Credit crunch, costly loans, COVID-19 combine to clobber the MSME sector

Lakshmana Venkat Kuchi *

Even before the COVID-19 pandemic hit India in mid-March or so, the economy was slowing down and one of its key engines - the Micro Small and Medium Sector Enterprises (MSMEs) - was sputtering. The lockdown to fight the pandemic, absolutely essential to save lives of people, however, killed the weaker MSMEs.

According to a survey by an industry body- All India Manufacturers Organisation - over one third of MSMEs and self-employed persons shut down operations, even after the Central Government came out with an assistance package in May last year.

The cautious and graded opening up of the economy, post COVID-19 lockdown, kickstarted the engines of the economy and on the eve of the Union Budget 2021-22, there are signs of economic recovery and a healthy economic growth rate in the next two years-which surely will help MSMEs too.

During the pandemic year, every sector of the economy was badly hit, barring agriculture, and saw severe contraction. Few industries engaged in pharma and health care, food, food processing, and food delivery services maintained to keep their head high.

Government had announced a Rs 3 lakh crore collateral-free loan scheme for MSMEs as businesses, especially micro, small, and medium enterprises (MSMEs), as part of a Rs 20-lakh-crore economic stimulus package to deal with the COVID-19 pandemic.

Green shoots are visible, on the eve of the 2021-22 budget, so to speak, with forecasts of double-digit growth from international agencies. This growth will however not be enough to overhaul the minus 23 percent growth contraction of the pandemic year.

Cash crunch, high-cost loans plague MSMEs


When it comes to the MSMEs, the sector continues to cry out for attention, as a major chunk of the units are beset with financial problems to an extent that they need loans for working capital needs. Most of the MSMEs (6.3 crores, approximately) are plagued by a host of problems, some endemic and persisting for several years. This is not a new phenomenon.

Even a decade ago, the MSMEs were plagued by credit crunch and high cost of credit and suffer from a built-in inability to compete in the foreign, and even domestic market and were ceding ground to cheaper imports - mostly from China. Today, Chinese imports are stopped.

What the pandemic has done is to accentuate the problems of MSMEs, and also inflict a newer element of uncertainty which poses an existential threat to the sector.

Lets see the basic problems that plague the MSME sector.

Firstly, the MSMEs had the problem of inadequate access to the banking system for the simple reason that many smaller units were not getting financing from the banks because they could not repay the earlier loan-as they do not get payments from the clients (Government, PSU, and even private sector) and banks are unwilling to lend unless the record is clean.

The small entity had taken a loan and produced and sold, and will repay if clients clear his dues. But since it is not happening, he must borrow more and it increases his interest payments. Often, he is treated as NPA, but he has receivables from customers.

Besides, for MSMEs, the cost of borrowing is high, which makes the product costs high and these companies become uncompetitive in the export market as also in the domestic market. There is a cost of finance, cost of compliance, cost of manufacturing all add up to make MSME goods uncompetitive in the global market, compared to even Bangladesh, Vietnam or Malaysia or Indonesia, or any other small countries.

For the same reason, the MSMEs lose ground to cheaper imports and bow out. A rough estimation puts Chinese manufacturing costs to be at least 40 percent to 50 percent lower than in India. By and by, many manufacturers find manufacturing activity tending towards becoming unviable.

Capital, labour shortages affecting revival


In the post-COVID-19 opening phase, some sectors have been hit very badly as activity came to a grinding halt, like construction, real estate, aviation, hospitality, industrial component manufacturers, pockets of the textile sector, media, and entertainment. MSMEs dependent on these sectors were obviously very badly affected. However, manufacturing in some areas has revived.

Some sectors like medical equipment, pharma, software, education, e-commerce food, food processing, and food delivery businesses have not been affected much. Manufacturing and certain basic infrastructure items have opened and resumed and now are returning to normal.

Though most MSMEs are working to only about half their capacities. The auto sector, two-wheeler sector, engineering goods sector (pumps, valves, foundries), infrastructure have revived, slowly. Supply chains are also now getting restored much to the relief of manufacturing. But, if a small company is dependent on a single big company, and if that is not doing well, the small unit will not be able to survive.

Post COVID-19 in MSME, we are witnessing sector-wise issues. For example, the textile sector can resume, but they are hit by labour issues. Engineering goods factories have resumed, they have orders but labour shortage is an issue. In some units, raw material is there, labour is there but funds are an issue. Banks are not giving them sufficient funds.

Urgently needed, a more effective MSME revival kit


The growth estimates, pegging India nearer double digits over the next two years, give the hope for the MSME sector as well, provided its problems are resolved. For many, mere survival is a battle. They may survive if the bigger companies help the MSMEs out by making a timely payment for the goods and services that have been already delivered.

Some MSME owners complain that Government companies and even private sector clients had been irregular in making payments for goods already supplied citing pandemic. This of course was leading to delayed payments to the vendors and small manufacturers. The MSMEs must in the meanwhile continue to pay bills, salaries, and costs of raw materials and run his home.

A possible solution is that banks buy the bills of the Government, as in pay the small manufacturer what the Government must pay and recover the money from the Government and likewise with big manufacturers and MNCs. Banks, as already been seen, are unwilling to lend, despite well-meaning and helpful directions from the Central Government.

For the simple reason that the bankers are not sure if they lend today and some loan turns NPA, they fear they may be hauled up even after retirement. As per AIMO estimates, nearly 40 percent of MSMEs out of the total 6.3 crore units face an uncertain future and their survival faces a big question mark. Its impact on jobs and livelihood of hundreds of thousands of people is, of course, direct and drastic.

From the Government, any MSME survival kit must have a practical and workable solution to ensure timely, affordable, and adequate credit, including for working capital requirements, to the MSMEs and small entrepreneurs. It must also be legally stipulated that payments for goods and services of MSMEs must be time-bound and quick. Every help-technical, logistical, marketing, and sales --- must be provided to the entrepreneurs to enable them to take on the competition, at home, and abroad.

Why MSME sector is important is because it contributes 32 percent of the country's gross value-added and proyides employment to over 11 crore people. More important, it accounts for roughly half of the country's exports.