Atmanirbhar loans: Do MSMEs want anything more than 3.7 lakh crores?

Source : Sify
Author : Sairaj Iyer
Last Updated: Fri, May 15th, 2020, 17:50:53hrs
Atmanirbhar loans: Do MSMEs want anything more than 3.7 lakh crores?

New Delhi: Micro & Medium Small enterprises (MSMEs) on Wednesday emerged as the major benefactor of Finance Minister Nirmala Sitharaman's Atmanirbhar Abhiyaan fiscal stimulus package. Six of the sixteen policies that were explained during the press conference were directly related to MSMEs. Of the Rs 5.94 lakh crore worth of a package, Rs 3.70 lakh crores has been exclusively directed towards MSME sector.

Here is a brief list of the MSME package:

1. Rs 3 lakh crore collateral free loans from banks with 100% principal and interest guarantee cover by the government. This is a 4 year tenor with moratorium for 12 months. 45 lakh units can resume business activity and safeguard jobs, said a ministry document. Eligibility criteria includes borrowers to have turnover of at least Rs 100 crores or outstanding loans of up to Rs 25 crores.  

2. Rs 20,000 crores as subordinate Debt fund for stressed SMEs. 2 lakh SMEs which are either functioning or even stressed NPAs are to benefit.  

3. Rs 50,000 crores as equity infusion through a fund of funds packages. The package will also help MSMEs get listed on stock exchanges to access equity capital.  

4. New definition of MSMEs: Investment limits have been revised and additional criteria of turnover has been revised. The ministry says that such measures will encourage micro, small and medium MSMEs to raise investments. The distinctioon between manufacturing and service sector has been removed.  

5. Global tenders in government procurement tenders up to Rs 200 crores have been disallowed to enable domestic MSMEs who have faced "unfair" competition.  

India Inc's initial response was optimistic, and some also expressed their concerns. A BusinessToday report quoted MSME veterans revealing their concerns. Animesh Saxena, President for Indian Micro and Small & Medium Enterprises was quoted in this report as saying that the industry was on a ventilator and needed oxygen and support and not medicine that would work in three months. "If they are not given benefit and immediate support they will not survive 3-4 months of no business," Saxena was quoted as saying in the BT report.  

Meghna Suryakumar, Founder and CEO, Crediwatch, an information intelligence platform in elaborated on the collateral-free loan. She said, "Setting the threshold for eligibility (Rs 25 cr outstanding and Rs 100 cr turnover) is helpful but it is yet to be seen whether public sector banks will underwrite such unsecured loans at a faster pace on the back of these terms. The real-need of the hour is to move to cash-flow based lending."

On the aspect of global tendering, Suryakumar explained, "MSMEs working as ancillary units, autos and infrastructure for example, lose the bidding on smaller deals. The move should improve the competitiveness of Indian MSMEs on government contracts. It should also see an increase in registration by MSMEs and Mid-Market businesses on such platforms.

Other concerns revolved around the size - could it have been larger? Could more MSMEs access collateral free loans? Also, will banks be able to lend to MSMEs more swiftly?

The MSME tale has been a case of opportunities and challenges. For starters, 6.34 crore MSMEs employed 12 crore workers according to a 2015-16 National Sample Survey study. Lending, although has been a perennial issue.  The aspect of swift loans prompted former Finance Minister Arun Jaitley to announce in September 2018. The idea was to allow lenders and borrowers a common platform. Later, the UK Sinha committee report documented critical findings related to the sector. This June 2019 RBI report estimates the credit gap in MSME sector in range of Rs 20 - 25 lakh crores or at least six times of the MSME stimulus announced on Wednesday.  

The thresholds are a cause of concern. The policy document reads SMEs with turnover of over Rs 100 crores could get government guarantee-covered loans. That works out to Rs 6,66,666 for the MSMEs. That, for the size of an MSME of over Rs 100 crores in turnover? The number can go higher only if the ceiling of Rs 3 lakh crores gets reworked upon or in the likelihood of fewer MSMEs seeking a collateral free loan.

Also, MSME ministry data says smaller MSMEs such as micro enterprises constitute 99% of MSMEs numbered at 6.30 crore. The total number of MSMEs stands at 6.33 crores. Collateral-free loans cannot be accessed by smaller MSMEs. The ministry defines micro enterprises as manufacturing companies with investment in plant & machinery not exceeding beyond five lakh rupees. Micro services could include those with investments not exceeding ten lakh rupees. Essentially, the policy works in favour of the bigger MSMEs, not the smaller ones.  

