Budget 2020: Easier credit payment and compliance spell relief for MSMEs

Finance Minister Nirmala Sitharaman announced a bunch of measures to give further impetus to micro, small and medium enterprises (MSMEs) that are struggling to meet stringent compliance norms and secure payments. Lowering the threshold for availing of invoice credit, extending easier compliance norms to majority of the micro and small firms, and waiving dividend 

distribution tax (DDT) will help the entities from the next fiscal year.

To reduce the crunch in working capital for MSMEs, the minister proposed to amend the Factoring Regulation Act, 2011. The new rules will allow non-banking financial companies (NBFCs) to offer invoice credits to MSMEs against their supplies to larger firms. The move will enhance “their economic and financial sustainability,” Sitharaman said.

According to Animesh Saxena, president of industry body Federation of Indian Micro and Small & Medium Enterprises (FISME), opening doors for NBFCs to finance invoices uploaded by MSMEs at Trade Receivables Discounting System (TReDS) will give a big boost to these platforms. Industry bodies like FISME have been seeking such a measure for long. According to its estimates, this will increase the cumulative turnover of these platforms to over Rs 1 trillion in the next 18 months.

Further, identifying the working capital credit as a major issue for the MSMEs, the minister proposed to introduce a scheme to provide subordinate debt for entrepreneurs of MSMEs. “This subordinate debt to be provided by banks would count as quasi-equity and would be fully guaranteed through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). 

The corpus of the CGTMSE would accordingly be augmented by the government,” she said.

According to the government’s estimates, more than 500,000 MSMEs have benefited from the restructuring of debt permitted by the Reserve Bank of India in the last year. In the Budget for 2020-21, the window for such restructuring that was supposed to end on March 31 has been extended by a year.

To ease the restructuring process, the minister on Saturday announced the launch of an app-based invoice financing loans product. The application will reduce tethering issues such as delayed payments and consequential cash flow mismatches for the MSMEs.

To help mid-size companies, which are successful in the domestic market but fail to compete internationally, in select sectors like pharmaceuticals, auto components and others, the Budget proposed to extend hand-holding support — for technology upgradations, research and development, and business strategy. A Rs 1,000-crore scheme, which will be anchored by EXIM Bank together with Sidbi, has been proposed for the same. While both these institutions would contribute Rs 50 crore each, Rs 900 crore debt funding will be made available from banks.

“The scheme will help the component sector to remain relevant and competitive. This has also been a long-standing request of Automotive Component Manufacturers Association (ACMA),” said Deepak Jain, president, ACMA, the largest lobby group of automotive component manufacturers.

According to Jain, enabling measures to extend invoice financing to MSMEs and creating access to working capital through a new scheme will be helpful. 

Reducing compliance burden on MSMEs, the Budget has also proposed to raise the ceiling of annual revenue to Rs 5 crore — from Rs 1 crore — for firms that need to undergo financial audit. However, the raised limit will be applicable only to firms that carry out less than 5 per cent of their business transactions in cash. According to Sitharaman, this will promote digital transaction and benefit small retailers, traders and shopkeepers. “Enhancing the turnover threshold for audit of MSMEs will facilitate ‘ease of doing business’,” said Jain.

According to Govind Lele, general secretary of Laghu Udyog Bharati, this will cover over 80 per cent of the micro and small enterprises. “Removing the burden of dividend distribution tax from firms will increase the amount of dividend for most MSMEs,” he said.

With inputs from Arindam Majumder