Globally, the Micro, Small and Medium Enterprises (MSMEs) segment plays a crucial role in employment generation and contributes significantly to overall economic activity. Post COVID, MSME’s are facing similar challenges as it was in 2020 during pandemic. In 2020, the MSME’s sector faced the challenges of salary payments, loss of employment, reduction in the potential capacity, etc. ie finance to MSME’s issues while many enterprises are still facing the same problem in 2022 due to inadequate consideration by the policymakers in the previous union budget of 2021-22.
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In India, the MSME sector constitutes a vast network of over 63 million units and employs around 111 million people said, Shaktikanta Das, Governor, Reserve Bank of India. The government of India (GoI) has announced several support measures to MSME’s such as credit guarantee schemes, loan restructuring measures, moratorium and deferment of interest payments on borrowings, and a few others under the broad umbrella of Atmanirbhar Bharat initiatives to help the sector come out of the woods.
Das further added, the share of MSME’s in overall GDP is around 30 per cent (GOI, 2018). The MSME sector accounts for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country. However, the sector faces operational problems due to its size and nature of business, and is, therefore, relatively more susceptible to various shocks to the economy.
The Cabinet committee approved the new definition of MSMEs on June 1, 2020, and added the turnover criteria with the investment to define them. Economists and industrialists were divided into two groups to analyse how that would benefit the finance to MSME’s to revive from COVID induced crisis.
In the current budget, Finance Minister Nirmala Sitharaman announced the allocation of Rs 6,000 crore for five years to make MSMEs more resilient, competitive and efficient. However, the specifications are missing, and this allocation might not be proved sufficient to achieve the target.
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Moreover, the budget allocation for technology up-gradation and quality clarification is reduced to Rs 80.72 crore from Rs 330 crore last year, a massive drop of more than 70%. Allocation for Interest subvention scheme also witnessed the whopping reduction of 99% and stood at only Rs 0.04 crore.
Another step taken by the policymaker is the extension of ECLGS (Emergency Credit Line Guarantee Scheme) till March 2023. This scheme would help the MSMEs borrow more from the market as the government provides a guarantee to the banks and NBFCs. The total allotment under this scheme would be Rs 5 lakh crore. Most of the schemes deal with the supply side of the sector, whereas MSME’s requires more demand-side policy actions to fight the current crisis.
In conclusion, no major reforms and policies are constructed for this sector, specifically micro industries, which have a huge employment generation share within the MSME sector. Without focusing on the MSMEs, India could not achieve higher sustainable growth. Policymakers and investors are also worried about taking decisions in the favour of MSME’s as they are responsible for their vulnerability.
Below are the few factors which are affecting the MSME’s sector.
- Crunch of Capital – SMEs in India are largely unorganized, most of the transactions carried by them are in cash and not entered properly in accounting books. In the absence of accurate transaction data, these businesses do not get the mandatory credit score and find it difficult to access business loans from the formal sector.
2. High Cost of Transaction – Business volumes of MSMEs remain low in most of the cases and hence cost of transactions remains high, both in offline and online modes of payment. This affects company’s profit margin significantly in medium to long run.
3. Risk perceptions by Banks & Financial Institutions – In absence of high credit score or collaterals, most of the banks perceive MSMEs as risky clients. This problem amplifies when the client is any start-up. Even if banks get convinced to disburse loan, rate of interest remains higher than normal. Different MSMEs have different financial requirements, depending upon the size of business, cash flow pattern and vendor engagements. All this requires tailor made services and products.
4. Cybercrime – In absence of adequate awareness and knowledge about handling digital banking and transaction activities, SME’s are found to be more vulnerable for cybercrime and phishing.
The MSMEs sector has been one of the most vulnerable sectors during pandemic because of its size, scale of business and availability of financial resources. Studies and surveys showed that approximately 95% firms were impacted negatively due to national lockdown imposed in April 2020, 70% of businesses remained disrupted till August 2020. Even after progressive unlocking, reports suggest that almost 40% businesses remained interrupted till the end of February 2021. The three critical barriers faced by MSMEs are market access, overall productivity and getting access to more finances. An average 11% decline in business volume of Indian MSMEs has been recorded because of lockdown in 2021 in comparison to 46% decline during nationwide lockdown in year 2020.
To overcome these uncertainties there are Non-Banking Financial Company (NBFCs) which plays an important role of providing finance to MSME’s . These loans fall under the unsecured category but there are only a few eligibility criteria that a business owner has to meet which are laid down to cut down the risk on the lender’s side. Lendingkart is one such NBFC that provides MSME loans exclusively for startup owners, small business owners, women entrepreneurs on a short-term basis. The range starts from Rs. 50,000 to a whopping 1 crore. The process is quick and online, the disbursement is usually done within 3 days, depending on the completion of procedures and clearing the eligibility requirements.
Other features of the loan offers – flexible repayment tenure, zero prepayment charges, no requirement of collateral/security. The loan offers vary from lender to lender, with the motive to provide finance to MSME’s.