Obviously, the government cannot dole out loans to everyone - it evokes the question of 'What if...' However, the UK Sinha committee report indicates bulk of MSME NPAs were those with turnover larger than 100 crores. And it is this section of MSMEs that a major part of the package is geared towards.

Here is the graph: 

Sinha committee report has a number of critical points for policy-makers, here are some of them:  

1. Reprieve from Personal Loans by MSMEs: Data points suggest MSME promoters could be using retail loans in order to fund their business. In other words several MSMEs are paying for their business from personal loans. As on Mar'18, this number stood at Rs 9.04 lakh crores according to TransUnion Cibil. "These are retail borrowings and are not classified as MSME loans despite retail borrowers declaring the end-use as loans under MSMEs."  

2. Collateral Free-Loans: Policies exist for MSME collateral free loans up to Rs 10 lakhs. The committee sought to increase ceiling to Rs 20 lakhs.

3. Insurance: "Design of insurance products that address the special needs of MSMEs after a catastrophic event should be encouraged."  

4. Disaster: "Currently, on declaration of a natural calamity, banks offer a rescheduling of existing loans. This has involved conversion of outstanding limits to Working Capital Term Loans, moratorium on repayments of old loans, some amount as fresh loan, etc. While this provides some immediate succour, the overall leverage increases."

Besides these, several unverified tweets expressed their hope for a waiver on interest during moratorium period. The Finance minister on Wednesday hinted that more reforms could be announced. That, under the Rs 20 lakh crore grand Atmanirbhar Bharat Abhiyaan. 

Speaking about moratorium,Thomas Isaac, Kerala's Finance Minister tweeted, "If the first days package of Union FM is a fair sample the Rs 20 lakh stimulus is going to be deeply disappointing. The actual outflow resources directly from the budget is only around Rs 30,000. At least the interest payment of MSME sector during the moratorium  could be waived."

There has been optimism as well. Uttar Pradesh Chief Minister Yogi Adityanath was reported as saying that an online loan fair for MSME sector would soon be organized. He said 36,000 domestic businesses in the state will get loans ranging from Rs 1,600 to Rs 2,000 crores from these online fairs. Majority or over 14% of MSMEs in India are registered from Uttar Pradesh. The UP MSME sector employs at least 1.5 crore workers. 

Overall, the MSME package may help MSMEs pay some dues via a loan, compete with global giants, and get paid for government projects within 45 days. The previous demand of free electricity and direct support to wages of workers, however have found no mention. Another area of concern was low demand from customers in days of lockdown that has dented the aspirations for several MSMEs. With the lockdown in place, not many customers are buying apparel, footwear, clothes, and furniture. Demand has also dipped in services such as transportation, real estate, and professional services. These are namely areas that constitute as the top-10 items in MSME sector. Reviving demand could be a part of another package. Again, all eyes will be on the Finance Minister. 

More reactions:

Dhiraj Relli, MD & CEO, HDFC Securities, "Some clever structuring of the package ensures limited immediate impact on Government spend / fiscal deficit. Sops to MSMEs could help their lenders i.e. Banks/NBFCs to improve their recoveries, write back some write offs and postpone slippages/recognition of NPAs. Sectors like Banks/NBFC, power generating companies and sectors that have high linkages with MSMEs could see an uptick in their valuation, though partial impact was already visible on Wednesday.  Worry about rating downgrade could get postponed and we may have to see the next set of announcements by the FM to get a better handle on this."

Dr Joseph Thomas, Head-Research, Emkay Wealth Management: The measures are more of supply side and there is very little that is on the demand side. Probably, the future announcements may contain a more balanced coverage of demand and supply side factors. Demand side factors generally tend to work faster as it is oriented towards the consuming unit directly.”

Amar Ambani, Sr President, Yes Securities, "The package announced by the finance minister is effectively designed to be impactful, yet not burden government finances. The policy has been crafted largely around liquidity needs of employees, MSME and NBFCs. Market will eagarly await for announcements around land reforms, labour and law in the coming days. Collateral free loans for MSMEs with a full credit guarantee by the government will be highly fruitful. Likewise for the Rs300bn infusion in debt papers of NBFCs."

Rajesh Goenka, MSME development Forum in an ANI story: MSME is the spine of the country... "They produce the highest number of jobs. MSMEs work as an economic army in the country. Just like doctors, MSMEs work in frontline and maintain supply chains. We were facing a few problems like rents, pending dues, liquidity problem. We have brought these issues into PM's notice as well."

Image: A file picture of Finance Minister Nirmala Sitharaman