India's unemployment rate hit 26% and 14 crore people lost employment as per CMIE data released recently. This is the single largest blow to the economy, thanks to prolonged lockdown in the wake of COVID-19 outbreak, and greatest and gravest threat to the demographic dividend that is (was) our strongest point.
Against this background, if any sector can help mitigate it to a great extent, it is Micro, Small and Medium Enterprises (MSME) sector. In this article, the focus will be on credit flow to the sector, presently at 2% to the mandated 20%, for strengthening the MSME backbone to largely shoulder this 14 crore unemployed burden.
As per a government report, the MSME sector contributes 31.8% of Gross Value Added (GVA), 48.10% of exports, and provided employment to 11.10 crore people. MSMEs are small units with original investment in plant and machinery at Rs 10 crore at the upper end, with sub-limits for small and micro units at Rs 5 crore and Rs 25 lakh respectively.
In terms of recommendations of the Prime Minister's Task Force on MSMEs, banks have been advised to achieve a 20% year-on-year growth in credit to micro and small enterprises, and a 10% annual growth in the number of micro enterprise accounts.
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Public sector banks have been advised to open at least one specialised branch in each district. Banks have been permitted to categorise their MSME general banking branches having 60% or more of their advances to the MSME sector, as specialised MSME branches for providing better services to this sector as a whole.
However, the progress has been tardy so far, even before COVID-19. The credit extended by banks to the MSME sector, grew only 2.6% year-on-year as of February end 2020 from ?10.67 lakh crore to ?10.95 lakh crore. Out of this, the manufacturing component, registered a negative growth of -1.1%, vs a 4.6% rise in services component.
The government in 2015, came out with the Micro Units Developments and Refinance Agency (MUDRA), a wholly-owned subsidiary of SIDBI to refinance Pradhan Mantri Mudra Yojana (PMMY) or the popularly known MUDRA loans, extended by the banks, NBFCs, and MFIs.
These loans cater to shopkeepers, fruit and vegetable vendors, truck operators, repair shops, artisans, food processors, small manufacturing and service units, etc. To build a resilient Indian economy and to improve its export competitiveness, credit flow to the MSME sector has to improve substantially.
However, bankers will not be in favour of exposure to the sector, as defaults on MUDRA Loans have been on the rise and were last reported over 12% in September 2019 as per a CIBIL report. With a lot of uncertainties around the future business potential of various activities and services post COVID-19, risk aversion is likely to grow.
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A few measures can be tried out to improve credit flow to the MSME sector.
1. Government to Step in - protection of credit-loss and credit sanctioning official
As mentioned above, with increasing delinquency and risk aversion by bankers, the government has to come up with a scheme providing seed capital (margin), underwriting credit-loss and stipulating regulatory sanction before the opening of credit decision for review by 3Cs - Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC), and Comptroller and Auditor General of India (CAG), so that bankers can afford to take genuine business risks.
2. Cluster-based approach
The United Nations Industrial Development Organisation (UNIDO) has identified 388 clusters spread over 21 states in various parts of the country, including the densely populated largest slum-dwelling Dharavi in Mumbai, known for its leather goods products.
A cluster-based approach to lending is likely to be the best strategy for optimal results in the shortest possible time to accelerate credit flow to the MSME sector.
3. Simplified loan processing and assessment
All applications should be made online, and a simplified assessment based on Nayak Committee recommendations (20% estimated turnover as working capital may be used). Local Industry centres, bodies may render assistance, in drawing up project reports, imparting finance, accounting knowledge, and consultancy services. SIDBI already (in 2017) came up with a Certified Credit Counsellor (CCC) scheme in this regard to assist the MSME borrowers.
4. Central Research Institute
We need to build an apex institute for enterprises and entrepreneurship at the national level to foster a conducive environment for the growth of entrepreneurs and development of skill sets and dissemination. The institute will be a platform for discussion and deliberations, charting a road map for the growth of MSME sector and in facilitating research and development works comprising government, academicians, industry experts, entrepreneurs and economists.
(The author is a policy analyst and commentator. Views are personal)