The ecosystem for MSMEs needs a complete overhaul

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By B. Yerram Raju

Ease of doing business for MSMEs: The pandemic has shifted risks from the MSME sector to the zone of uncertainty. Targeting their growth is now an imperative and no longer an option. What is needed is an overhaul of the ecosystem to allow MSMEs to thrive.

The change of definition wanted to change the situation has had no lasting impact on the sector other than the reclassification of banks from one sector to another. Furthermore, the lack of risk appetite for this sector despite the lowest NPAs in the micro and small manufacturing industries of the financial sector is too well known.

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Reforms in six areas are essential to increase productivity and competitiveness; more than half of which could be implemented quickly through policy or law.

(i) Sectoral policies aimed at improving productivity in the manufacturing, real estate, agriculture, health care and retail sectors;
(ii) Unblock supply on land markets to reduce land costs by 20 to 25%;
(iii) Create flexible labor markets for industry, with better benefits and safety nets for workers;
(iv) enable efficient distribution of electricity to reduce commercial and industrial tariffs by 20 to 25 percent;
(v) Allow the largest public enterprises to potentially double their productivity. The government can grant more autonomy to PSUs and focus on creating long-term plans, linking their supply chains to the qualification and re-qualification of downstream companies; and
(vi) Improve the ease and reduce the cost of doing business.

The MSME sector is seen as a driver of employment in the manufacturing sector, while evidence shows that small business developers have also started to seek to optimize labor costs through better access to labor. technology. Their main problem remains access to credit for this transformation. It should have been made very clear to the Minister of Finance that his advice to the presidents of public sector banks would not be enough to produce results. Today, barely 23% of MSMEs have access to institutional credit. Can the RBI and state governments aim for at least 50% of MSMEs to have access to formal credit within a few years? It is a challenge that must be taken up without delay.

The nature and diversity, size and spread of the MSME sector require different institutional mechanisms. We claim superior technological prowess, but lack world-class technology for accessing credit that is aware of the sectoral and temporal diversity of MSMEs.
While artisans – rural and urban, handicrafts and looms have extensive niches and have even developed a branding effect for selling online and in online marketplaces, the core manufacturing sector is highly dependent on development. specific equity markets instead of debt markets. at one end and links with the big manufacturing industry at the other end.

Overall, Tamil Nadu, Karnataka, Maharashtra, Uttar Pradesh, Punjab, Telangana and Haryana outperform other states in terms of MSME growth. Many manufacturing clusters are located here. The reasons for the delay of other states require investigation.

Access to credit

Small financing banks, NBFCs, regional rural banks are the best choices to finance the sector with cash-flow financing and easy facilitation of guarantees from the government, as the ten PSBs and SBIs can handle the financing. the large business sector.

Even SIDBI has failed miserably to achieve its stated objectives in the statute with impunity and several funds are waiting on its doorstep. The government should restructure this institution as a gateway for the sector and a model to follow in extending refinancing and guarantees to major on-call lenders. CIBIL scores should be kept in cupboards for at least two years if the industry is to benefit from an objective credit assessment.

All lending institutions working for the MSME sector should switch to cash flow based lending from the balance sheet approach. For example, if balance sheets were still guiding credit risk, then due to weak economic growth in 2018-19 followed by severe supply chain disruptions caused by the pandemic, no MSMEs will be able to be loaned anymore. by the next fiscal year. If banks look at the order book and cash flow, credit becomes easier and the industry is likely to recover.

In this sense, Telangana State has commendable initiatives for institutional development with T-Hubs, We-Hub, TSiPASS, TPRIDE, TASK and Telangana Industrial Health Clinic (TIHCL) where the main objective is the relaunch and restructuring of micro and small business manufacturing. Let us take the case of TIHCL which is an NBFC but which has a consultancy branch where the emphasis is on relaunching companies in difficulty, by identifying problems and proposing rehabilitation solutions to the promoter.

Other issues

Data on business registration and business exit in manufacturing should be possible with data synchronization between credit institutions and governments through a better validated GIS at both levels.

District Industrial Centers (DICs) as delivery instruments require organizational development and HR interventions without delay. While the ball is in the state courts, resources are at the center. They should provide a welcoming environment for investors in the sector and all incubation and skills development centers should be synchronized with DICs.

Land continues to be another major obstacle to the growth of the sector as its price has reached the ceiling and is not accessible to the small sector. It is desirable to go back to the approach of the 1960s, when land was leased with lease rights granted for a mortgage from lenders without registration fees.

This sector needs credit with popularization and management of the strategy. The shocks of Covid -19 during the first and second waves pushed many micro-businesses to shutdown – but no statistical tally is available because the exit of companies has never been recorded. There is a need to look at the entire MSME ecosystem rather than introducing several half-baked programs that end up benefiting none.

(The author is an economist and risk management specialist. He is the author of the book “The History of Indian MSMEs – From Despair to Dawn of Hope” published in 2011.)

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