown has been a negative growth of credit to Micro, Small and Medium Enterprises and Textiles. The Government has tried to address this now by providing collateral free guaranteed loans.
According to Sanjay Doshi, Leader – Financial Services Advisory, KPMG in India, the biggest challenge banks faced in providing incremental is the basis of underwriting as the norms and historical information around profitability, stock levels, working capital levels, etc. under which credit was extended cannot be relied upon.
“In the new reality, banks are in a dilemma on how to assess a borrower and what risks they need to underwrite. Further, even when borrowers are willing to provide collateral, there are practical challenges around something as basic as stamping and signing a document. Collateral free automatic loan under the 100% credit guarantee scheme should provide relief to the MSME,” says Doshi.
Source- Economic Survey of India
To understand what is at stake, it is important to understand the importance of the MSME sector. The MSME sector contributes in a significant way to the growth of the Indian economy with a vast network of about 6.3 crore units and a share of around 30 per cent in nominal GDP in 2016-17. The share of the sector in total manufacturing output was even higher at 45 per cent.
What seems to be the biggest miss from the announcement is that there is little to stimulate demand and providing more or easier debt may not be the answer to address the liquidity challenges for MSMEs.
“The package announced today has left MSMEs thoroughly disappointed. MSMEs were demanding immediate financial support to pay salaries and interest on loans during the period of lock down. Instead, the Government has offered a loan scheme without collateral. The scheme entails little expenditure for Government- it will only help create a Credit Guarantee Fund, which will enhance the comfort level of bankers to lend. Good, but not enough for MSMEs. There are several other initiatives which would be helpful in different degrees to MSMEs like Rs 20,000 crore sub-ordinate debt fund, and Fund of Funds etc.,” says Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME)
Jayanth Mutha, Director, Himlite Products says while the intent was right, the actions have been half- baked. “As far as the short term measures are concerned, there has been a loss in sales so far. Expenses, salaries and rent have to be paid. So I take a loan and pay. But they haven’t said anything about the interest rate which I presume won’t be low. So while I can take a loan and solve my immediate liquidity problem, I will have the burden that there is another loan that I have to pay back. I don’t want to be an NPA. More clarity of thought should have come by while announcing such measures,” says Mutha.
Collateral free loans are not a new phenomenon and have been announced earlier too, and Saurabh Agarwal, Principal, IIF College of Commerce and Management Studies and Managing Committee Member, Assocham says the critical issue here is that banks have always been averse to lending to what they regard an ‘unprofitable business idea’. “So unless any MSME is looking for business expansion or has a financially rewarding business plan, our banks don’t show much interest in funding them,” says Agarwal.
The Reserve Bank of India has been trying to nudge banks to lend to MSMEs for years, but has not been very successful. Banks loans to MSMEs qualify for Priority Sector Lending classification. The RBI had also recently announced that incremental loans to MSMEs will be exempted from CRR from fortnight ending January 31, 2020 up to fortnight ending July 31, 2020. However, bank loans to sector has failed to pick-up, with most lenders have turned risk averse, opting to park their money with the RBI instead of lending it to small businesses.
The biggest worry for MSMEs is the fact that even if they manage to secure a loan from a bank, in the absence of real demand, they may slide into a debt trap. “The FM did not speak anything about demand revival. For all companies to stand on their own feet, they would need sales and demand revival eventually. The demand revival chain needs to be set in motion for such small and medium units to survive in the first place. Also, there was no mention of the labour. When there are no people to run the factories, what can really be done, “questions Mutha.
According to Doshi, the Scheme appears to address the existing borrowers with outstanding credit. “Working of the scheme for ‘new to credit’ MSME needs further clarity. The effectiveness of policy measure announced lies in the efficacy of its implementation. We need to wait for the finer points on the implementation steps,” Doshi says.
Talking on similar lines, Mahavir Pratap Sharma, Immediate Past Chairman, CEPC, says the fine print is what has to be seen. “It will be good if the quantum of Rs 3 lakh crore loans can be split between micro, small and medium enterprises. Also, I still don’t know how they will take in account the unorganised sector that don’t file returns and don’t have a balance sheet either. Hopefully the money will trickle down to them too,” says Sharma.
(With contributions from Neha Dewan and Shariq Khan)