MSMEs Want More Attention

India’s micro, small and medium enterprises (MSME) sector, which contributes nearly 30 per cent to the country’s GDP and accounts for 45 per cent of the total employment, has great expectations from the upcoming Union Budget for 2023-24.

Undoubtedly, the cash-strapped MSME sector has the highest number of job creators and taxpayers. They produce goods and services that enrich and add value to the daily lives of people around the nation. But it is also true that the MSME sector has been under continued distress for the past several years despite good intentions and support. It clearly needs much more. 

“The Union Budget 2022-23 must focus on providing an easier line of credit, which would be one of MSMEs’ main needs since their working capital is often constrained by slow payments and supply chain issues. Additionally, the government must make working capital more accessible or simpler,” says Vicky Jain, Co-founder and CEO, uKnowva, a mobile-enabled enterprise platform that helps scale and automate everyday business operations.

Presently, the 63 million MSMEs in India account for close to 30 per cent of the gross domestic product (GDP). They have already contributed nearly 50 per cent to India’s total exports in 2022 during which the country’s exports have grown by 37 per cent year on year (YoY). 

Talking about the central schemes, the Modi government in the 2022-23 budget announced an additional credit under Emergency Credit Linked Guarantee Scheme (ECLGS) for 130 lakh MSMEs and extended it until March 2023. 

Also, the guarantee cover under ECLGS has expanded by Rs 50,000 crore to a total cover of Rs 5 lakh crore. “MSMEs are looking forward to incentives or subsidies to adopt digital technologies and ecommerce platforms, government investments in industrial infrastructure and digital literacy programmes, relaxation of regulatory requirements or simplification of procedures to make it easier for them to access financing and compliance as well as programmes to promote the use of digital payment systems,” says Vinod Kumar, President, India SME Forum.

Experts note that the government needs to bring reforms to strengthen the ecosystem and provide MSMEs with better grants to be able to sail through tough times. Also, the root cause of the Indian MSME industry’s woes is its failure to attract private capital which results in continuous starvation for funds. 

The finance ministry should consider making the taxation of unlisted equities at par with the listed ones. In a year when venture capital funding has dried up, angel investors can be a saviour to many startups. They should get the benefit of reduced taxation on capital gains in line with listed equities. This can give a much-needed boost to the startup ecosystem,” says Sousthav Chakrabarty, Co-founder & CEO, Siply, a micro-savings app that helps the underserved masses to invest and save. 

Easier lending norms 

There are also high expectations from the upcoming budget on further ease in MSME lending. Non-banking financial companies (NBFC) loans in FY22 grew more than 10 per cent which was almost double of bank loans signalling the rapid demand for simplified access to credit.

"As a key driver in India’s growth story, enabling lenders who can subsequently increase the inflow of credit to the sector would be optimal. Refinancing options for MSMEs similar to the National Housing Board’s refinancing scheme would allow NBFCs and other players to serve micro-businesses with better terms while insulating them from the volatility of rates,” says SidharthMahanot, Cofounder & COO, Indifi, an online lending platform that provides online business loans to small businesses.  

Also, the Credit Guarantee Fund Scheme (CGS) was launched to make collateral-free credit available to SMEs. Currently, there is an interest rate cap of 18 per cent which makes it unavailable for smaller and lower-rated NBFCs to avail of the scheme due to the high cost of capital. “Relaxation of this cap to encompass more lenders will allow the better reach of credit for the end customers as well,” says Mahanot. 

Banks and MSMEs 

Although the Centre has introduced a few loans and funding schemes, lack of formal finance, restricted access to international markets, nonavailability of skilled workforce and decade-old technology solutions are among the key issues facing the sector at present. According to industry experts, the government should resolve the financing issues so the sector can move forward on the path of growth after the Covid-19 horrors. 

“Banks must be more considerate towards MSMEs and prepayment fines are another issue. When businesses tried to switch banks during Covid-19, they learned that there would be a 2 per cent penalty. All banks have agreed not to impose prepayment fees on micro and small businesses, but they still do. We appeal to the government to look into the same,” adds uKnowva’s Jain.  

This article was published in BW Businessworld issue dated 'Jan. 14, 2023' with cover story titled 'Steady Flight'