MSME loan restructuring: Indeed a relief to small firms but not enough to save crisis-ridden sector

In a win-win manner, the rare face-off between the Finance Ministry and the Reserve Bank of India (RBI) has just been settled, leaving all stakeholders involved happy. Among them, the micro, small and medium enterprises (MSME) should be the happier lot. One of the crucial outcomes of the recent Central Board meeting was the announcement of a scheme for restructuring the stressed standard assets of MSME borrowers with aggregate credit facilities up to Rs 25 crore, though subject to conditions as are necessary for ensuring their financial stability. These steps, along with the recent government initiatives, are expected to go a long way in covering the loan deficit of MSMEs by ensuring adequate, timely and reasonably priced credit, irrespective of the turns in credit cycles. Still, these will be small steps, given the precarious conditions that the sector is passing through right now. But on the positive side, it sends a strong signal about the resolve and the urgency by the government to address the concerns.

Factually, MSMEs are the engine of our economic growth. As the second largest employer after the agriculture, the sector provides 120 million jobs. The sector contributes 30 percent to the total economic output of the country and accounts for 40 percent of the exports.

However, the last couple of years saw the sector being struck by a double whammy – demonetisation and GST (hopefully with a shorter term impact), followed by adverse conditions in the credit flow (which seems to be a bit more longer term). Industry estimates that close to 900,000 MSMEs have shut down. The recent scams involving PNB forced banks to develop cold feet towards the sector. The issues around NBFCs, a key source of funds for small businesses, further dried up the flow. Gross bank credit, according to RBI, to micro and small enterprises shrank by 2.5 percent during the current financial year so far, a fact underlined by the Finance Ministry. [caption id=“attachment_5102011” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] MSME plays a vital role in the overall economic growth in more than one way. A start-up needs to grow into a SME and then a medium-sized company which in turn will graduate into a larger firm to drive the economy. Out of 15 lakh incorporated companies, 15,000 are medium-sized, waiting to bloom into big corporates. However, any impediments and lack of credit during this growth will upset this graduation process. The government knows this well and hence has been quick to see the downside risks of stagnant or negative funds flow to MSMEs and stepped in with the launch of support and outreach initiatives for the sector. The policy unveiled early this month promises to enhance MSMEs access to credit by launching the 59-minute portal for credit up to Rs 1 crore. The policy package also consists of a 2 percent interest subsidy for all GST registered MSMEs, on fresh or incremental loans. However, it may take some time and many more strong decisions on the policy front for the government’s and apex bank’s programmes to play out in full. The sector still needs more positive support like land at competitive rates, lower power tariff, easier rules for inter-state business and direct and indirect tax breaks. It is also imperative that new growth triggers emerge from within the sector. The disruptive fintech players can also play a crucial role to hand-hold the sector with a tech-driven ecosystem. Factors such as costs, physical presence, and lack of incentives as well as absence of scale have led to a sort of financial disintermediation in the MSME segment. But fintech players can easily overcome these and new odds by lowering cost, thanks to efficiency gains spurred by technology. They can also widen their use-case utility by rolling many functional aspects such as finance, advisory etc into a single module. At the end of the day, only big steps now can pull the MSME out of the woods. (The writer is Managing Director & Chief Executive Officer of LivFin)