Why MSMEs need help again and why the govt's earlier approach may not work?

While players in the financial ecosystem are opening up to the idea of receivables funding for the sector, this market needs a regulator, which a Parliament panel feels only RBI can provide

Valuations of payment gateways for the micro, small and medium enterprises (MSME) are shooting up. These gateways offer bundled services to the MSMEs which include not just receiving payments but also inventory management to help with keeping tax records. As customers even from mid income groups switch to digital payments for dealing with small shops to roadside vegetable traders, the business for the gateways has boomed. 

This could be surprising as the package of measures to help the MSMEs last year have made little headway. The “Fund of Funds” has not got even one financial institution interested to give it a shot. 

In the middle of the second Covid wave, Instamojo absorbed a tech company primarily to build up skills to better cover the 64 million odd MSMEs of India. Other payment gateways like Paytm, Razorpay, and CCAvenue are all stretching into the same business turf. 

Yet, less than a year after suffering the first Covid pandemic, thousands of MSME units are again facing devastation from the next one. The duration of the crisis may be bunched up this time but it shall certainly leave far more wrecks than the first wave. The sector contributes nearly a third of the Indian GDP (31.66 per cent of the gross value add) and totes up more than 10 million in employment. Any shake up here exacerbates inequality like no other sector of the economy, except possibly agriculture. 

MSMEs need a confidence booster:

Business confidence of the MSMEs was already low. It has trailed that of the large firms through FY21, reported Bornali Bhandari, Senior Fellow at NCAER on the Business Confidence Survey, the think tank conducts. “It is a gap which widened further in the third quarter of the…financial year”. 

Just weeks ago in early April, the central government had cleared an ordinance to allow “pre-packaged” insolvency for MSMEs. It was expected that the ordinance will encourage these small units to approach banks with far more confidence to reorder their business. They could begin life anew after seeing off the impact of Covid. Since the threshold level for coming under bankruptcy proceedings is Rs one crore of default, the prepackaged offer cuts under it. An MSME owner can offer her creditors a resolution plan before the latter moves the bankruptcy courts for recovery of money. 

It is now conceivable that the ordinance may have to be put in abeyance for some time, while the ministry of corporate affairs takes stock of the damage to the sector. Else the pressure on the owners of these units could be intense as the banks try to protect their levels of NPAs.

No off-take for GOI schemes:

Last year, as part of the revival package, post Covid, the finance ministry had announced several measures. These included:

• Rs 20,000 crore Subordinate Debt 
• Rs 3 trillion collateral-free automatic loans or Emergency Credit Line Guarantee Scheme
• Rs 50,000 crore equity infusion through MSME Fund of Funds. 
• A new revised criteria for classification of MSMEs. 
• A new registration of MSMEs through ‘Udyam Registration’ for Ease of Doing Business. 
• No global tenders for procurement up to Rs. 200 crores

There is a sort of an invisible line between the third and fourth items. All the three below have been executed without fuss. They did not need money and brought up to date archaic systems in the sector. 

Above the line, the three schemes have all seen very dismal performance. To make any headway all of them will certainly need a rejig.

Since they have not delivered, the mood in the MSME sector has not particularly improved. Bhandari notes that about 75 per cent of the universe NCAER surveyed were not aware of the Emergency Credit Line Guarantee Scheme as in December 2020. “During the survey and after it, some firms reached out to us inquiring about the details of the scheme and how to utilise it” she noted in an article in Indian Express. 

Data from the ministry itself shows the scale of the problem. The Emergency Credit Line is the largest reach out by the government for the MSMEs. The ministry had reasons to be pleased that of the total Rs 3 lakh crore it had offered, 82 per cent had been used up by March this year. 

But calculated by another measure, only 87 lakh MSMEs have dipped into this pot. It means less than 14 per cent of the total number of the eligible units in the country had been helped by the measure. By any reckoning it is difficult to believe that only such a small percentage of them needed the support especially after a country wide freeze on business, in the first quarter of FY21. 

