The plan would be implemented in a decentralised manner, so the decisions could be taken by even the middle-level bank management.
In what would improve the liquidity conditions of micro, small and medium enterprises (MSMEs), the government will soon put in a place a system under which banks will release 90% of these firms’ receivables on the basis of receipts of purchases from their clientele among CPSE/state-run undertakings.
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The plan, according to official sources, would be implemented in a decentralised manner, so the decisions could be taken by even the middle-level bank management.
The system, the sources said, won’t create any problem for banks as advances to CPSEs are supported by government guarantee.
Among other issues like a slowdown in demand from overseas buyers, long delays in settlement of dues by domestic buyers, including state-run firms, have undermined the MSMEs’ ability to sustain their business cycles.
The facility will be part of a package for MSMEs to be unveiled by the Prime Minister in early November with a view to help them meet their working capital requirements. Demonetisation and the GST had hit the MSME sector hard and resulted in job losses, a fact the ruling dispensation is concerned about and is keen to address quickly given its electoral ramifications.
MSMEs are the backbone of the Indian economy, contributing nearly 30% of the gross domestic product and 49% of country’s exports. MSMEs are also the largest employers, next only to agriculture. Over six crore such units provided employment to about 11 crore people (NSSO, 2016).
In a meeting with public sector bank chiefs recently, finance minister Arun Jaitley had asked them to step up supply chain financing to MSMEs to mitigate their difficulties.
According to a recent Reserve Bank of India study, contractual labour in both the wearing apparel and gems and jewellery sectors suffered as payments from employers became constrained after demonetisation. Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net, the central bank noted.
The banks could pocket upto 10% of the receivables when the CPSEs settle the receipts within 90 days of the transaction. In cases of delays in settlement, the buyers (CPSEs) should bear interest for such delays.
A study by Small Industries Development Bank of India indicated that post-demonetisation and post-GST introduction, the relative credit exposure initially declined for most MSMEs before recovering by March 2018. During demonetisation, many smaller districts, which were witnessing higher growth, felt greater shock compared to larger centres.
Bank loans disbursed to MSMEs fell to Rs 7.89 lakh crore in FY17 from Rs 8.77 lakh crore in FY16. It recovered to Rs 8.86 lakh crore by end-FY18.
MSMEs have long been facing a problem of delayed realisation of their receivables, leading to liquidity constraints and a key reason for many of them turning into non-performing assets. As on September 30, 2017, MSME NPAs were 8.34% of the respective outstanding loans. However, a large number of these firms depend on informal channels because of easy accessibility and availability of credit without any documentation hassles and mortgages, even though the rate of interest on such loans may be very high.