MSMEs—Solutions on the Anvil?
Can MSMEs Sort Out Cash Flows?
Generally for MSMEs, let’s first look at the slew of announcements the Finance Minister made at the Union Budget.
- In a boost to MSMSEs, turnover threshold for audit raised to Rs 5 crore from Rs 1 crore
- Govt asks banks to extend restructuring MSME NPAs for one more year, which has a deadline of March, 2020
- FM unveils new scheme to provide subordinate debt to MSMEs
- Amendments to Factor Regulation Act to help MSMEs to raise invoice financing
- MSMEs to benefit from e-market place working on single platform for exchange of goods
Cash Flow and lack of cash being certain critical factors that impede MSMEs, the move from the Government to offer debts is welcome. However the Government should encourage more fintech lenders to permeate the market. Digital finance lending platforms offer unsecured loan products and are found to be much more comfortable with higher risk profiles. They use sophisticated credit assessment tools to determine enterprise potential not just on the basis of historical cash flows and general financial information but also by calculating future potential to scale and be productive.
The Union Budget 2020 focuses on creating a coherent and viable policy framework for lending to the MSMEs, including making it a core business activity for banks. The extension of restructuring NPAs for one more year is a right move in this direction. Policy hindrances in linkages between platforms should hopefully be addressed now. The Government has thereby pre-empted loans disbursed under the MUDRA scheme from turning into NPAs, which have in fact doubled within the last one year. The government now must avoid a target-driven approach in loans disbursal under this scheme.
Currently, only businesses having a turnover of more than Rs 1 crore are required to get their books of accounts audited by an accountant. In order to reduce compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, the FM has proposed to raise by five times the turnover threshold for audit. This hopefully should provide succout to a huge number of MSMEs.
The FM also informed that an app-based invoice financing loans product will be launched. This will obviate the problem of delayed payments and consequential cash flow mismatches for the MSMEs. She also assured that necessary amendments will be made to the Factor Regulation Act 2011 to enable NBFCs to extend invoice financing to the MSMEs through TReDS, thereby enhancing the economic and financial sustainability. This subordinate debt to be provided by banks would count as quasi equity and would be fully guaranteed through the Credit Guarantee Trust for the Medium and Small Entrepreneurs.