Ease of Doing Business for MSMEs: All lending institutions working for the MSME sector need to move to cash-flow based lending from the balance sheet approach.
By B. Yerram Raju
Ease of Doing Business for MSMEs: The pandemic has transited risks of the MSME sector to the uncertainty zone. Targeting their growth is now an imperative and no longer an option. What is required is an overhaul of the ecosystem to enable MSMEs to grow.
Definition change that was sought to be a gamechanger didn’t have a lasting impact on the sector other than the reclassification by banks from one sector to the other. Also, lack of risk appetite for this sector despite lowest NPAs in micro and small manufacturing sector from the financial sector is too well known.
Reforms in six areas are key to increase productivity and competitiveness; more than half of which could be implemented rapidly via policy or law.
(i) Sector-specific policies to improve productivity in manufacturing, real estate, agriculture, healthcare, and retail;
(ii) Unlocking supply in land markets to reduce land costs by 20 to 25 per cent;
(iii) Creating flexible labour markets for industry, with better benefits and safety nets for workers;
(iv) Enabling efficient power distribution to reduce commercial and industrial tariffs by 20 to 25 percent;
(v) Enabling the largest state-owned enterprises to potentially double their productivity. Government can provide PSU’s more autonomy and emphasize on them creating long-term plans, linking their supply chains to the skilling and re-skilling of the downstream enterprises; and
(vi) Improving the ease and reducing the cost of doing business.
MSME Sector is viewed as an employment driver in manufacturing while the facts show that the small business promoters too have started looking at optimizing manpower costs through improved technology access. Their main problem continues to be access to credit for this transformation. It should have been very clear for the Finance Minister that her counseling the public sector banks’ chairpersons would not be adequate to deliver results. Today, barely 23 percent of the MSMEs have access to institutional credit. Can the RBI and state governments target that at least 50 percent of the MSMEs have access to formal credit in a couple of years? This is a challenge that needs to be addressed without delay.
Nature and diversity, size, and spread of the MSME sector require different institutional mechanisms. We claim superior technology prowess but do not have world class technology for credit access which is cognizant of MSMEs’ sectoral and temporal diversity.
While the artisans – rural and urban, handicrafts and handlooms have niche areas in spread and even have developed a brand-effect to sell online and on online marketplaces, the core manufacturing sector is highly dependent on the development of specific equity markets instead of debt markets at one end and linkages with the large manufacturing industry at the other end.
Overall, Tamil Nadu, Karnataka, Maharashtra, Uttar Pradesh, Punjab, Telangana, and Haryana outshine other states in the growth of MSMEs. Many manufacturing clusters are located here. The reasons for other states lagging behind needs an inquiry.
Small Finance Banks, NBFCs, regional rural banks are the best bets for financing the sector with cash-flow financing and easy guarantee facilitation from the government as the ten PSBs and SBI may take care of funding the large corporate sector.
Even SIDBI failed miserably in working towards its stated objectives in the statute with absolute impunity and several funds wait at its gate. The government should restructure this institution as a gateway for the sector and a role model in extending refinance and guarantees to the primary lenders just on call. CIBIL scores should be consigned to cupboards for at least next two years if the sector has to be given an objective credit assessment.
All lending institutions working for the MSME sector need to move to cash-flow based lending from the balance sheet approach. For example, if balance sheets were still to guide the credit risk, then due to slow growth of the economy in 2018-19 followed by the severe supply chain disruptions caused by the pandemic, no MSME can be lent any further by the next fiscal. If the banks look at the order book and cash flows, lending becomes easier, and the sector has every chance for revival.
In that sense, the state of Telangana has some commendable initiatives for institutional development with T-Hubs, We-Hub, TSiPASS, TPRIDE, TASK, and Telangana Industrial Health Clinic (TIHCL) where the main objective is revival and restructuring of manufacturing micro and small enterprises. Take the case of TIHCL which is a NBFC but it has a consulting arm where focus is on revival of stressed enterprises, by identifying the problems and offering rehabilitation solutions to the promoter.
Data on registration of the enterprises and exit of the enterprises in the manufacturing sector should be possible with data synchronization between the lending institutions and the governments through better validated MIS at both the levels.
District Industries Centers (DICs) as delivery instruments need organisational development and HR interventions without delay. While the ball is in the courts of the states, resources are with the center. They should have a welcome environment for investors in the sector and all incubation and skill development centers should be synchronized with the DICs.
Land continues to be another major hurdle for the growth of the sector as its price has touched the roof and is not accessible to the small sector. It is desirable to go back to the 1960s approach when lands were given out on lease with leasehold rights allowed for mortgage with lenders at no registration cost.
This sector requires credit with extension and strategy oversight. Covid -19 shocks in both first and second wave pushed many micro enterprises towards closure – but no statistical count is available because exit of enterprises was never recorded. There is a need to look at the MSME ecosystem in its entirety rather than introducing several half-baked schemes that end up benefiting none.
(The writer is an economist and risk management specialist. He is the author of the Book “The Story of Indian MSMEs – Despair to Dawn of Hope” published in 2011.)