Ravi Krishnan
Access to formal credit is the Achilles heel for most micro, small and medium enterprise (MSME) firms in India. It is one of the gaps that the government is seeking to fill with its 12-point programme for MSMEs announced on November 2.
About 97 per cent of MSMEs operate in the informal sector, according to a Reserve Bank of India staff working paper (from the Mint Street Memo series). As these firms don't have formal documentation and records, banks are reluctant to lend to the sector.
Bank credit has been slow in recent years. Although it picked up recently, banks have ceded space to NBFCs who have doubled their share in MSME credit from 5.5 per cent in December 2015 to around 10 per cent by March 2018. That’s why when a liquidity crunch is feared to hit NBFC lending, the government has been pushing the central bank to open a special window for such firms and also be lenient in recognising MSME defaults.
While an attempt to help out the MSME sector is commendable, sanctioning a loan of Rs 1 crore in just 59 minutes looks like a gimmick that can have unintended consequences. It could mean subtly putting pressure on state-owned banks to lend to this sector. Public sector banks would do well not to relax their credit appraisal and assessment in a rush to meet this artificial deadline.
As it is, in a sector that is reeling from demonetisation and the imposition of Goods and Services Tax (GST), the level of delinquent loans is pretty high. According to SIDBI's MSME Pulse, the non-performing assets ratio ranges from 8.7 percent to 19.5 percent depending on the size of the loan taken.
Public sector banks are the worst affect as about 15. 2 percent of their MSME loans turned sour at the end of June 2018 compared to 5 percent for NBFCs and 3.9 percent for private banks. Unbridled, forced lending to the sector could reverse the gains made by banks in recognizing and resolving their bad loans.
Thus, the government would do well to take steps to help MSMEs beyond opening credit channels. Indeed, some of this has already been done. Asking companies with a turnover above Rs 500 crore to register themselves on the Trade Receivables Discounting System (TReDS) receivables platform will help MSMEs tackle cash flow problems and enhance their access to credit, since banks will have greater security (and documentation) in extending loans.
Indeed, the larger question policymakers should ask is why do MSMEs remain small and operate in the informal economy. The answer lies in complex regulations and lack of infrastructure. The GST, which is supposed to help ease the tax burden, is a case in point.
There is no denying the crucial role MSMEs play in contributing to economic activity and generating jobs. There are an estimated 63 million MSMEs which employ around 111 million people, or a fifth of the country’s labour force. They account for about 45 per cent of manufacturing output and 40 percent of India’s exports.
However, to help their case, the government should focus on improving infrastructure and ease of doing business. Steps like checking unwarranted inspections of factories, simplifying penalties for minor offences under the Companies Act etc. are some welcome steps that have been announced. More such measures are needed rather than directed lending.
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