Working capital finance is an important aspect in any venture, more so for the fledgling MSME businesses. As the Indian economy is largely MSME driven with this sector contributing upwards of 30% to the economy both in GDP and employment generation, it is highly incumbent upon all stakeholders to facilitate easy and adequate flow of credit to this sector. The sector is presently highly constrained by lack of availability of adequate financing options.
To support the growth of MSMEs especially in the backdrop of “Make in India” initiative of the Government, we require new solutions and instruments to improve the flow of working capital credit like Invoice and bills discounting, cash flow and POS financing and Factoring etc. In order to aid growth and reach of credit to MSMEs and spread of Factoring in Indian Markets, opening up of the Credit Insurance is a key especially for NBFCs who will also help MSMEs in resolving their problems of ‘Delayed Payments’. Credit Insurance will solve this constraint to a large extent.
The Covid-19 Pandemic had a very severe adverse impact on the entire MSME sector in the country. The lockdowns implemented due to Covid 19 Pandemic practically brought the operations of majority of MSMEs to a standstill. The Covid-19 Pandemic placed MSME owners, employers, workers and Institutions associated with the MSME sector into a very difficult state, where no one had any experience to handle this kind of situation. Extended lockdowns have negative impact on supply of finished goods, procurement of raw material and availability of employees to work in production and supply chain processes. The sector faces challenges related to financial liquidity, debt repayments, meeting fixed expenses like electricity, rent, wages/salaries and statutory dues, etc. It is gathered from the feedback from MSMEs that disruptions caused by Covid-19 pandemic adversely impacted MSMEs’ earnings by 20-50% and the Micro and Small enterprises face maximum heat, mainly due to reduction in demand and liquidity crunch
Atmanirbhar Bharat Package announced by the Government for MSME sector which comprised of some major announcements to help the sector to restart their operations also provided newer opportunities to a large number of enterprises but, many MSMEs have not been able to avail the credit and other facilities either due to not meeting the eligibility criteria or lack of knowledge about the schemes. As a result of non- availability of adequate working capital, the immediate challenge for the MSMEs is to pay their statutory dues, wages and repay the creditors. Continuing interest burden, uncertainty of realisation of pending bills and past dues are other factors worrying the MSMEs.
Under the given situation, it is necessary that the RBI and the Government should liberalize the flow of working capital credit to the MSME sector by announcing urgent measures, some of which are suggested below:
- The Rs 3.0 lac crore ‘Emergency Credit Line’ mandated for providing collateral free loans to MSMEs has been a very effective financial measure to restore their liquidity and financial health and has greatly helped MSMEs to restart operations by giving them additional working capital support. Due to continuity of the Covid 19 Pandemic and the second wave affecting MSMEs more ferociously, it is desirable and recommended that Government should increase the size of this Emergency Credit Line from Rs 3.0 lac crore to Rs 6.0 lac crore and extend the period of availability to 31st March. 2022. In addition, the eligibility criteria under ECLGS should be improved to include new borrowers and those MSMEs which had not availed credit on 29th Feb 2020. ECLGS makes only those entities eligible for incremental financing which had availed credit on 29th Feb 292020.
- Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme should be substantially enlarged by raising its corpus to provide guarantee coverage up to Rs 5.0 lac crore by promoting the scheme and ensuring its strict enforcement as many Banks hesitate in lending on the basis of this guarantee alone.
- Banks provide loans to NBFCs for on lending to MSMEs with the responsibility of recoveries resting on NBFCs. Such loans to NBFCs were earlier being classified under the Priority Sector by Reserve Bank of India. Since April 1, 2011, the Reserve Bank of India made all loans sanctioned to NBFCs (other than MFIs) for on-lending to Micro and Small enterprises ineligible for classification as direct or indirect finance to MSE sector. On our representations, though the RBI in 2019 allowed restoration of PS classification but only up to credit of Rs 20.0 lacs per borrower. It is therefore recommended that all loans given by banks to NBFCs for the purpose of on-lending to Micro, Small and Medium Enterprises should be treated as indirect finance to MSMEs eligible for classification under the Priority Sector lending of banks as per the policy prevalent prior to 2011.
- In order to ease the liquidity constraints of MSMEs, Banks should be directed to provide additional moratorium of one year for payment of loan instalments and past interest. The interest rates being charged on lending to MSMEs should be moderated and Banks should refrain from charging any penal or additional interest on over dues or delays in payment of installments of principal or interest.
- Credit Insurance should be introduced by IRDAI through the Insurance companies to mitigate the risk perception of NBFCs and Micro Finance Institutions in order to accelerate the flow of credit to MSME sector particularly the Micro enterprises.
- The Banks should be asked to reduce their margin requirement by 10 to 15 percent on cash credit and OD limits which would automatically result in eligibility of borrowers across the board to draw additional credit facility without the need for any further security or documentation
- NPA classification norms should be changed from 90 days to 180 days or at least classification deferred for one year.
- Fund of Funds scheme of Rs 50000 crore for equity infusion into MSMEs should be implemented as it has not been launched yet even after nearly one year of announcement.
- Restructuring scheme 2.0 announced by RBI should be enlarged to include all MSMEs which became stressed after 31 March 2020 instead of those who were standard on 31 March 2021. Very few MSMEs would be able to take the benefit of restructuring with the current eligibility criteria.
The above measures will be extremely helpful in mitigating the liquidity and working capital constraints of the MSME sector.
Views expressed above are the author’s own.
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