MSMEs get a helping hand in Budget but challenges in financing remain

According to CRISIL Ratings' bi-annual 'MSME Report' (June 2023), the debt need of the sector is more than Rs 100 trillion. Of this, 70% is for working capital requirements alone

“The universe of companies on platforms like ours will go up. Now, as far bank funding is concerned, we will have to wait for the central bank’s guidelines,” says 

Ketan Gaikwad, managing director (MD) and chief executive officer (CEO), Receivables Exchange of India (RXIL). It is his way of putting it across that measures in the Union Budget for micro, small, and medium enterprises (MSMEs) have many moving parts.

Consider the move to lower the turnover threshold for buyers to Rs 250 crore from Rs 500 crore on the Trade Receivables Discounting System (TReDS), an invoice discounting platform. It would bring an additional 22 central public sector enterprises and 7,000 companies into play, according to Finance Minister Nirmala Sitharaman. But few will go public on a long-sticking irritant: Big firms going roughshod on MSMEs on bill settlements. As for the credit side, banks have been nudged to accommodate MSMEs even if such enterprises are in the special mention account category for reasons beyond their control (this is to be supported through a guarantee from a government-promoted fund). Off record, bankers say they would not like to run afoul of the supervisory staff of the Reserve Bank of India (RBI). What if such loans were to turn into non-performing assets? And given the forbearance nature of these decisions, bankers would prefer to look to the RBI for guidance.

Credit crunch

The 'Report of the Expert Committee on MSMEs' of 2019 (Chairman: U K Sinha) noted that most large firms deal with MSMEs on a credit basis; and given that buyers do not honour invoices on time, these firms face a financial crunch. MSMEs, on their part, hesitate to file complaints against large buyers, or get into legal battles to enforce contracts. What you have in effect is buyers using MSMEs as an alternative to banks. While discounting systems such as TReDS have provided a partial solution, the problem persists. 

According to CRISIL Ratings’ bi-annual ‘MSME Report’ (June 2023), the debt need of the sector is more than Rs 100 trillion. Of this, 70 per cent is for working capital requirements alone. “Only a fourth of the debt is sourced formally; the cost of capital from the informal segment is extremely high. Thus, understanding the working capital needs across sectors and clusters is critical,” says Pushan Sharma, director (research), CRISIL Market Intelligence & Analytics. The same report had it that a fifth of MSMEs by value is expected to witness an increase in working capital compared with the pre-pandemic (FY20) level. Plus, assessing their working capital is a challenge because of limited information and lack of high-frequency data points. CRISIL Ratings addresses this lacuna through primary research and proprietary analytics of its data pool.

The Financial Stability Report of June 2024 says the number of invoices uploaded and financed on TReDS grew by more than 56 per cent in 2022-23, with the success rate remaining steady at 94 per cent. But Gaikwad points out: “Only 82,000 MSMEs are registered on all the TReDS platforms (RXIL, Invoicemart and M1xchange) out of 46.9 million firms registered on the Udyam portal, so there is immense potential”. His counterpart at Invoicemart, Prakash Sankaran, is of the view that “volumes on TReDS have seen a steady rise since inception, much of it after the pandemic. We have to keep adding enablers to widen participation. We are on our way to TReDs 2.0”.

Ask Ashwani Kumar, MD and CEO of UCO Bank, how he views the plot and he says: “Building robust technological infrastructure and enhancing customer awareness are the main challenges required to be addressed. We have developed in-house capability to handle them”. He adds, “this government initiative will facilitate ease of flow of credit to MSMEs which will help in entrepreneurship building, employment generation, credit growth in MSMEs segment which ultimately leads India to a $5 trillion (economy)”. This is politically correct.

What you can’t get away from is what was highlighted in Sinha’s report. Data shows that the average debtor days for MSMEs was quite large and consistently running over 90 days. That gross working-capital cycle (days) for these firms was always 300 days (“very high”, according to the report). This led to a higher working-capital cycle, high inventory-turnover ratio; and the very small bandwidth available from the creditor made things worse”, said the report. No subsequent study has been done on these issues.

Then you have the larger structural issue of liquidity: Of the two-decadal high credit-deposit (CD) ratio at a tad below 80 per cent. It’s unlikely that banks will go all out to meet MSMEs’ needs. Add the pressures of maintaining high-quality liquid assets under the RBI’s draft liquidity coverage ratio framework. This is to tackle retail deposits outflows resulting from internet and mobile banking. The proposed changes are to come into effect from FY26; and it could well be that from the first half of FY25, banks may relook at their credit growth and business plans, afresh.

Tough business

Then you have issues beyond the pale of finance. For example, there is a need to examine and rationalise building regulations to augment manufacturing capacity. 

The Global Alliance for Mass Entrepreneurship, in its report in 2023, was categorical that MSMEs are integral to the growth of the economy and creating opportunities for the 90 million workers who will be looking for jobs by 2030.

According to the Ministry of Statistics & Programme Implementation, the share of MSMEs in all-India manufacturing output in FY22 was 35.4 per cent. Data Dissemination Portal of Directorate General of Commercial Intelligence and Statistics has it that the share of export of MSME-specified products in exports in FY24 stood at 45.7 per cent.

Small is still beautiful.