Budget 2023 | Most MSMEs doing well but financing still an issue, says FISME secretary general

Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises

India’s micro, small and medium enterprises (MSMEs) are doing well as the economy has recovered from the pandemic shock, but firms continue to face financing troubles, a top official of an industry body said.

While payment cycles remain elongated, MSMEs continue to struggle to access bank and alternate finance, Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME) told Moneycontrol in an interview. Edited excerpts:

The last two years have been tough for all sectors, though we are seeing a recovery now. What is the state of the economy, especially with reference to the MSMEs that you represent?

The feedback that we have is that the economy has certainly recovered from the COVID-induced slowdown, but the growth may not be as high as perhaps we had expected, in terms of gross domestic product (GDP) growth of about 8 percent.

But even 6 percent is not bad keeping in view that the global situation is not very conducive ― we have a war going on, and inflation and outright recession in some of the developed markets which is also impacting our exports.

So, keeping all these factors in mind, I think, we are doing OK as an economy, and MSMEs are also doing well.

Has the global slowdown started hitting the manufacturing side already?

Gems and jewellery, garments and auto components have felt the impact, but rest of the sectors are still doing OK. All these three areas are demand-elastic ― whenever you have money, only then you go for them.

What needs to be done now in Budget 2023?

We have had two meetings with the finance minister. What we have said is that select reforms and policy interventions will have the same impact as large (fiscal) measures. We are aware that in the current situation we can’t expect the government to start doling out money. And we had already passed through the COVID-19 period spending a lot of money. But I think, the government will be quite prudent not to spend too much now.

Also read: Budget 2023 | Industry expectations and state of the economy

What we are proposing is only reforms primarily. There has already been headway on our request for use of surety bonds instead of bank guarantees. The second thing is in the public procurement area. We have suggested ways to induce quality in government purchases. We have to see that government purchases support quality manufacturers and we don’t decide only on the basis of cost. Because, if everything boils down to the price, it is then a race to the bottom. So, people would start cutting corners, reduce quality. And then, if you are producing third-rate products, you would not be able to export to the world when there is global competition out there.

Are there issues on the financing side as well?

We have also suggested reform in banking and finance with respect to ratings. Many MSMEs, particularly the larger of the small and medium enterprises, are required to get loan ratings from credit rating agencies. And it has a lot of cost component involved. Nowhere in the world, especially in the developed countries, MSMEs are subjected to this mandatory requirement.

We feel the banks are capable to judge MSMEs ― it is not about large-scale loans. If for a loan of Rs 4-5 crore you can’t rely on the banks’ ability, this is a very pathetic situation. Also, the credit rating agencies are employing the same model for MSMEs that they employ for the large industries, and the result is that no MSME has got investment grade rating.

Watch: Budget 2023 | MC Budget Manifesto | Wishlist On Economy For FM Sitharaman

We feel that (credit rating) is not needed. What they do in Europe is, they club MSME loans with retail loans and the bundle is rated. We have suggested that a committee must be formed to resolve this issue.

There is also the issue of prepayment penalties. During COVID-19 when firms tried to change banks, they discovered they would charge penalties of 2-4 percent. For micro and small enterprises, all banks have signed a code to not charge pre-payment charges, but they are still charging.  We have requested the Union government to intervene.

Has the government’s emergency credit guarantee scheme helped the MSMEs?

It has been a roaring success. The number of beneficiaries has crossed 1.25 crore. It has served its purpose for the specific period, it was obviously to help firms tide over the crisis period.

Of course, MSMEs need funds, that is why a lot of firms were interested in changing banks. If certain sectors are doing well, they would like to expand. The requirement of funds is huge for the MSME sector.

I think we have to ramp up our resources. The government also has to see that they don’t take up too much money out of the coffers of the banks. If the government (bond) yields rise, most of the banks would be happy parking their funds (there) and they would not take any risk (to lend to businesses). That would be unfortunate. If the government remains financially prudent, they would help competition in the banks.

Do pending payments to MSMEs continue to be an issue?

The Trade Receivables electronic Discounting System (TReDS) needs to take off… payments to MSMEs are routinely delayed. Financing remains a challenge.