Covid-19: Rescuing The MSME Sector
India is managing the effects of the global Covid-19 pandemic using unprecedented public health and economic measures. With adverse outcomes looming large on the economy, relief interventions will need to minimise permanent damage to lives and livelihoods. Among the many parts of the economy that require immediate attention and succour, are the micro, small and medium enterprises.
Given the clampdown on economic activity in the past few weeks, it is unquestionable that a vast number of these units will be choked, possibly to the point of perpetual closure. There are an estimated 6.33 crore unincorporated MSMEs engaged in non-agricultural economic activities, employing 11 crore persons across the country. MSMEs contribute nearly 30 percent of India’s gross domestic product and close to half of the country’s total exports.
This is the backbone of the Indian economy and deserves urgent financial stimulus and a safety net.
What The Government Has Been Doing
So far, the Reserve Bank of India has announced an indicative list of Covid-19 operations and business continuity measures to be set in place by scheduled commercial banks, nonbank financial companies, payment banks etc. Financial institutions have been directed to assess the impact of the health crisis on their balance sheets, asset quality, liquidity, etc. and introduce contingency measures to manage risks. The RBI has allowed a moratorium on term loans, eased working capital financing and deferred interest payment on working capital facilities without an asset classification downgrade.
In terms of ad-hoc relief measures, many public sector banks have introduced emergency credit lines whereby a maximum loan amount of up to Rs 200 crore or 10 percent of the existing fund-based working capital limits can be availed by MSME borrowers. The Small Industries Development Bank India has announced a concessional interest rate of 5 percent for MSME loans under the SIDBI Assistance to Facilitate Emergency Response against Covid-19. These loans would be provided within 48 hours, with no collateral and minimum paperwork but only those MSMEs that are manufacturing products or delivering services related to the Covid-19 fight are eligible for these loans. The government has also introduced measures permitting delayed GST payments until June 2020, without levy of interest, late fees or penalties.
Despite these measures, however, there are reports that MSMEs are unsure of paying salaries and creditors given the current freeze on production and supply coupled with slowing demand. A risk-averse conservative approach towards lending has been noted in public sector banks even before the health emergency hit the economy, it is believed that this approach may only worsen in these times.
Imagining A Composite MSME Policy Framework
It is important that the Ministry of MSMEs draws up a policy framework with multiple scenarios for how to continue business operations, commensurate to the spread of the virus. Governments worldwide have been using various policy measures to soften the economic blow rendered to their MSME sectors.
A policy framework could be considered for the Indian MSME sector, one that is based on fostering their resilience to the onslaught of this health emergency, not just in the short-term but also for the medium and long term – considering both supply- and demand-side impacts. It is pertinent to note that the lack of accurate information on this sector due to the absence of a dedicated MSME census conducted in recent years (the last MSME census was held in 2006-07), and the absence of a unified (and verified) MSME database could hinder targeted relief delivery and making access to credit easier for enterprises that need it the most. That said, the proposed policy framework could consider the following...
1. Measures To Mitigate Impact On MSME Labour Workforce
With 99 percent of MSME sector enterprises categorised as micro, it is clear that a large percentage of the 11 crore persons employed in this sector work in these vastly informal enterprises. Wage support could be made available to workers employed in such units. In Brazil, for instance, the government has decided to pay part of the salaries of micro and small units. Countries such as Canada and New Zealand have offered temporary wage subsidies (capped) for a fixed period of three months. In India, the government has not yet announced a wage support or subsidy package to incentivise employers to retain employees during this crisis although it has directed employers in all commercial establishments to continue paying wages, as per due date, without any reductions.
A wage support or subsidy package would enable employers to pay salaries and other statutory dues to daily wage workers, especially in such units.
The structural issue of the means of identification of these enterprises aside, a policy framework that contemplates wage support during these challenging times, will help address the woes of MSMEs.
2. Specific Measures For Self-Employed Or Owner-Managed Enterprises
It will be critical that the self-employed MSME units be given the safety net needed to navigate this crisis. There may be room to compensate (subject to a cap) self-employed businesses who can prove a decrease in turnover. The government can approve such compensation subject to demonstration of reduced income, for instance, by way of documented decline in predicted revenue due to cancelled orders, restricted movement of goods and labour etc.
The framework could also make it imperative for businesses to draw up cash flow forecasts for how they will operate if compensation were provided for a fixed time-period. The policy framework must account for self-employment separately since this includes hawkers, small shopkeepers, those offering private services such as plumbers, electricians, drivers etc. who do not fall into the regular or casual salaried workers in other enterprises. Germany and New Zealand amongst many other countries have offered direct subsidies to one-person businesses and micro-units.
3. Measures To Defer Utility And Social Security Payments
Treatment of commercial electricity, water, and other utility bills could be examined especially in a scenario where lockdown is extended further. It will be extremely beneficial for units to be offered deferment or be required to only partially pay property taxes, rent and other utilities in order to avoid further costs and liquidity shortfalls, since payment of personnel salaries should be a priority for enterprise owners. Many countries have introduced such interventions for small businesses; Singapore, China, and Belgium to name a few.
In India, the government has currently proposed to pay the Employees Provident Fund contribution for businesses having less than 100 workers, where 90 percent of these employees earn less than Rs 15,000 per month. Such contribution amounting to 24 percent of wages will be credited to PF accounts for the next three months. While this is estimated to benefit 80 lakh employees and incentivise 4 lakh establishments to retain their employees, it is unclear due to lack of information in this regard, how many MSMEs will benefit from this measure.
The EPF and Miscellaneous Provisions Act is presently applicable to establishments with 20 employees or more whereas most tiny and micro-businesses that comprise 99 percent of all MSMEs are known to have between 5-10 workers. This makes most small, informal economic units ineligible to have PF accounts for their workers and therefore are excluded from availing this relief measure.
4. Measures To Enhance Access To Credit
Formal credit channels such as banks and NBFCs will need to play a much larger role in making financing easily available to this sector. MSME credit already forms a very small percentage of total outstanding bank credit with credit growth to this sector showing signs of decline much before the pandemic struck.
While SIDBI could play a role in incentivising banks to lend to MSMEs, a viable lending model for this sector has to be determined, one where banks are encouraged to innovate with lending strategies and exercise due diligence. This will be possible only if lending to this sector is made a core business activity for banks; and is not just at the behest of priority sector lending norms where PSBs focus 60 percent of such lending only at micro-segments.
Similarly while Mudra scheme could help alleviate credit constraints, there are concerns that such loans may morph into NPAs for banks.
Structural changes to lending practices for this sector are well overdue. It is time to expand the role of fintech lenders. Given the current economic climate, digital finance lending platforms will be better suited to offer unsecured loan products given most enterprises in the micro and small business spectrum will have higher risk profiles. Since these platforms use historical cash flows and check future enterprise potential, it is time that they are allowed to be further embedded in the lending ecosystem for the MSMEs. The Economic Survey 2019-2020 highlighted the need for PSBs to embrace fintech lenders and collaborate with them to make faster and safer lending choices using the analytics tools the latter utilise to assess the creditworthiness of small businesses, enhance turn around time in loan application processing and disbursal processes.
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.
Radhika Pandey and Amrita Pillai are Fellow and Research Fellow, respectively, at the National Institute of Public Finance and Policy, New Delhi. Views are personal.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.