With an eye on elections, government gives boost to MSME sector

At a time when the talk of a liquidity crunch in the Indian financial system is rife, it seems odd that micro, small, and medium enterprises (MSMEs) have been promised that loans below Rs 1 crore would be sanctioned in less than an hour. But when you put it in the context of a general election next spring, the government’s efforts to pacify the MSME sector, which been through the wringer in the past two years, starts to make sense.

For nearly two years, the MSME sector has borne the brunt of the government’s policy measures. With demonetisation first and then the haphazard implementation of the goods and services tax (GST), the MSME sector had been left cash-strapped.

The percentage of non-performing assets in the loans given to the sector has grown to 17.2% in June, from 14% in December 2016, according to the MSME Pulse report from TransUnion CIBIL and the Small Industries Development Bank of India (SIDBI). According to the report, the total credit exposure in India to the MSME sector is Rs 22.8 lakh crore.

This year has been particularly bad for the sector with loans being tough to come by. This is because 11 of the 21 public sector banks are facing lending restrictions as they are under the Reserve Bank of India’s prompt corrective action (PCA) framework. With a financing requirement of nearly Rs 4.5 lakh crore over the next two year, it was assumed that the non-banking financial companies (NBFCs) will step up into the space left vacant. However, in the aftermath of the meltdown of the biggest NBFC in the country, Infrastructure Leasing & Financial Services (IL&FS), the entire industry is strapped for cash.

It was a precarious situation for Prime Minister Narendra Modi and the ruling Bharatiya Janata Party (BJP) whose traditional support base among MSMEs was getting increasingly antagonised.

But all that changed last week when a mega support package was announced for the MSME sector. Prime amongst the measures was the promise of loans of less than Rs 1 crore being sanctioned in less than an hour. These loans can be accessed through a link on the GST portal. Further, all GST-registered MSMEs would get a 2% interest subvention for fresh and incremental loans. And for exporters who receive loans in the pre-shipment and post-shipment period, there would be an increase in interest rebate to 5% from the existing 3%.

MSMEs with a turnover above Rs 500 crore would be brought on to the Trade Receivables e-Discounting System (TReDS) where entrepreneurs would be able to access credit from banks based on their upcoming receivables, it was announced.

While these measures were specifically aimed at increasing credit access for MSMEs, the package for the sector also included several other measures. For example, public sector companies have been asked to procure 25% of their total purchases from MSMEs and of this 3% should be from MSMEs promoted by women entrepreneurs. To improve the ease of doing business for MSMEs, clusters would be formed, initially for pharmaceutical sector MSMEs; regulations with regard to labour laws have been relaxed; inspections would be done through a computerised random allotment; and environmental clearance has been simplified.

“Linking loan approvals to GST returns will encourage more and more MSMEs to become a part of the formalised economy. Besides, any platform which can reduce friction and give convenient access to finance to the MSMEs will see rapid adoption,” says Vinod Parmar, global head of sales and marketing at Vayana Network.

What remains to be seen is whether the government’s measures help boost the growth of MSMEs. With 65 million MSMEs in the country employing 120 million people, the sector is one of the largest in terms of job creation. A healthy MSME sector will be crucial in the run-up to the elections scheduled in 2019 and disruption in credit to the sector could affect both jobs and the MSME entrepreneurs. Prime Minister Narendra Modi has a penchant for making mega announcements near the festival of Diwali. This year, the focus clearly is on the elections, which is why the traders who form the BJP’s traditional support base have a lot to cheer about.