‘MSMEs desperately need access to trusted financial partners, secure regulatory framework to boost scale’ | The Financial Express

‘MSMEs desperately need access to trusted financial partners, secure regulatory framework to boost scale’

Ease of Doing Business for MSMEs: MSMEs across India are not able to grow in scale and consequentially the real potential of the sector lays dormant.

‘MSMEs desperately need access to trusted financial partners, secure regulatory framework to boost scale’
This unorganised sector plays a crucial role in advancing sustainable and inclusive development.

By Ishpreet Singh Gandhi 

Ease of Doing Business for MSMEs: Micro, Small and Medium Enterprise (MSME) sector has emerged as a substantial sector of the Indian economy, contributing immensely to employment generation, innovation, exports, and inclusive growth of the economy. The MSME sector makes tremendous contributions to the growth of the Indian economy with its vast network and remains a key focus area as we usher into the Amrit Kal. This unorganised sector plays a crucial role in advancing sustainable and inclusive development.

Yet, MSMEs across India are not able to grow in scale and consequentially the real potential of the sector lays dormant. The ecosystem supporting MSMEs ought to expand. The sector is mostly led by sole proprietors who lack market linkages, working capital and entrepreneurial guidance to keep up with technology upgrades among other challenges. Today this sector desperately requires access to a network of trusted financial partners and a secure regulatory framework to empower MSMEs and boost their scale of operation. The key challenges for the MSME sector to be solved are:  

Mounting NPAs: Overall annual MSME Non-performing assets (NPAs) have increased from 8.6 per cent in FY19 to 12.5 per cent in FY20 and as of March’22 stood at 12.8 per cent. Now that the Covid impact is fading, the mounting delayed payments and working capital gaps are some of the key promoters to be blamed for the rise in MSME NPAs. The ​​Global Alliance for Mass Entrepreneurship (GAME) and Dun and Bradstreet India report estimated that the delayed payments in the MSME sector are approximately Rs 10.7 lakh crore, equivalent to almost 6 per cent of India’s GVA (Gross Value Added). The impact of delayed payments is further amplified due to the lack of access to easy credit. According to a report by RBI in 2019, the MSME sector alone has an estimated credit gap of Rs 20–25 trillion.  Thus payment delays and the lack of access to credit are severely impacting the cash flow of MSMEs and consequentially feeding the problem of rising NPAs.  

In addition to policy initiatives by the government, the MSME sector needs ecosystem-level support from the fintech sector to overcome these challenges. The advent of NBFCs and fintech has democratized access to credit and has enabled the market to overcome the limitations of the traditional modes of credit. Today, NBFCs are innovating new product solutions that can deliver ecosystem-level financial support to businesses. One such example is supply chain financing where under the anchor-led model the MSMEs can leverage the higher credit rating of their customers to avoid the impact of delayed payments and simultaneously cover their working capital needs. 

Dependent on aggregators: Digitization was expected to provide MSMEs with an enormous potential to unlock market linkages. This expectation has been demystified as MSMEs have lagged behind in digital adoption and consequently became dependent on aggregators to take advantage of an online platform. Many MSME players have submitted concerns that an unequal bargain was struck. E-retail is just about five to six per cent of India’s total retail. Evidently, large parts of the country have been left out by big players like Amazon, Flipkart etc.  

The government has also recognised the necessity to offer MSMEs a platform enabling democratized access to online commerce. The government’s new ONDC (open network for digital commerce) platform will make MSME businesses discoverable to all buyers on any B2C (business-to-consumer) platform, thus delivering greater exposure and better opportunity for brand development. 

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Dip in exports’ share: We have seen the MSME exports’ share dip to 45.04 per cent in FY22 in comparison to 49.35 per cent during FY21, even though the overall exports from India have increased. Industry debates have accentuated the rise in commodity prices and exports as one of the reasons for this dip in MSMEs exports. The current inflation in the economy has increased the input prices for all industries and it is likely that the exports will increase as inflation decreases. Though the lack of procedural know-how and entrepreneurial guidance are also some key challenges. 

The government has introduced various initiatives to promote MSME exports under the Udyami Bharat Programme. The recent additions to the programme are Raising and Accelerating MSME Performance (RAMP) and Capacity Building of First-Time MSME Exporters (CEBT). Both initiatives are expected to amplify India’s self-reliant economy drive under the flagship campaign of Atam Nirbhar Bharat. Designed with an outlay of Rs 60.62 billion, the RAMP scheme will be operational for a five-year period and would function as a policy, knowledge and technology provider. These schemes will enhance the Ministry’s programmes and help MSMEs to deliver globally competitive export products. The CEBT scheme is a subcomponent of The International Cooperation (IC) scheme. The CEBT scheme aims to ease the export process for first-time exporters, be it in terms of monetary support or procedural support. 

Payments: There is huge potential in solutions like adopting suitable payment solution providers (PSP) to avoid any mode of payment-related limitations. The Reserve Bank of India (RBI) has also introduced a regulatory framework approving various payment aggregators to enable secure partnerships across the sector. PSPs can support the unorganized industry players in increasing their sales, by bringing more convenience to their customers via digital payment methods. Further, simple digital bookkeeping within the same payment platform can help MSMEs manage all their transactions and maintain a huge customer base in one place. 

Also read: Exclusive: No further extension of Udyog Aadhaar license validity for MSMEs by govt

Similarly, digital solutions also offer the capability to enhance customer satisfaction, resource optimization and waste elimination. There is also a significant digital literacy gap in the MSME sector which has been recognised by both government and non-government agencies. Today, we can track various initiatives like the Digital MSMEs scheme and the Udyami Bharat Programme where digital literacy of the MSME sector is a key agenda.  It is essential for the MSME segment to use the potential presented by digitisation and for the sector to be offered affordable and accessible digital solutions like technology-enabled logistics, end-to-end digital finance solutions and reliable digital market linkages. Thus the future of MSMEs lies in digitisation, where the MSME players are empowered with digital literacy, offered flexible credit and a reliable and fair online marketplace.  

Ishpreet Singh Gandhi is the Co-Founder of StrideOne. Views expressed are the author’s own. 

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