Interest subsidy to MSEs can lead to rise in indirect taxes

Giving interest subsidy to micro and small enterprises (MSEs) can lead to nearly three-time rise in indirect taxes for the Government, according to a report by rating agency Crisil.
Those getting rated for four years also enjoy 75 bps lower rates, the report said today.
As per the report, Rs 1 crore of interest rate subsidy to MSEs can generate nearly thrice as much in indirect taxes, create 38 jobs, and also increase revenue and profitability of MSEs - and all of it in the near-term.
It means that to create 1 lakh jobs and generate indirect taxes of Rs 8,400 crore, the corpus of interest rate subsidy required would be Rs 3,000 crore. That will also go a long way in mitigating job losses and business stress seen in the sector of late.

"We see two ways in which the Government can completely change the game for the MSE sector. One, by offering direct interest rate subsidy between 1 per cent to 4 per cent depending on performance and credit rating scheme (PCRS), and two, by subsidising annual rating reviews for 3 to 5 years," Crisil SME Ratings business head Manish Jaiswal said in a statement.
"These steps may seem like giveaways, but are actually very revenue positive for the government," he added.

PCRS has been a very successful scheme with more than 1.25 lakh MSEs getting themselves rated since 2005. It has also helped lenders identify the better-rated MSEs, which improved their asset portfolios.

But an enduring drawback of PCRS is that it doesn't offer subsidy support for re-rating and annual reviews of ratings. That is the reason why more than 90 per cent of the MSEs do not seek a re-rating the report said.
A separate analysis of 1,583 MSEs across the country showed those getting rated for a four-year period saw their average cost of borrowings falling 75 basis points because ratings had induced financial discipline and improved credit profiles.
It also improved MSE access to growth capital and facilitated 70 per cent higher borrowings.
"Continuous rating over 3 to 5 years is necessary to

develop a strong credit culture among MSEs. Subsidy support under PCRS for annual rating reviews will improve financial discipline, afford greater access to formal finance, and strengthen MSEs structurally," Crisil SME Ratings senior Director R Vasudevan said.
"It will also engender scalability and ultimately help achieve the objective of PCRS," he added.
In this context, the Reserve Bank of India may also consider recommending banks and non-banks to seek external assessment of MSEs under PCRS, the report said.
According to Jaiswal, PCRS can have at least two more positive impacts.
One, the independence of the PCRS rating scale will help the government segregate lender's assets and allow only non-toxic ones in the Government's Credit Guarantee Trust for Micro and Small Enterprises (CGTSME) scheme, whose ceiling was recently enhanced from Rs 1 crore to Rs 2 crore of collateral free financing for MSMEs, he said.

Second, it can help in early identification of eligible companies for the government's 'Make in India' initiative through its sponsorship of Zero Effect, Zero Defect, or ZED, ratings. Indeed, PCRS can be a great example of collaboration within various government initiatives for the larger economy and employment good, Jaiswal added.