By Pushkar Mukewar
Credit and Finance for MSMEs: Over the years, there have been several announcements in and out of the Budget, to make access to credit easier for MSMEs. But so far, it’s just not been enough. Will the Finance Minister fix this long-standing problem this year? It is said that India’s economy runs on the back of millions of MSMEs and that this sector faces a severe and growing problem in accessing funds. The reason is a complex intertwining of factors — the small size of most MSMEs, the fact that they don’t have collateral to offer to large banks and lending institutions, and the increasing reluctance of these banks and lenders to take on risky loans.
There are various estimates regarding the yawning credit gap that MSMEs face, with the most drastic saying that only 6-10 million of India’s 63 million MSMEs have formal access to credit. Some experts say this is a gross under-estimation, and in fact, close to 50 per cent of MSMEs do have access to credit. Whichever end of the spectrum you look at, it’s clear that there is still a large section of MSMEs that doesn’t have access to formal lines of credit.
The Association of Chartered Certified Accountants, in a 2021 report, says that MSME growth in India ‘faces several issues due to a lack of access to low-cost formal credit from traditional sources such as banks. Due to poor demand, market uncertainties, and the high-risk profile of the sector, banks are cautious about lending to these businesses.’ The report quotes statistics from the World Bank, which estimates the MSME credit gap to be at approximately US$ 380 billion.
There have been several government schemes to ease access to credit, but so far, this has not been enough to bridge the yawning credit gap. So, what can the upcoming Budget do?
Change in NPA Classification
When loans are overdue for more than 90 days, the Reserve Bank of India (RBI) mandates that they be classified as non-performing assets (NPAs). Because MSMEs live from payment to payment, and because payments are often delayed, these companies end up defaulting on loans. For a bank, it means an increase in NPAs, which is one reason why banks are reluctant to lend to MSMEs. The sector has been asking the government to ease the RBI norms and increase the 90-day repayment limit to 180 days. This, say, experts, will lead to banks being more willing to lend to MSMEs, and it will also mean MSMEs will not be forced to shut because of lack of funds or inability to repay loans.
Relax NBFC Guidelines
With MSMEs finding it difficult to access credit from commercial banks and large lenders, they often approach non-banking financial companies (NBFCs). In the wake of the pandemic, the RBI had allowed NBFCs to restructure MSME loans in specific sectors so that these loans were not classified as NPAs despite non-payment. This restructuring is valid till March 2022. According to reports, NBFCs have asked the Finance Minister to extend the deadline by another year. This will not just ease things for MSMEs; it will also encourage NBFCs to continue lending to this sector.
Strengthen Trade Finance Systems
The Trade Receivables and Discounting (TReDS) platform is an electronic means of financing or discounting trade receivables of MSMEs through multiple finance institutions. According to data from the RBI, this platform has seen a good response from MSMEs, banks, and NBFCs. In fiscal 2021, as per the RBI, 91.3 per cent of invoices uploaded on the platform were financed, compared to 90.2 per cent in fiscal 2020. To encourage more MSMEs to join this platform, it is essential to expand it to include more state government departments and state public sector undertakings (PSUs). Reports say that some MSMEs have asked for the TReDS platform to be synched with the GSTN network to create better credit discipline.
Improve Cash-flow-based Financing
When commercial banks and lenders offer credit, it is usually asset-backed credit. That is, these lenders demand a business asset as collateral. MSMEs have been asking for the government to promote cash-flow-backed lending, where financing depends on the MSME’s current and projected cash flow. This can help smaller businesses with almost no assets to offer as collateral.
The government has launched several schemes to improve the country’s digital infrastructure. However, many MSMEs have no digital footprint given their size and, often, remote addresses. This means that they are unable to access many of the government’s finance schemes, as well as any fintech schemes that may be available to them. Some estimates show that close to 80 per cent of MSMEs are in rural and far-flung areas. Improved digital infrastructure will allow them to access the same schemes that urban MSMEs benefit from.
Pushkar Mukewar is the CEO and Co-Founder at Drip Capital. Views expressed are the author’s own.