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MSME Is The Largest Employer After Agriculture: NP Desai, Growth Idea Lab

The Micro, Small and Medium Enterprises (MSMEs) play a pivotal role in the economic and social development of the country, often acting as a nursery of entrepreneurship and innovative entrepreneurial spirit

Photo Credit : PTI

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Globally, MSMEs are considered to be an engine of economic growth and a key instrument for promoting equitable development. In the Indian context, The MSME sector contributes significantly to the country’s manufacturing output, employment and exports and is credited for generating the highest employment growth as well as accounting for a major share of industrial production and exports. The Share of MSME manufacturing output in total manufacturing output has reduced from 42% in FY 06 to 37% in FY 13.  In an exclusive interview with BW Businessworld, NP Desai of Growth Idea Lab, and Chief Consultant for Revival of Sick MSMEs discusses the MSME sector and why it is integral to revive sick MSME units in India

Why are MSMEs an important engine of economic growth and a key instrument for promoting equitable development?

Firstly, MSMEs can work on a lean structure and work on local demand in a very cost-effective manner thus developing local skills and hence make a dent on the local economy at the Panchayat level. Also, it serves factor to large industries like automobile, aerospace, defence, etc., as the cost of manufacturing in a small unit is more competitive. So, one automobile unit like Maruti will generate lakhs of jobs thus developing equitable development. Since, services are also covered under the definition of MSME, job creation at much lower cost is possible and a good example is the IT industry in last 20 years. Also, successful small units have got the potential to grow big and Nirma group of companies is a proof of that.

What is the current employment status of MSMEs in India?

Today about 4 cr MSMEs are there in India and 80% of these are small vendors like tea stalls, puncture shops, automobile garages, etc., and are employing more than 3 to 4 cr people. Mostly this segment is unorganised. About 60 lakhs are in the organised sector and employing about 6 to 7 cr people. MSME is the largest employer after agriculture.

Why is it integral to revive and rehabilitate sick MSMEs?

The assets of MSMEs like machinery, other infrastructure are national assets and they are not getting used in case of sick MSMEs thus creating job losses and revenue loss to the govt.

Also, the children of these entrepreneurs may become a social liability if they are young and if the entrepreneur is not able to finance their needs like education etc.

What constitutes an MSME to be considered sick?

By government definition, any unit whose net worth is eroded by 50% is considered to be sick. The government has become proactive and defined incipient sickness in MSME as follows:

If the unit is not able to service interest or repayment of term loan for one month it is considered as SMA-0. If not able to service for two months it is SMA-1 and for three months it is SMA-2(SMA-2 means special mention accounts) and bank has to provide hand holding support but in ground reality, they either neglect these signs or do not act proactively though there are set procedures by RBI.

What are some of the issues that the MSME sector is plagued by?

There are internal factors and external factors:

Internal Factors

  • Weak financial structure: As they are supposed to bring 25% margin (their own funds) and by definition, various government giving capital investment subsidies are a part of this. But generally, the government release this over a span of six months to few years and lot of corruption is there.
  • No clarity or detailed execution plan: As 95% of MSME units are partnership or proprietary concerns, they lack depth of management particularly accounts.
  • Poor manpower planning: The entrepreneurs, in their wish to control cost, are not able to pay for the most suitable people and have a make do attitude thus affecting the efficient running.
  • Dispute in partners: This is also one of the biggest cause of sickness

External Factors

  • Power cut
  • Delay in release of subsidy.
  • Political reasons like bifurcation of Telangana and Andhra.
  •  General recessions in the economy.
  •  Natural calamity.

What are some of the policy shifts required to revive sick MSME units?

  • There shall be a penalty on the officers for delaying revival. As on today, though RBI has given clear-cut guidelines for the time of decisions, no bank follows as there is no accountability.
  • Various gaps are there in existing policy. I am highlighting few of them below:
  • From the time of NPA to the time of execution of restructuring package/ rehabilitation packages, what rate of interest to be charged.
  • As the bank has to get TEV (Techno Economy Viability) , a study has to be carried out by an external consultant, there are no guidelines how the report to be prepared and their recommendations are not mandatory.
  • The concept like we have suggested (attachment enclosed) shall be taken up by the private sector on a pilot basis and once visible benefits are proven, it shall be scaled up or encouraged like angel investing, venture financing etc., by giving proper tax incentives.

What are Growth Idea Labs’ initiative in revive and rehabilitating sick MSME and what has been the outcome so far?

GROWTH IDEA LAB started working for the above in Sept 2015 and during this period, about 15 units were studied we have invested close to 18 lakhs and time with all above 2 units investment of 6 lakhs are turning sour and in 3 units approximately 9 to 10 lakhs invested have been turned around and are on the way of revival but their bankers attitude is suspicious

Because of this effort, we could sign MOU with Nalsar University of Law (Centre for Excellence in Economy & finance) and TECCI for developing Sustainable Ecosystem for the revival of sick MSME Units.

We are working on how to improve operational efficiency for running sick/weak units and various ideas are generated.

One idea is to keep raw materials of the sick unit in the warehouse and increase operational efficiency by taking advantage of the price differential between wholesale/manufacturing to retail which can be 6 to 10%. This step alone can reduce the cost of production by 2 to 4%. We are working on how to take up this under FINTECH Startup.

What is the way forward for reviving and rehabilitating sick MSME’s from the perspective of GIL and its collaborators?

We hope to raise approximately 3 cr from various sources for creating an Emergency response fund (ERF) which will be housing various talent and deployed in sick unit/weak unit to remove various hurdles the unit faces. They will help to remove these hurdles and they will be having some small cash at their disposal to meet any emergency funds. Once we get the feel of the situation, maybe in a month’s time, we will take up the issue with their (units) banker to get their view and work at a rehabilitation plan/ restructuring plan. This exercise may take 2 months. All the cost incurred so far will be capitalised as part of equity. We expect that about 5 lakhs unit we can get the ray of hope for the units’ revival. We will create a separate fund of 10 cr which will invest in the equity of such curated unit at a predetermined exit route which can be listing on SME exchange, promoters buyback or some other investor replacing us in 3 to 5 years time. We expect 4.5x return from our portfolio of 50 to 100 units over a span of 2 years. Once the above model gives visible results, it can be replicated in many states by various other entrepreneur and we can provide technological / Strategic support.


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