Under the Emergency Credit scheme the government offered a loan to these units to cover their payment obligation to banks if they had become substandard due to the Covid crisis. As the ministry’s own data shows less than one in five such units applied and got the loan. It could be that they realised they shall have to pay back the loans at some stage to the government. It is not surprising. An older credit linked capital subsidy scheme to upgrade technology drew in just 76,759 units from the whole country. When the scheme was wound up last year it had written out cheques for only Rs. 4867.58 crore.

The other two schemes have performed far worse than even this standard.  One of these was a Rs 20,000 crore subordinate debt offered to the promoters as an equity support, so that they qualify for restructuring their loans taken from banks. In about nine months the sum actually used has been just Rs 40.59 crore. “Either the owners of these units have not understood what the government support shall mean for them, or the banks have not nudged them to take out the support”, said a government official. By any standards this is a disastrous level of performance. 

The scheme was principally directed at the 5,279 medium enterprises in the country, as per the 73rd round of National Sample Survey made by the ministry of statistics and programme implementation in the year 2015-16. Small units numbering 330,868 were also eligible to apply. 

As part of the Covid relief package, the government had also offered to build a Rs 50,000 crore Fund of Funds to invest in the sector. Simply put, it meant the government will offer one or more financial institutions a matching capital support of upto Rs 10,000 crore to set up a fund to invest in the MSME sector. The catch is the fund shall have to use the seed money to draw in five times the investment from the market. With the total corpus, the mother fund is expected to set up daughter special purpose vehicles to invest in a range of MSME units. In principle, it had seemed a plausible proposal. 

Throughout 2020, the MSME ministry has held discussions with several fund houses. While several had shown interest seeing the capital on offer, they had walked back once they realised the investment they shall have to raise by their own effort. Minister for MSME and road transport, Nitin Gadkari had used his deep connection with segments of the industry to get them interested but it has not made any headway. “The risks are too big, considering the size of the Indian debt market”, said a government officer involved in the discussions. The ministry has acknowledged the failure in its reply to Parliament on March 22. There has not been even one success. 

With the second wave of Covid, it is back to the drawing board for the MSME ministry, once again. Unless it draws upon a market led initiative. 

A feasible alternative: 

A simple option to ease the cash flow for the sector has till recently just not taken off. This is the factoring of the bills market. One of the biggest challenges an MSME owner faces is the mass of unpaid bills for the output of her unit. This is particularly true of the units that do not sell their products to retail customers. Since their clients are usually larger enterprises, their bargaining power is limited. 

The MSME ministry has hardly pushed the envelope even though in 2014, the RBI had introduced the concept of TReDS, a mechanism of trade receivables financing for MSMEs to be executed on a secure digital platform. The market known as factoring allows units to trade their unpaid bills at a discount. The only catch is the bill must be countersigned as an authentic document by the company on whom it is raised. This is the difficult part as many debtors to the MSMEs refuse to sign them. 

To get around the problem a Parliamentary standing committee has made several useful suggestions last year. One of those is the integration of the TReDS platforms with GSTN e-invoicing portal to enable real time sharing of data. It makes the bills more transparent and therefore fetch better value in their trade. 

RBI has also recently allowed traders on these platforms to access its online payment windows, RTGS and NEFT, without having to go through banks.  Sundeep Mohindru, CEO of one the largest such platform M1Xchange, who has secured a $10 million funding including from Amazon said the companies using his platform were able to turnaround their receivables fast enough to enjoy an effective rate of interest of close to 10 per cent per annum. He says as on 31 March, 2021, there are 7100 MSMEs and 770 corporates registered on M1Xchange. 

Noticing the potential, banks too are joining the business. Invoicemart is a joint venture between Axis Bank and mjunction. RXIL is a joint venture between RXIL, Receivables Exchange of India Ltd (RXIL) was incorporated on February 25, 2016 as a joint venture between Small Industries Development Bank of India (SIDBI) and National Stock Exchange. But the market needs a regulator, which the Parliament committee feels only the RBI can provide.