By Devaprakash Ramakrishnan
Devaprakash Ramakrishnan is a Development Specialist with a deep interest in development finance and making markets work for the poor with a strong focus on private sector participation.
Micro, Small and Medium Enterprises (MSMEs) continue to be citadels adorning the industrial map of India. The recommendations of Dr Prabhat Kumar Committee hold promise for unveiling a new chapter in the Indian business ecosystem for crafting a MSME policy.
MSMEs shocks
A renewed expectation has crept in from the debilitating MSMEs. For decades, they have escaped a deserving attention, despite their huge potential to steer the wheels of the economy. MSMEs bear the brunt with poor ability to overcome shocks during economic reforms, unveiling of credit policies or an onslaught of disasters.
With 5,16,619 MSMEs bleeding as of March 2015, almost double since 2013 as per RBI data, MSMEs remain the underdogs in the eyes of providers. MSMEs, with 8,000 products on their shelves, contributing 30% of overall employment and nearly half of Indias exports, sail with a Non-Performance Asset (NPA) tag. They seem to harbour a lions share in the overall NPA pie.
Of the 4.27 lakh crore NPAs in industries, 1.23 lakh crore represent MSMEs which works out to 29% as of 2016, with the NPA ratio for MSMEs 8.77% comparing favourably with 11.75% for large industries. According to TransUnion CIBIL, a rating agency, Rs 54,799 crore out of 12 lakh crore was credit portfolio at the risk of turning into NPAs as of March 2017.
Addressing structural issues than offering largess
Tired of license and regulatory barriers, MSMEs in India are looking for a market-led framework which places ease of doing business on the forefront than getting swayed by short-term considerations or free lunches. The current policy mandate of MSMEs compulsory procurement of 20% of annual sales needs an extension beyond central government entities to include state ministries and corporations. With one in three SMEs receiving payment beyond 90 days and up to 20% of the cash flow being locked up, managing cash flow is a huge challenge for MSMEs.
Formal registry and skewed ownership
With an average of 2.3 employees, MSMEs in India remain largely single-person establishments forcing them to approach at least 68 agencies for incorporation. Adhar Udyog with simplified Aadhar based registration holds promise with 2.5 million MSMEs already registered. Providers are left with poor incentives for serving informal MSMEs due to perceived high risk and a high cost of serving individual clients. MSMEs registry is the first step towards showing them the path towards evolution as serious business clients in eyes of providers.
With only 7.6% and 3.87% of MSMEs respectively owned by Dalits and tribals and less than 3 million MSMEs either partially or fully owned by women, structural distribution of MSMEs is skewed against the deserving class of social groups warranting equitable ownership. Women entrepreneurship leaves much to be desired as women ownership is particularly tilted towards small-sized firms with 98% of businesses in the micro category.
A single comprehensive central law applicable to all states with a uni-window for registration and licensing, including provisions for annual filing and declaration is the need of the hour. Along with that, a clear mandate to deal effectively with delayed payments by large companies well within 30 days window. Geographically too, MSMEs are clustered in states like Uttar Pradesh, West Bengal, Tamil Nadu, Maharashtra and Andhra Pradesh, and account for 42% of national presence much to the exclusion of states like Bihar, Jharkhand and North East.
Restoring the credit tap of MSMEs
Accessing loan funds is painful due to MSMEs poor capacity to demonstrate collateral. Accessing equity is far more challenging due to perceived risks felt by angel investors. The policy provision should open new avenues of formal finance for non-collateral based lending with opportunities for deepening credit for MSMEs including market encouragement for fee-based credit rating tool and private-led credit guarantee fund. The current scope and remit of credit guarantee trust fund span over only 27 lakh MSMEs with 127,000 crore loans disbursed by banks which fathoms merely 10% of the potential.
The policy pronouncement should address the twin evils of credit market failures viz asymmetric information and imperfect contract enforcement. There is a need for banks to go full hog on non-collateralised debt instruments of asset-based financial products like factoring, invoice discounting, inventory financing and financial leasing. Given the current logjam faced by MSMEs with traditional banks, it would be appropriate to delegate MSME lending dedicatedly to NBFCs, tech companies and peer-to-peer lenders including consideration to float a separate specialized financial institution. Doubling the lending target to Rs 2.44 lakh crore under Pradhan Mantri Mudra Yojana for 2017-18 is a welcome step. More importantly, introducing collateral registries for movable assets on the lines of property mortgages is expected to increase firms access to capital particularly for smaller sized businesses as evidenced from countries like Ghana and China. This will give a better comfort to banks, as part of their drive towards monetising non-land assets.
A shift from project appraisal to an actuarial approach with the business model of banks leaning towards asset-based lending with credit default swaps established with insurance companies to give comfort to the banks through the joint selection of clients with insurance companies. The large swathe of working capital and overdraft needs of MSMEs piling up in loan demand stand as testimony to himalayan errors of omission much against the loan appraisal conscience of banks.
Natural problems
Disasters and riots take a heavy toll on MSMEs in view of their fragile nature, under-capitalisation, weak cash flow, poor awareness on insurance and loose and unincorporated nature of MSMEs. There is as much as 60% of an estimated overall loss to the economy. The last Chennai floods in 2015-16 reported an average per unit loss of Rs 11.8 lakhs with not even 50% of the crumbled 14,000 units managing to get their claims settled in six months. MSMEs, especially in manufacturing and service sectors, run with no disaster recovery plans and run into rough weather of recurrent disasters, further crippling their aspirations to stay protected from insurance to shield them against perils.
An enabling and integrated MSME policy for well-functioning and sick MSMEs will provide equal importance to agriculture, manufacturing and service sectors, thereby increasing MSMEs share in both private and public spaces. MSMEs may need a separate financial architecture with a dedicated regulatory turf outside RBI, like National Housing Bank (NHB) for the housing sector.
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