India’s micro, small and medium enterprises (MSMEs) are struggling to survive an unprecedented crisis. Experts are still debating at the end of the coronavirus pandemic how many of these small companies will stay afloat or remain as standard accounts on the books of banks.
How bad is the situation in the MSME sector?
Typically, MSMEs are the first to take hit in an economic downturn compared with big companies. This time too, many MSMEs are hit hard due to the onslaught of the COVID-19 pandemic. The demand on the ground has slowed to a trickle. Adding to the woes, a good number of skilled workforce has moved back to their home states complicating the matter further. The crisis has impacted several MSMEs so hard that many of these entities are unable to even pay salaries to existing workforce and pay rentals, according to industry officials.
How critical is MSMEs to India?
These firms are very important in the context of employment generation. India’s MSME sector contributes over 28 percent of GDP and more than 40 percent of exports, while creating employment for about 11 crore people. In other words, MSMEs are one of the major employers in the Indian economy. This is the reason why it is critical for the government to ensure that the MSMEs survive the pandemic.
How many of them will survive the pandemic?
But, the pandemic has forced several MSMEs to shut shop already. According to a survey by the All India Manufacturers’ Organisation, about 35 percent of micro, small and medium enterprises and 37 percent of self-employed individuals have started shutting their businesses, saying they saw no chance of a recovery in the wake of the Covid outbreak.
What has the government done so far?
Union finance minister Nirmala Sitharaman, on 13 May, announced a collateral-free loan scheme to help MSMEs. Under the credit guarantee scheme, loans issued by banks to targeted companies are guaranteed by the government. In other words, government will act as a guarantor to compensate banks a percentage of the potential losses if the money isn’t repaid.
Companies with a turnover up to Rs 100 crore can avail this benefit, Sitharaman said. These loans will carry a tenure of four years and have full credit guarantee from the government. Also, these loans will offer a moratorium of 12 months on principal payments. Approximately 45 lakhs units will benefit from this scheme. Companies can draw upto 20 percent of the outstanding loan as on 29 February.
How has the scheme performed so far?
Till now, aggregate loan sanctions by PSBs and private banks stand at Rs 75,426.39 crore of which disbursements are at Rs 32,894.86 crore. Of which, private banks sanctioned loans worth Rs 32,687.27 crore to MSMEs, while they disbursed Rs 10,697.33 crore under the scheme. This is still about 10 percent of the total scheme size of Rs 3 lakh crore.
Why the response is muted so far?
There are two main reasons. First, MSMEs are not keen to take further additional loan exposure because they do not see a major pick-up in demand on the ground. If the demand is absent, why would companies borrow more? Additional loans will mean more repayment burden and chances of defaults on bank loans. Another reason is the 20 percent additional loan limit is too less for many companies if their loan outstanding amount is small. This amount, many MSMEs tell bankers, will not be enough to meet their requirement.
What lies ahead?
The survival of MSMEs depend on how soon economic activities can get back to normalcy. The demand situation needs to revive for MSMEs to survive. Cash flows need to stabilise. When will this happen remain uncertain in the present scenario as COVID-19 cases continue to rise. According to experts banks need to think beyond pushing credit to MSMEs to help them revive.
Revenue to fall a fifth?
According to rating agency Crisil, revenues of Indian MSMEs are likely to fall to a fifth with the expected GDP growth contraction in the economy. A likely 5 percent contraction in the Indian economy will significantly hurt MSMEs across sectors.
“The pain will radiate as India Inc heads towards around 15 percent decline in revenue and around 25 percent fall in Ebitda. For MSMEs, the fall in revenue will be steeper at 17-21 percent, while Ebitda margin will shrink 200-300 basis points to 4-5 percent as weak demand gnaws away gains from lower commodity prices, Crisil said.
That’s not all. According to the agency, a sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front. The challenges would be the hardest for micro enterprises, which account for 32 per cent of the overall MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch, Crisil said.
To sum up, Indian MSMEs have tough days ahead as COVID-19 uncertainty continues to loom over the sector. Only those who manages to innovate and adapt to the new business environment will survive. Going by the present trends, many more MSMEs may shut shop and further trim the workforce. One needs to wait and watch how the situation evolves from this point.