The Diwali gift provided to the micro small and medium enterprises (MSMEs) by Prime Minister Narendra Modi is quite timely and should provide a lot of succour to this sector. The problems of the MSMEs have been quite varied ranging from credit, receivables, exports, sale etc. Presently, at the institutional level, there are several processes and systems in place to boost this sector. However, the success has been limited given the breadth of this segment across all segments. In order to address these issues, several steps have been announced and prima facie look good for the MSMEs.
Five of these measures would warrant some comment.
A major malaise for this sector has been obtaining credit and this is where the FINTECH companies would be involved going ahead. The scheme to have loans given in 59 minutes sounds cool and it will be interesting to see how this works out. Presently, if one looks at the structure of overall credit in the country, over 99 percent of the accounts have loans of less than Rs 1 crore and accounts for around 40 percent of total outstanding credit. This of course includes loans to individuals as well as farm loans. Therefore, it is not to say that such loans are not being given today but the delivery mechanism is to be made simpler.
Presently, when it comes to loans less than Rs 10 crore there is no need of collateral and hence when it is Rs 1 crore it would not be required. But this would be an online platform where it can be expected that if the SME has a PAN, GST and a CIBIL score, the basic cleanliness check is done. From then on, it will have to map to the lending agency which can be a bank or NBFC which joins the platform and loans are disbursed. This will be different from the present system where there is some physical inspection that may be conducted by the banker and books examined.
While this is a very good idea for SMEs, it would have to be seen if the delinquency rate moves up in the absence of such physical checks. One may assume that while there will be deviances, the quantum would not be large given the size of the loan. The same logic which holds for retail loans will hold wherein normally one will not expect large numbers of households to default at one point of time. It will get pronounced especially if steps like demonetisation are taken when this sect, in particular, was adversely affected.
The government is also talking of giving some subvention of 2 percent in case the unit has a GST registration. This is an incentive to get the GST registration done which will be good for the nation as a whole. There is also an increase in interest rate subvention for both pre and post-shipment of exports. Presently around 6-7 percent of credit goes to this sector. Given a growth rate of 10 percent in this segment and a subvention cost of 2 percent on say half of this incremental credit which would be less than Rs 1 crore, the burden for the government would not really be high and be around Rs 500 crore. The clue here is to ensure that the lender is compensated by the government in a seamless manner and arrears are not built up or else there would be slack in the willingness to lend.
The third important step announced relates to receivables which are a major challenge for the MSMEs. By ensuring that all companies which have a turnover of above Rs 500 crore register for the trade receivables platform ‘TReds’ discounting becomes automatic as it will be on the electronic platform which can get automatically monetised. This will be a big benefit for the SMEs as it will save a lot of time and money in capital which otherwise gets locked up. The fact that it is a transparent competitive platform means that the MSME will get the best rate on this platform. This will become more significant at times when there is a slowdown in the economy where the larger companies are in higher arrears.
Fourth, the central public sector units would be mandated to purchase 25 percent of their requirements from MSME,s. Now this is an increase by 5 percent over the existing 20 percent, which is good news. The government, however, will have to follow-up with the payments as often the delays in getting payments from the government tend to be higher given the paperwork involved. There should ideally be a scheme where the payment is automatic so that the SMEs do not have to look for alternative finance for such receivables.
It will be interesting if the government gets on to the TReds platform as its purchases would be in large numbers in general. One may expect that the state governments too would follow with similar incentives for the SMEs.
The fifth important announcement made is in encouraging more SMEs to register in the Government e-marketplace (GeM) where buyers and sellers meet and can trade. This is a very good measure that exists and from what has been stated the participation of SMEs has been rising which helps them to widen their canvas of operations. There are already over 6 lakh products being dealt with involving almost 2 lakh buyers and sellers.
The present package given to the SME sector is noteworthy and falls well within the ambit of the 'Make In India' campaign wherein there is a serious attempt to strengthen the links of this sector with the rest of the economy. While these steps are positive, it can be expected that the immediate impact would be limited and gradual. It can be expected that put together these measures would have a significant impact in the next couple of years as more units gets integrated with the GST and the GeM and are able to leverage the credit portals.
(The writer is Chief Economist, CARE Ratings; and author of Economics of India: How to fool all people for all times)
Updated Date: Nov 02, 2018 19:23 PM