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MSMEs in the light of COVID-19 Problems and Possible ways out
9/20/2020 12:27:36 AM

Ravinder Jalali

The Covid-19 pandemic has not left any sector of the economy where it has not made any adverse impact and Micro, Small and Medium Enterprises (MSMEs) are no exception. At the beginning of COVID 19 we have seen how hundreds of thousands of migrant workers across the country have been the worst casualty of Covid-19 induced lockdown. The first relief package, called the PM Garib Kalyan Yojana, was announced by the government on March 26. A closer look of the MSME sector explains why MSMEs are so vulnerable to economic stress, although, Medium, Small and Micro Enterprises have been the focus of the government’s relief package. Government has always been in favour of providing benefits to Micro, Small and Medium Enterprises (MSMEs), which can be only availed if the business had registered itself as an MSME under MSME Act.
Classification of Enterprises as Micro, Small and Medium Enterprises (MSME) W.E.F. 01.07.2020
Earlier MSMEs were defined in terms of investment in plant and machinery. But this criterion for the definition was long criticised because credible and precise details of investments were not easily available. Earlier also, MSMEs were classified in two categories, such as manufacturing and service enterprises. Now it has been removed and both will be the same. MSMEs were defined on the basis of investments they put, now the revised definitions will also include turnover.
New definition and criterion have been notified and has come into effect from 1st July, 2020. Now the revised definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover. The limit of Small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover. Similarly, the limit of Medium unit was increased to Rs.50 Crore of investment and Rs. 250 Crore of turnover.
Given the shape and form of MSMEs, it is not hard to envisage the kind of problems they are facing. To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. Even GST has its threshold and most micro enterprises do not qualify. This apparent invisibility tends to work for enterprises as well as against them. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs. The single-biggest hurdle facing the MSMEs is lack of timely finance. Most of the MSME funding comes from informal sources and this fact is crucial because it explains RBI’s efforts to push more liquidity towards the MSMEs have had a limited impact. A key reason why banks are reluctant from extending loans to MSMEs is the high ratio of bad loans. The other big issue is the delays in payments to MSMEs — be it from their buyers (which include the government also) or things like GST refunds etc.
MSMEs are the largest employment generator and are facing huge threat amid economic slowdown and demand contraction. The sector is set to lose further as economic activities have taken a hit. Many of the micro and small businesses do not have the luxury to work from home due to the nature of work. Another issue is a complete shut-down of transportation, and thus, a broken supply chain. Shrinking stocks and a limited or a lack of procurement options because of the lockdown means an imminent closure of their businesses.
Work from Home (WFH) is applicable to less than 8 per cent of the core MSME and services sector. WFH has resulted in over 63 per cent drop in productivity in the services industry as there has been a mass migration of labour to the villages.
The RBI has been trying to pump money into the MSME sector but given the structural constraints, it has had limited impact. The government can provide tax relief, give swifter refunds, and provide liquidity to rural India to boost demand for MSME products. MSMEs need support from the government to tide over this crisis. In one of the surveys, More than 50 per cent of MSMEs expect the government to offer tax discounts or exemptions, followed by 36 per cent of MSMEs asking for loans at zero interest or cheaper rates.
Thirty per cent of MSMEs started a business website, since the lockdown started owing to the COVID-19 pandemic. MSMEs who were able to offer e-commerce functionality witnessed revenue contribution from e-commerce increasing to approximately 50 per cent of their total revenues. According to the survey, lack of technical expertise and the perceived costs of developing a web presence continue to be the key challenges to creating web presence. Due to these challenges, very often MSMEs take assistance from web professionals to create digital presence. MSMEs are the second largest job providers, after agriculture.
During the lockdown, businesses had no revenue to service their debts to banks. To soften the pressure on them, the RBI permitted banks to defer repayments on term loans till the end of August 2020. This was not a mandate; it was just regulatory forbearance. RBI left the final decision to banks. It however asked banks to charge interest on the outstanding portion of the loans during the moratorium period.
A borrower approached the Supreme Court praying that the court should order RBI to ask banks to waive the interest during the moratorium period as they had no income during the lockdown. SC has fixed 27th September 2020 as next date of hearing. At the centre of this case is a simple question. Who will bear the cost? Banks are financial intermediaries between depositors and borrowers. They take deposits from depositors and lend out the money to borrowers at a slightly higher interest rate. From the interest they collect, they keep a margin to cover their costs and some profit, and use the rest to pay interest on deposits. If banks are asked to waive the interest during the moratorium period, can they absorb it all in their profits? They will be forced to pass on most, if not all, of the burden to saving holders. Now the question is that is it fair to bail out borrowers at the cost of savers? Besides, these savers too were impacted by the lockdown. Banks are commercial institutions and bankers are expected to make decisions on commercial considerations. Banks do reschedule loans and fund interest. But that is done in specific cases and on commercial considerations, not out of sympathy. Besides, banks are accountable to their shareholders for the conduct of their business. How do they justify privileging one set of stakeholders over another?
What is being sought now is total waiver of interest. It is not clear RBI’s regulatory authority extends to issuing a decree to banks to forego income. If indeed the RBI instructed banks to waive interest as requested by the petitioner, not only will the RBI run the risk of acting beyond its authority, but will in fact run the risk of acting in contravention of its regulatory mandate.
If SC directs waiver of interest, Small savers to whom the rate of interest is a very material consideration will pull their monies out of banks and take them to saving options in the informal market in search of higher returns, exposing themselves to the risk of total loss. If small savers pull their money out of banks, won’t the erosion of this low cost source of funds make banks more vulnerable and threaten their viability?
Waiving of interest is an issue beyond the purview of banks, and clearly in the domain of the government. When the government decides to waive farm loans, it bore the burden by itself, did not pass it on to banks. Similarly in this case too, if some concession has to be accorded to borrowers, the cost has to be borne by the government. Whether the government should take on this burden is a complex political and economy issue.
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