Dynamic roles of MSMEs for post COVID 19 growth with support from Banks and good Government policies

Businesses have been taking a hit due to COVID-19 lockdown. The supply chain has been disrupted, imports are down, and markets are bearish. The MSME segment has perhaps been the hardest hit



Businesses have been taking a hit due to COVID-19 lockdown. The supply chain has been disrupted, imports are down, and markets are bearish. The MSME segment has perhaps been the hardest hit.

As on 31st October 2019, a total of 1,944,336 companies were registered in the country. Of them 1,156,114 companies were active (comprising of 1,090,762 private companies and 65,352 public companies). A majority of the active companies (about 73.54%) were operating in activities covered under four broad heads, namely, ‘Business Services’ (32.27%), ‘Manufacturing’ (19.96%), ‘Trading’ (12.82%) and ‘Construction’ (8.49%).

According to a recent survey, about 26% of businesses surveyed said their sales and purchases have been impacted due to the virus outbreak. MSMEs are grappling with problems like low liquidity or cash flow and lack of workforce as the daily-wagers have gone to their villages.Businesses that are. The services sector is also slowing down with more people opting for social isolationinto manufacturing will also take a hit on export business as the situation remains uncertain.As on 30th September, 2019, the total number of foreign companies registered in the country were4,836 and of them 3,388 foreign companies were active.

COVID 19 & MSMEs: The Identification Problem

The micro, small, and medium enterprises (MSMEs) are perhaps one of the hardest hit due to the COVID19 lockdown in India. At present, the sector provides employment to 114 million people and contributes 30% of India’s GDP (gross domestic product), not to mention close to half of the country’s exports come from products and services within this sector.With severe supply-chain disruptions, especially for those businesses that do not manufacture or provide essential services, the capacity to continue paying workers (without any reductions) during the lockdown, as per government directives, looks bleak. A recent survey of 5,000 MSMEs, conducted by the All India Manufacturers’ Organisation (AIMO), has found 71% of them could not pay their worker salaries in the month of March. Reports from across the country raise similar alarm bells for how these businesses are unable to meet immediate capital requirements.

The government has announced that a stimulus package focused on the MSME sector is in the offing, to address medium- and long-term issues that will test their resilience. Emergency credit lines introduced by Public Sector Banks (PSBs); a concessional interest rate loan announced by the Small Industries Development Bank of India (SIDBI) specifically for MSMEs engaged in manufacturing goods or providing services related to COVID19; and deferring GST (goods and services tax) payments until June 2020. While these are good steps to be taken to ease short-term liquidity concerns, the stimulus package focussed on the MSME sector will have to be more far-reaching.

Governments across the world have been introducing a range of measures to infuse more confidence and credit into their small business lines. These measures include short-term liquidity providing ones as are being offered in India currently, but also involve wage support/subsidy (capped) for a period of three to six months, direct subsidies to one person businesses and micro units, deferral of rent and utility payments, compensation for decrease in turnover during lockdown periods, etc. While India must consider introducing such financial and safety net measures as well, the real challenge will lie in identifying these 63.4 million unincorporated MSMEs, of which 99% are micro-enterprises that remain largely informal.

Informality in the MSME sector

The number of enterprises in the unorganised sector (unregistered) is estimated to be 99.7% of all unincorporated non-agricultural enterprises (excluding construction). What is also pertinent to note is that 84.17% of this universe of unincorporated businesses are the owner-managed/self-employed firms (with characteristic features of household enterprises), and the next highest share is of units that employ up to five workers (micro units). The International Labour Organization (ILO) has specifically highlighted how economies with large informal sectors will need to acknowledge and act on the fact that workers in such sectors have no income replacement and are directly affected by lockdown measures – the worst affected group being the self-employed, street vendors, hawkers, construction, transport and domestic workers, to name a few.

Issues in identification

The lack of a comprehensive dataset on MSME units and their employment profiles will exacerbate issues of targeted relief delivery in this crisis situation.An RBI Expert Committee on MSMEs, in June 2019, has also noted the absence of reliable (and updated) information on this key sector of the economy. In the event that the government decides to directly aid workers in micro-businesses or provide a separate set of relief measures for say self-employed/owner-managed enterprises. With no end in sight by when the virus spread will be contained and the lockdown eased, it is clear that only currently available structures/mechanisms can be utilised to identify MSMEs and drive home relief measures. Some of these measures are discussed briefly here.

