Ease of Doing Business for MSMEs: Even as lack of access to affordable and timely bank credit has remained a perpetual issue for MSMEs, the biggest challenge in solving the credit crisis is the lack of awareness about credit schemes by the government, according to experts. In a panel discussion at The ScaleUp Summit organised by Financial Express Online on Thursday, panellists underscored the challenges MSMEs face in raising credit or managing their working capital efficiently and suggested likely solutions to help them navigate their growth path.
The speakers at the panel titled ‘Challenges MSMEs Face in Scaling Up’ were Mukesh Mohan Gupta who heads MSME body Chamber of Indian Micro, Small & Medium Enterprises (CIMSME); Harjinder Kaur Talwar, MD & CEO at the parking and traffic management solutions provider Comvision India and Vice President, FICCI CMSME; and Rajan Raje, Chair, MSME Forum, Bombay Chamber of Commerce & Industry and Group CEO at agrochemicals company Nichem Solutions.
“The biggest problem is the lack of awareness of the government schemes and banks among MSMEs,” said Gupta highlighting government initiatives such as Emergency Credit Line Guarantee Scheme (ECLGS) launched in 2020, infusion of additional Rs 2 crore credit into the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) in the budget earlier this month, and existing Samadhan portal and facilitation councils set up by the government to facilitate the clearance of dues pending with government departments and public sector units.
Gupta suggested creating an online portal for first-time borrowers — on the lines of the Online PSB Loans portal set up by the government for existing borrowers — to raise bank credit. “Often submitting loan application at a bank branch is also a big issue for MSMEs. PSB like portal should be available for new entrepreneurs to submit and track their applications online that should have a fixed turnaround time,” added Gupta who also make YouTube videos related to MSME schemes and policies by the government.
Echoing Gupta, Raje noted that while multiple MSME schemes are in existence but the real problem has been related to their implementation and awareness about business regulations. For instance, the treatment of capital withdrawn in the balance sheet to pay salaries in the case of proprietorship or partnership firms vis-a-vis private limited companies in India. The difference in the treatment as per the company type wasn’t known to Raje until he reached out to a bank to raise additional credit.
“The bank told us our capital has been eroded since we have been withdrawing it by way of salary. That time we learnt that if you are a proprietorship or partnership unit, the salary you are withdrawing is essentially taking away your capital unlike in a private limited set-up where you can do that,” said Raje.
Nichem Solutions got its business rated for better credibility and invested in standardising and certifying its products from international test bodies. “This whole cultural change helped us to grow. MSMEs also should look at this with seriousness without which survival would be a challenge,” Raje added.
For proprietorship or partnership firms, Gupta said the government should bring them as well under the net of the concessional corporate tax rate of 15 per cent which was extended by one year for newly incorporated manufacturing companies in the latest budget. The intent to provide extension was to attract more investments and support the Make in India initiative driven by schemes such as the Production Linked Incentive (PLI).
Amid challenges for MSMEs to raise bank credit, the credit gap particularly for women-owned MSMEs has remained significant. Highlighting the plight of women MSMEs, Harjinder Kaur Talwar in her address said there is no dedicated support for women-owned enterprises, which have achieved scale, seeking growth capital to expand their business in India and also overseas.
“As an MSME owner, you have to look at everything by yourself. But if someone doesn’t show confidence in you, you tend to lose your own confidence. Banks ask for collateral even if I have plant and machinery to my credit,” said Talwar as she urged banks to define women-owned enterprises in order to acknowledge their work through better credit support. There could be some concessions offered in collateral too, said Talwar.
“Banks ask for an alternate source of income to offer loans. If I ever had it, I would have deployed that in business. Banks don’t even call us to understand the viability of the proposal. They simply reject it,” Talwar added.
The finance gap for women-owned 15 million MSMEs in India, which are around 20 per cent of the 63-million MSME base in India, stood at $158 billion with 90 per cent of such women entrepreneurs relying on informal sources of financing, International Finance Corporation’s (IFC) Regional Manager for Asia & Pacific Qamar Saleem had said at an event in October 2021.
Another challenge has been around bank guarantee as the format to secure bank guarantee in working with a corporate, or a PSU, or a govt dept, is different. Talwar urged the government for uniformity in bank guarantees to be followed by all PSUs, private entities, and others in order to save time for not just MSMEs but also banks, corporates, PSUs, others.
Importantly, Finance Minister Nirmala Sitharaman in her budget speech had announced surety bonds as a substitute for bank guarantees in government procurement. A surety bond is essentially a mechanism that provides government buyers assurance from surety providers (insurance companies) that the latter would compensate in the event of the vendor failing to oblige the contract. Sitharaman had noted that the insurance regulator Insurance Regulatory and Development Authority (IRDAI) has given the framework for the issue of surety bonds by insurance companies.