Budget 2021: The Indian Chamber of Commerce (ICC) suggested earlier that a two percent interest subvention scheme for micro, small and medium enterprises (MSMEs) on loans must be extended with enhanced coverage of three-four per cent to the extent of ₹ 300 lakh, in the upcoming budget. The two percent interest subvention scheme for the micro, small and medium enterprises on loans was extended till March 31 with some business-friendly provisions. The coverage of the scheme is limited to all term loans and working capital to the extent of ₹ 100 lakh, which the Indian Chamber of Commerce expects to be extended to ₹ 300 lakh.
Industry leaders and analysts have come up with a few more expectations that they seek from Budget 2021 for the micro, small and medium enterprises sector. Mr. Neeraj Dubey, Partner, Corporate Law, Singh & Associates, a full-service law firm, explains that stimulating access to finance for NBFCs and FinTech firms will provide a boost for the MSME sector.
Given the poor lending practices from NBFCs such as IL&FS; banks, flush with liquidityare wary of NBFCs and consequently MSMEs, as a lending segment. Since NBFCs and FinTech firms bring many more ‘new to credit’ MSMEs to formal finance than public and private banks, this risk aversion affects job creation. Furthermore, even those NBFCs with optimized models (e.g., combining physical and digital models that keep costs low while being MSME-centric) charge upwards of 20% in interest, which is expensive for many MSMEs. Together these factors limit the scale-up of innovative and effective NBFCs and FinTech players.
For ‘supplier firms’, this credit crunch is further exacerbated by delayed payments: according to Brickworks, delayed payment only from India’s 1000 largest firms amounts to INR 3.3 lakh crores. The micro-enterprise realizes income from large suppliers ~200 days after invoice submission, which reduces production cycles in a year, increases the cost of goods, reduces the resilience of supply chains, and leads to delayed tax collections.
Constituting a committee for framing guidelines for partnership/ proprietorship by Ministry of Corporate Affairs or IBBA, like the payments due to MSMEs from corporate debtors ahead of, and throughout the Corporate Insolvency Resolution Process inside the ambit of ‘insolvency resolution process costs’, treating offline and on the net sellers at par in GST to allow smaller sized MSMEs to leverage e-commerce, class-1 government officers earmarking particular hour of the day to hear MSME grievances, and more have been amongst other essential recommendations.
Beyond lines of credit from banks, enabling NBFCs and FinTech firms to access capital markets to raise debt, securitise and sell their portfolios to banks, and even insure their portfolios will drive greater penetration of formal credit. To stimulate credit from banks, expanding PSL norms to nano and mass enterprises, and backing this up with credit guarantees will help. Existing mechanisms such as CGTMSE are powerful but need process tweaks to encourage more NBFCs to participate.
3. Targeted schemes designed with a job creator focus: Large scale schemes such as MUDRA have an average ticket size of < INR 50,000 and create one job for every 11 loans granted. Almost half of all job creation through the scheme drove ‘self-employment.’ Bringing greater focus to nano and mass enterprises and expanding deployment channels to include NBFCs, and FinTech firms that work with these segments will create jobs efficiently.
4. Mainstreaming financing platforms such as TReDS and OCEN: TReDS has seen limited uptake from MSMEs and large buyers. Less than 15% of all Central Public Sector Enterprises transacted at least once in the last three months on TReDS. Fewer than 15,000 MSMEs have benefitted from the 3 TReDS platforms. While it is mandatory to register on TReDS for firms with a turnover >500 crores, reducing this to a minimum threshold of INR 200 crores will increase the number of buyers and, consequently, the number of MSMEs on TReDS. If mainstream, OCEN, a platform for mainstream cash flow-based lending, would greatly benefit thin files and no collateral MSMEs. For such platforms, incentives and innovations rather than mandates to encourage participation from key stakeholders will help. For example, supporting trade credit insurance via TReDS will enable banks to lend to MSME suppliers of low or un-rated corporates.
5. Felicitating prompt payments: Large corporates make a ‘prompt payment pledge’, an ethical commitment to pay their MSE suppliers in accordance with the The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). Section 15 of the MSMED Act talks about the liability of the buyer, provided that the period agreed between the parties shall not exceed 45 days from the day of acceptance or deemed acceptance of goods or services. This will create a movement around ‘prompt payments’ and encourage corporate boards to both track payment efficiency and link it to CFO KPIs.
Short-term suspension of Basel norms: MSME body Federation of Indian Micro and Small & Medium Enterprises, which represents 740 MSME associations involving 20 lakh members, in India, has sought a short-term suspension of Basel norms on the banking sector to ease lending. The suspension has been sought to permit the needed flexibility amongst banks essential to assistance Covid-hit MSMEs. Basel norms are worldwide norms by the Switzerland-primarily based Basel Committee meant to set a typical normal for banks across nations. It has 45 members comprising of central banks and bank supervisors from 28 nations. FISME recommended exempting banks from Basel norms for 3 years like suspending Bank Loan Ratings to assisting lending in complicated occasions.