Covid period credit guarantee scheme helped MSME achieve higher net profit margins: RBI study

Credit guarantee scheme during Covid helped MSMEs

Emergency Credit Line Guarantee Scheme, started during Covid-19, improved profitability in certain MSMEs, according to a paper published in RBI’s October bulletin.

The primary survey conducted by RBI researchers showed that the net profit margins of MSMEs in clusters were higher than those that did not avail of the service.

“One-third of respondents responded to the query on the various schemes, and among these respondents, ECLGS ranked as the most beneficial, followed by Mudra, PLI and TReDS,” the paper said.

Trade Receivables Electronic Discounting System (TReDS), which was started by Reserve Bank of India, helps MSMEs access financing for trade receivables for working capital.

The government recently announced the success of its white goods PLI scheme for the production of air conditioners and LEDs, which is primarily designed to help MSMEs.

The study also pointed to a trend of increasing formalisation among MSMEs, saying that registrations to avail of government schemes helped this trend.

However, the study also noted that despite formalisation, most firms dipped into internal sources for financing, like retained profits, rather than relying on bank loans and long-term financial institutions.

Rent, Electricity charges reign supreme

The study also found that rent and electricity were the primary factors affecting profitability of MSMEs, followed by debt servicing and employee costs.

Therefore, government incentives targeting these areas tend to help MSMEs.

“The pressure to reduce output prices amidst rising input prices was the major economic issue faced by the firms during both pre- and post-COVID periods,” the study noted.