Targeted relief delivery for MSMEs: Potential Mechanisms

  • The SIDBI, a financial institution set up for the promotion and development of the MSMEs, must herald the cause of targeted loan delivery. The Bank has already announced emergency assistance loans and must ramp up efforts in financing and refinancing this sector. This assumes more importance in light of the fact that as per RBI’s data on sectoral deployment of non-food credit, the MSMEs’ share in total outstanding bank credit has fallen to 37%, as of February 2020 (it clocked 5.58% share in March 2019). Coupled with a dwindling share in bank credit is another troubling fact – the weighted average lending rate to the MSMEs is 11.24% – the second highest amongst different segments. The need to push cheaper credit to these enterprises cannot be overstated, and SIDBI will be the ideal institution to drive this agenda, given its vast network and experience in this sector.
  • There have been serious concerns around the MUDRA scheme in the recent past, in terms of these collateral-free loans coalescing into NPAs. However, information about enterprises that have availed this scheme will be vital to general enterprise identification in this crisis. A bulk of these loans is known to be sanctioned in the Shishu category that is loans up to INR. 50,000, with a majority of these beneficiaries being women. Around 13 million accounts have received these loans as of FY (fiscal year) 2018-19, and 10 million enterprises are reported to avail this scheme each year, since roll-out. Financial institutions should be able to draw up information about MUDRA beneficiaries and their employment profile to establish potential firm size, sector and employment profile, location, and other such details.
  • The UAM and the MSME Databank, as mentioned in the previous section, are also additional avenues to identify enterprises better. It records 12 million registrations as of date while the MSME Databank is seen to have much fewer registrations at 160,000. It is unclear whether there are overlaps between these two datasets. Irrespective, basic information on 10 million MSMEs can be assumed to be readily available with the MSME Ministry.
  • The Jan Dhan, Aadhaar, and Mobile (JAM) trinity is being utilised to push direct cash transfers provided under the first stimulus package that the government announced days into the lockdown. While state-wise presence on JAM varies, it might be a good mechanism for wage support transfers to daily wage and casual workers, who have been unable to collect payments (in cash) from their employers due to the lockdown affecting movement. If wage support is rolled out for labour/workforce in MSMEs, the JAM would be ideal to use as a transfer mechanism. The importance of a wage (and incentives) support programme also comes highly advocated by the ILO – a recent report mentions that countries such as India, Brazil, and Nigeria, with a ‘lion’s share of the workforce in the informal sector’, will need to introduce such wage support to thwart increase in poverty in working classes.
  • It is critical to note that while tax cuts may be necessary for larger businesses, such measures will exclude the informal sector where employment and turnover will not meet minimum thresholds required to pay income tax or to be registered under the GST. Relief for informal workers and tiny micro-enterprises with 5-10 workers, will need to be targeted such that it reaches them, in time to save their lives and livelihoods. The role that trade unions and other labour market institutions in India can play in identifying these businesses and workers, should also be encouraged. The government will need to collaborate with manufacturing and retail trade associations, and pay heed to the findings from surveys they have been conducting with their member businesses.
  • Permanent structures to support the informal sector have been long overdue, and the hope is that these will be set up immediately post crisis recovery. For now, it is clear that money is not the real challenge, choosing the ideal mechanism to direct relief to the targeted vulnerable group will be.

Asit is, the Nation was reeling under slowdown of economy; COVID 19 has now struck as a proverbial last straw on camel’s back. Burdened by fixed costs of employees, rentals, finances, electricity etc., on one hand and cancellation or drying up of orders, default on payment by customers and non- availability of funds on the other hand, is pushing a large number of MSMES to either shut the shutter or go bankrupt.

Recent relief packages announced by RBI, Public Sector banks and SIDBI, especially for MSMES are at best capable of providing symptomatic relief. It is time that whiles some more quick fix solutions are being worked out, a long term strategy is put in place, keeping fast changing business environment in view.

