MSME sector has been affected by credit and viability concerns and hence regulatory interventions are needed to address them.
What is the background?
There are around 50 million MSMEs, both registered and unregistered, which stands as the biggest employer after agriculture sector.
MSME sector cumulatively contributes 37.5% of India’s GDP and also account for 16% of bank lending.
However, around 8% of credit to manufacturing micro and small enterprises and 13% to medium enterprises are estimated to be gross NPAs.
What are the concerns?
Pradhan Mantri Mudra Yojana (PMMY) is a scheme to extend collateral free loans by Banks, Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) to Small/Micro business enterprises and individuals in the non-agricultural sector.
This was mainly done to enable MSMEs to setup or expand their business activities and to generate self-employment.
Selection - The scheme helped banks to push the services sector lending below Rs. 5 lakhs significantly.
However, there is also an evidence of moral hazard following the lending.
This is mainly because of adverse selection as several enterprises are non-traceable at the location mentioned in the applications.
Settlement delay - The government has put in place measures like e-Invoice, TReDX, Samadhan, GeM to ensure prompt payment of bills from public sector undertakings and central government departments.
Even so, the State PSUs and state government departments continue to delay the bills of MSMEs, leading to NPAs.
Loan disbursal – Some banks follow a multi-layered approach to lend to the sector and as a result due diligence suffers.
The branch that disburses is also expected to monitor and supervise the credit but does not have the time or manpower for that.
There is hardly any communication between the entrepreneur and the credit authority until an irregularity in the account surfaces.
What are the measures needed?
Lending norms - Under priority sector lending, the sub-target for bank lending to the micro enterprises has been 7.5% of adjusted net bank credit.
RBI has recently made that all loans to MSME will qualify as priority sector lending.
Previously, loans up to Rs 10 crore per MSME borrower was only considered for priority sector calculation.
Apart from increasing thresholds in priority sector portfolio, RBI should also frame credit risk assessment mechanism for the MSMEs.
Revival - Though MSMEs have been declared as NPAs, they have no exit route of the sort facilitated under the IBC code or the Industrial Disputes Act.
Innovative institutional interventions like the Industrial Health Clinics should be leveraged to revive and restructure sick enterprises.
Also, cluster development of MSMEs should be undertaken, thereby providing additional lending incentives.
Credit Guarantee - Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) needs to be reviewed and redefined.
The premium rates charged by CGTMSE were found to be high and the claim settlement process getting unacceptably late.
It also has a role conflict with SIDBI as the latter is the promoter of MSME and at the same time secures its guarantee for the MSME enterprises financed directly by it.
Asset registry - Banks in India only accept fixed assets as collateral while giving loans to such companies, which have most of their capital invested in moveable assets. (raw materials/inventories)
Hence, setting up of a Movable Asset Registry will make it easier for larger units within the MSME segment to borrow from banks.
Credit registry - A public credit registry could be set up for MSMEs to distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers from them.
Also, role of credit rating agencies and effectiveness of internal credit rating tools should be enhanced, apart from digitising MSME lending.
Since MSMEs are still largely debt driven and not equity driven, it is important that access to credit should be easier, cleaner, and faster.
Altogether, healthy growth of MSME is crucial for employment and growth of the manufacturing sector as a whole.
