Indian policy makers responded very quickly to the economic crisis that stemmed from lockdowns launched to combat the pandemic. While the RBI cut interest rates, enabled loan moratoriums and implemented measures to infuse liquidity into the system, the government announced a series of stimulus packages for various segments of the economy. The focus of these were on supporting agriculture and reviving business, especially for micro, small and medium enterprises (MSMEs).

MSME Finance | 16 October 2020


Restructuring and Stimulus packages aimed at MSMEs

Redefining the contours of the MSME segment, government made structural changes by changing the classification of companies in this sector. With effect from July 1, 2020, an enterprise with:

·         plant and machinery investment not exceeding INR 1 crore and turnover not exceeding           INR 5 crore is a micro enterprise

·         plant and machinery investment not exceeding INR 10 crore and turnover not exceeding                  INR 50 crore is a small enterprise and plant and machinery investment not exceeding INR 50 crore and turnover not exceeding INR 250 crore is a medium enterprise


Further, as part of its AtmanirbharAbhiyan, the government has provided INR 3 lakh crores in collateral-free automatic loans to MSMEs. The World Bank also offered US $750 million in support to 15 crore MSMEs towards increasing liquidity access for small businesses impacted by the pandemic.


These initiatives have been launched with the best of intentions. However, the oversight appears to be that a majority of MSMEs in India are micro players. According to the MSME Ministry’s FY19 Annual Report, of India’s 6.33 crore MSMEs, 6.30 crore are micro-enterprises; that translates into a whopping 99.4%. These enterprises rarely have the paperwork, experience or confidence to avail of loans from banks and all these funds are essentially routed through banks or NBFCs.


Take for instance the government’s ‘59-minute loan’ programme through the‘PSBLoansIn59Minutes’ portal. While this was a genuine effort to provide rapid loans to MSMEs, it was not very effective as it catered only to entrepreneurs who already had GSTIN, filed income tax returns, bank statement, etc. If the compliance framework was simpler, perhaps by making PAN the Unique Enterprise Identifier (UEI) for an MSME, as suggested by the U.K. Sinha report, there could have been better response.


Another instance is the special insolvency resolution framework for MSMEs under the AtmanirbharAbhiyan. Called the pre-packaged resolution, a company prepares a restructuring plan in cooperation with its creditors before initiating insolvency proceedings to reduce the time and costs involved in the process. With the best of intentions, the finance minister announced in May, 2020, that the threshold for initiating insolvency proceedings had been raised to INR 1 crore from INR 1 lakh, to protect MSMEs from an adverse fallout of the pandemic and lockdown. However, on the ground, it is possible that creditors may now not show interest in lending to smaller borrowers in the first place as this provision does not apply to them.


Strengthening the entire ecosystem

While funding has always been a primary constraint, according to the U.K. Sinha report, delayed payments, inadequate market facilitation and lack of ease of doing business are also hurdles faced by the MSME sector, amongst many others. Very often, micro enterprises are not equipped with adequate knowledge to engage in product promotion, which in turn could result in more robust returns. Addressing one constraint without a holistic view of the entire ecosystem would therefore, have limited benefits. A simplification of the entire ecosystem is undertaken, with local level nodes that can offer hand-holding on various aspects of business, these initiatives would be more likely to yield better results.

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