The budget proposal for a credit guarantee scheme for micro, small and medium enterprises for purchase of machinery and equipment without collateral will speed up technical upgradation of the units. Combined with other announcements like public sector banks building in-house capability for credit to the sector, they will result in substantial savings for the units, analysts and industry officials feel.
However, the budget gave a miss to the industry demand for change in the 45-day payment rule for MSMEs brought in through Section 43B(h) of the Income Tax Act by the Finance Act 2023.
According to the provision if a larger company did not pay the MSME within 45 days for goods or services then it cannot deduct that expense from its taxable income. There was a section of MSMEs that had voiced concern over this rule as its continuation would have hurt orders from those companies.
“This (payment rule) would discourage corporates from having MSME vendors and flies in the face of other enabling provisions for MSMEs announced by the finance minister, Director-Regulatory at Nangia Andersen Mayank Arora said.
With credit guarantee banks will be able to take faster decisions on the loan applications as they would not have to do detailed appraisal of the unit in terms of liabilities and available collateral, secretary general of Federation of Indian Micro and Small and Medium Enterprises (FISME) Anil Bhardwaj said.
At present a detailed appraisal for a loan could take months and this delay sometimes leads to passing away of the opportunity that would have been available with the timely deployment of the machinery in terms of a new customer or a product.
Apart from the credit guarantee the banks would also have an asset in the form of machinery as collateral for speedy decision making. The credit guarantee would have to be paid by the borrowing unit which ranges between 0.5-1.5%, Bhardwaj said.
“The budget addressed the credit requirement for the MSME sector which faces a significant funding gap of Rs 20-25 trillion. The new credit guarantee scheme covering Rs 100 crore per applicant will enhance the penetration of formal credit, which is only 20% for MSMEs,” Director-Research at Crisil Pushan Sharma said.
Last credit guarantee scheme for MSMEs, the Emergency Credit Line Guarantee Scheme (ECLGS) was launched in May, 2020 as part of Aatmanirbhar Bharat Abhiyaan to support eligible MSMEs and business enterprises in meeting their operational liabilities and restarting their businesses during COVID. This guarantee during long lockdowns kept the units operational and saved banks from non performing assets of Rs 1 trillion.
A similar proposal in the budget has been announced that will support credit availability to MSMEs through a guarantee from a government promoted fund during their ‘stress period’ due to reasons beyond their control.
“While being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and to avoid getting into the NPA stage,” finance minister Nirmala Sitharaman had said in her budget speech.
This will provide another cushion to MSMEs that are vulnerable to supply chain disruptions due to events like the Red Sea crisis and other geopolitical disturbances which in some cases may also lead to payment default or delays, FISME secretary general said.
The budget announcement that public sector banks will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment will also provide relief to the industry. As per Basel II norms adopted in India banks are required to get their loan portfolios vetted by a third party. While in Europe the retail and MSME loans are vetted at the total portfolio level and corporates individually. In India MSMEs have been bunched with corporates so they have to obtain credit rating to be eligible for loans.
“Around 50,000 MSME are rated annually in India and they pay Rs 2 lakh annually for it. The development of in-house capabilities by banks would do away with the need for compulsory credit rating,” Bhardawaj said.
Apart from monetary costs, other problems with ratings was that the rating agencies were using the models developed for bigger corporations for MSMEs. This on many occasions have led to errors in ratings and for which the companies have suffered.
“As banks dominate MSME lending with 75% market share, building an in-house, technology-based underwriting model by public sector banks will attract new-ro-credit borrowers into the formal system,” Sharma said.
“This will help smaller companies access funds at a time when investments by large corporations and central and state governments have been crowding out access to funds to MSMEs,” director Nangia and co Mayank Arora said.
Reduction of the turnover threshold of buyers for mandatory onboarding on the TReDS (Trade Receivables Discounting System) platform to Rs 250 crore from Rs 500 crore will bring 22 more CPSEs and 7000 more companies onto the platform. Medium enterprises will also be included in the scope of the suppliers. It is another positive as TReDS platform has taken-off well with three of them in operation doing a business of Rs 1 trillion each.
Along with easing credit, the budget also announced that Small Industries Development Bank of India (SIDBI) will open new branches to expand its reach to serve all major MSME clusters within 3 years and provide direct credit to them. The limit of Mudra loans will be enhanced to Rs 20 lakh from the current Rs 10 lakh.