Reimagining MSME Finance
in India Post COVID-19

The effect of Covid-19 can be seen in an already dwindling world economy, which is entering its worst phase since the Great Depression. The Indian economy is no exception. The pandemic will further escalate the fiscal deficit and growing non-performing assets (NPAs), and India will feel the heat and so will its Micro, Small and Medium Enterprises (MSMEs).

MSMEs contribute to nearly 30% of India’s GDP and employ about 110 million individuals¹. The steep decline in the demand for their products and services will be further accelerated due to excessive dependence on cash based business operations, which is hindered by the nation-wide lockdown. Limited availability of workers, low liquidity for working capital and restriction on transportation will hamper procurement and sales. The Government and Reserve Bank of India have started with a considerate response with steps such as slashing interest rates, introducing moratorium for term loans, easing working capital and payment for employees from Employee Provident Fund (EPF). However, for a sector which is constituted primarily by micro-enterprises (over 90% of MSMEs are micro enterprises), these macroeconomic measures would not be enough. Most of these enterprises are informal with less than five employees and their dependence on formal sources of finance ranges from low to nil. Hence, they will find it difficult to really benefit from such provisions.

According to the Economic Survey 2017-18², data on credit disbursed by banks shows that out of a total outstanding credit of INR 26,041 billion in November 2017, MSMEs got only 17.4% of the total credit. Also, as per a survey conducted by Reserve Bank of India in 2018³, as compared to smaller MSMEs with a turnover of less than ₹10 lakhs, larger sized firms were found to have higher probabilities of having formal funding as the most important source. The on-going crisis has exposed the fault lines in the current credit system and is a good time to revisit our lending priorities. It is imperative for the government and mainstream financial institutions to safeguard the interest of these micro-enterprises. Some of the key initiatives that can be undertaken are as follows:

1. Measures to enhance access to credit - Formal credit channels such as banks and NBFCs will need to play a much larger role in making financing easily available to the MSME sector. MSME credit already forms a very small percentage of the total outstanding bank credit with credit growth to this sector showing signs of decline much before the pandemic struck. Structural changes to lending practices for this sector are well overdue.

2. Solving the liquidity crunch - Since most of the micro-enterprises depend upon regular cash flows for running their business, solving their liquidity crunch during and post lockdown should be the top-most priority. But since these units are mostly informal and have minimum ties to formal sources of credit, government will have to leverage local social infrastructures like Self Help Groups & their Federations, Farmer Producer Organisations (FPOs), Panchayats and related institutions, local Co-operatives and Civil Society Organisations’ (CSOs) network to lend immediate support to these micro-enterprises for fulfilling their working capital requirements. The government, corporates and private financiers can also come together to create emergency funds which can leverage the above channels to transfer funds directly to the entrepreneurs through innovative financial instruments.

3. Lending via innovation - Once the lockdown restrictions are lifted, it will be important for government and mainstream financial institutions to support these entrepreneurs to stabilise their businesses by fulfilling their credit requirements. However, lack of proper documentation and difficulty in credit assessment restricts access to formal finance for a large proportion of micro-entrepreneurs. Hence, to reach the maximum entrepreneurs and cater to their credit requirements, the following two basic steps are required:

• Use alternative credit history mechanisms such as cash flow history, enterprise potential / scope, community ratings etc. to assess a borrower. The traditional FIs can use the expertise of fin-tech organisations to create a safe, profitable portfolio.

• Strategic tie-ups with a large network of Common Service Centers and Rural Bank Outreach Centres (“Bank Mitras”) to ease the documentation process for the rural entrepreneurs. It will provide a great opportunity to formalise the micro-enterprise sector and the government should make the most of the opportunity.

4. Providing a cushion - The government should also provide wage support to micro-enterprises by paying a part of the salaries of the employees, beyond meagre relief through direct transfers through Jhan Dhan Yojna and PM Kisan Yojna. It can also defer their utility bills like that of electricity, gas, rent etc. for a certain period to reduce their financial burden load. Also increase in moratorium period and flexible EMIs can be facilitated by the government and mainstream financial institutions.

5. Specific measures for self-employed or owner-managed enterprises - It will be critical that the self-employed MSME units like hawkers, small shopkeepers, who do not fall into the regular or casual salaried workers in other enterprises be given the safety net needed to navigate this crisis. Government can approve such compensation subject to demonstration of reduced income, for instance, by way of documented decline in predicted revenue due to cancelled orders, restricted movement of goods and labour etc. Businesses can be asked to draw up cash flow forecasts for how they will operate if compensation were provided for a fixed time-period.

India has never seen a situation like this since its independence which makes it hard for the policymakers to find instant solutions. In these tough times, Development Alternatives (DA) and its network of partners are committed to lend their support to the government at multiple levels. DA, through its multiple initiatives across its areas of intervention, is trying to help micro-entrepreneurs, migrants, daily wage earners and marginalised members of the communities to survive through this pandemic and thrive after its effects begin to recede. It has also developed plans for co-creating solutions which will help micro-entrepreneurs, specifically in rural and semi-urban geographies to stabilise their businesses and make them sustainable.

In this time of emergency, it is important for the government, corporates, civil society organisations and other stakeholders to work in tandem and demonstrate their commitment towards creating rescue plans for the micro-enterprises, the ‘backbone of the Indian economy’, because if they fail to cope, it can have disastrous consequences for the Indian economy. It is also imperative that a strategy be drawn up to allow businesses to reopen operation in a phased manner, with social distancing norms in place. Government, institutions and businesses - both large and small - will have to work together to ensure workers' safety, be prepared for risk management in terms of phased restructuring of business operations and be prepared and open to systemic changes in business activity. ■

References:

1. https://www.cii.in/Sectors.aspx?enc=prvePUj2bdMtg TmvPwvisYH+5EnGjyGXO9hLECvTuNuXK6QP3tp4gPGuPr/xpT2f

2. http://mofapp.nic.in:8080/economicsurvey /pdf/000_ Preface_Ten_Facts_2017-18_Vol_1-18_pages.pdf

3. https://www.rbi.org.in/scripts/Annual ReportPublications .aspx?Id=1231

4. Annual Report - MoMSME 2018-19 - https://msme.gov.in/ sites/default/files/ Annualrprt.pdf

Munir Ahmed Tahir
matahir@devalt.org
and Saubhagya Raizada
sraizada@devalt.org