How has COVID-19 impacted the Finance vertical of the MSME Sector?

According to the Annual Report of the Department of MSME (2018-19), there are 6.34 crore MSMEs in the country. The MSME sector contributes around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output by creating employment for around 120 million people and around 48% of the overall exports from India.

The MSME sector helps in achieving inclusive growth by providing Rural Entrepreneurship, Non-agricultural livelihood, Female participation, Better payments, and cheap products with quality.

What is Micro Small and Medium Enterprises?

Impact of Covid-19: As an important part of the domestic and global value chain, the plight of MSMEs due to COVID-19 is a big concern.

Problem Aggravated due to Covid-19:

• Declining Revenues: MSMEs are already struggling due to problem of Finance, issues with the procurement of raw material, access to modern technology, infrastructure-related challenges, lack of entrepreneurial, managerial, and marketing skills and lack of professionally managed top management along with ineffective marketing strategy, lack of skilled manpower, multiplicity of labour laws and complicated procedures, along with the Covid-19 pandemic has worsened the condition of this sector.
• Unavailability of Cash: The long tenure of lockdown had raised an issue of the existence of MSMEs primarily due to the unavailability of cash which subsequently resulted in job losses.
• Lack of Labour Availability: The return of migrant labourers has created an issue of lack of labour availability and higher cost to call them back.
• Loan Against Collateral: Loans to MSMEs are mostly given against property as collateral but in times of crisis, the value of property declined and that inhibited the extension of new loans.
• Massive disruption in the supply chain: Unavailability of public transport increased the transportation cost and cost of supply.
• A complete collapse of demand in the market at the same time due to the cost of utility services like Bank charges, fixed overhead expenses, fear psychosis sensationalized by media, and news channels, the revenue of the MSME had declined.
• Liquidity Crunches as revenue decreased by 20-50%.

Positive Consequences:

• Some enterprises innovated their ways by shifting focus from non-essential commodities towards essential commodities; like production of hand sanitizer and toiletries, PPE kits, reusable masks, etc. and are able to survive in tough times.
• To ease the financial distress of the MSME sector during this period, the Reserve bank of India announced several measures such as a moratorium on term loans, and easier working capital financing. Some public sector banks have also opened up emergency credit lines for businesses.
• Due to lack of employment, various working-class people had entered in entrepreneurship by starting local area business which had a competitive advantage and started providing employment to others.

Various Measures taken:

• National report for MSMEs by Global Alliance for Mass Entrepreneurship (GAME) outlines a three-stage approach consisting of ‘survive, revive and thrive’-Survival is the first priority and the aim should be to ensure that large numbers of MSMEs are not immediately wiped out. However, those that survive will need to be helped to revive as the economy gets back to normal. There is a need to address the long-term objective of how MSMEs can actually thrive and support a faster growth rate for the industry.

Significant measures announced under Atam Nirbhar Bharat package-

• Subordinate Debt for Stressed MSMEs (Allocation of Rs. 20,000 crores) -This scheme aims to support stressed MSMEs that have Non-Performing Assets (NPAs). Under the scheme, promoters of MSMEs will be given debt from banks, which will be infused into the MSMEs as equity.
• Equity infusion for MSMEs through Fund of Funds (Allocation: Rs. 50,000 crores).
• Global tenders to be disallowed up toRs. 200 crore to protect Indian MSMEs from foreign competition.
• Relief to Contractors by providing Extension of up to 6 months.
• Use of Fintech and E-market linkage to be promoted.
• Interest Subvention of 2% for MUDRA-Shishu Loans.
• Collateral free Automatic Loans for MSMEs.

Various Government schemes to promote MSMEs-

1. Udyami Mitra Portal: launched by SIDBI to improve the accessibility of credit and handholding services to MSMEs.
2. MSME Sambandh: To monitor the implementation of public procurement from MSMEs by Central Public Sector Enterprises.
3. MSME Samadhaan: MSME Delayed Payment Portal will empower Micro and Small entrepreneurs across the country to directly register their cases relating to delayed payments by Central Ministries/Departments/CPSEs/State Governments.
4. Digital MSME Scheme: It involves usage of Cloud Computing where MSMEs use the internet to access common as well as tailor-made IT infrastructure.
5. Prime Minister Employment Generation Programme: It is a credit-linked subsidy program under the Ministry of MSME.
6. Revamped Scheme of Fund for Regeneration of Traditional Industries (SFURTI): Organizes traditional industries and artisans into clusters and make them competitive by enhancing their marketability & equipping them with improved skills.
7. A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE): Creates new jobs & reduce unemployment, promotes entrepreneurship culture, facilitates innovative business solution, etc.
8. National Manufacturing Competitiveness Programme (NMCP): To develop global competitiveness among Indian MSMEs by improving their processes, designs, technology, and market access.
9. Micro & Small Enterprises Cluster Development Programme (MSE-CDP): Adopts cluster development approach for enhancing the productivity and competitiveness as well as capacity building of MSMEs.
10. Credit Linked Capital Subsidy Scheme (CLCSS) is operational for the up-gradation of technology for MSMEs.

Way Forward:

The RBI has been trying to infuse liquidity into the MSME sector but given the structural constraints, it has had limited impact. The government can provide tax relief (GST and corporate tax) and provide liquidity to rural India to trigger demand for MSME products. The Government should have a database of all MSMEs registered in India through the MUDRA Scheme and Udhyog Aadhar Memorandum.

A credit guarantee by the government can help as it assures the bank that its loan will be repaid by the government in case the MSME fails to repay. If such defaults happen, credit guarantees are shown as a departmental expense in the Budget.