Special Characteristics of MSMEs

  1. Vast discrepancies in legal structure. It is estimated 4 million MSMEs are unincorporated. Out of these, 99% are in micro sector, functioning in an informal way.
  2. Vast product and services range. While on one hand 31% of MSMEs are in manufacturing, 36% in trading and 33% in services; on the other hand, 51% are in rural areas.
  3. Mostly starved of cash flow. Except for a few MSMEs, which been well established and have developed good way of generating capital resources; others mostly rely on working capital loan and cash inflow from sales. The outstanding credit by banks is only 37% that too at a weighted average interest rate 11.24%. Structurally strong MSMEs are better placed to current turmoil. Hence they are more eligible for financial assistance.
  4. Agile like a fighter aircraft. As most of MSMEs are ownership managed, their capability to re-position products or services to meet changing market requirements, and ramp up and ramp down is great.
  5. Market reach, productivity and visibility. MSMEs lack basic capabilities to enhance their market reach, adopt new software driven productivity tools and use social media for greater visibility.

Need of Comprehensive Package

New Secretary MSMEs Mr Arvind Kumar Sharma has stated immediately after taking over “Reed ki haddi bachi rahegi to phir se khade ho jayen ge” (If the back bone is intact, they will stand again. He also stated that thrust in the coming days will be that small businesses come out of distress. (Toi 8 May). This is a very welcome statement. However, package must be comprehensive. While immediate aim should be to bring MSMEs out of distress, at the same time, government should put plans in place to reposition them to grab the new opportunities arising out of changing world order due to COVID 19. Here are a few suggestions:

  1. Financial Support. While this is most obvious action, the problem is in enforcement of Government directives and ensuring that the benefits reach to even micro industries. In first case, even when Government directive for banks is to give loans without collaterals, the banks demand collaterals. Here Government must give guarantees. It is estimated that unorganised micro industries are about 99.7% of the unincorporated sector. This is where there is major problem, as how to ensure the package reaches the right entity. This is because most of them are household entities with no proper records available in Government departments. Here, a highly flexible approach may be required. For this, data available in various schemes like MUDRA, UAM (Udyog adhar memorandum), MSME data base and Jan dhan, Adhar and mobile (JAM) etc. Should be utilised.
  2. Prepare them for future. In this regard, enhanced skill training, adaptation of digital tools, enhanced use of social media should be encouraged. MSMEs should be providedaccess to market by enhancing incentives to their customers and making reserved quota more attractive. Centralised platforms to be provided to increase their market reach. Also, focus should be on productivity, for this emphasis to be laid on Industry 4.0. Similarly, quality has to be ensured. All these measures will enhance their competitiveness. As India is positioning itself to be the global manufacturing and services hub, MSMEs will be able to grab a big chunk out of this.
  3. Help them to help themselves. As stated earlier,MSMEs are highly flexible. This has been amply proved in the recent times, where some of them have generated opportunity amongst COVID gloom. A large number of them have started manufacturing PPE and masks. Many chemical companies have switched over to sanitizer. There are MSMEswho are forming clusters to manufacture components of ventilators and producing reagents in volumes for use in COVID 19 testing kits. Formation of clusters is a very smart move as it will make it easier for the government to provide support to them. In addition, a large number of SEZs are coming up along with highways; these will need large network of ancillaries. This is where government can play a leading role by providing incentives, access to market, financing and making infrastructure highly economical.

Apart from such measures, it is also imperative that a plan be drawn up to allow businesses to reopen activity, in a phased manner, with social distancing norms in force. Regular and surprise checks even may be introduced to enforce state guidelines. But it is important to now engage with the idea of slowly restarting business operations in areas with low infection levels, albeit with necessary and vital precautionary measures in place. Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk-management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.

The Policy Times proudly presents this article by Air Commodore S.S.Motial , Ex CMD ITI Ltd with Dr.P.Sekhar Global expert on Smart Cities and Secured Governance. These renowned experts analyse the Dynamic role of MSME for National growth bring out all facts on ground on Covid 19 and ways to strategically come out successfully and Economy fronts for the expansion of this very important sector.

By S. S. Motial                               

Retd. Air Cmde. Ex CMD ITI Ltd


By Dr P. Sekhar                           

Chairman of Global Smart Cities Panel, Micro Tech Global Foundation



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Dynamic roles of MSMEs for post COVID 19 growth with support from Banks and good Government policies
Businesses have been taking a hit due to COVID-19 lockdown. The supply chain has been disrupted, imports are down, and markets are bearish. The MSME segment has perhaps been the hardest hit
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