MSME sector is a vital component of the Indian economy. The sector consists of 63 million+ units employing about 111 million employees, which is about one-fourth of the countries’ labour force. MSMEs contribute about 45% countries’ production and contributes to exports to the extent of 48% of the country’s total exports. This vital statistic speaks volumes about the importance of MSMEs in all respects.
The sector has undergone tumultuous situations in the recent past due to demonetization and implementation of the GST. Considering the various difficulties and bottlenecks faced by the MSMEs, the Reserved Bank of India appointed “Expert Committee on MSMEs under the Chairmanship of Shri U K Sinha (formal chairmen of SEBI).” The Committee has undergone in various aspects of the sector and has come out with many vital recommendations for the consideration of Reserve Bank of India and Central Ministry of MSME’s. We would summarize here below the recommendations of the Committee-
- Considering developments in the sector so far, Committee has suggested re-imagined and modified MSMED act 2006 covering comprehensive and holistic MSMED code having provision for sunset of complex and scattered laws. Under the new law, the territorial jurisdiction and arbitrary inspections system has to be substituted with policy based and transparent inspection system. The law is expected to address the major challenges, related to infrastructural bottlenecks, absence of formulization, technology adoption, capacity building, backward and forward linkages, credit support, risks capital and problem of delayed payments, etc.
- The Committee has endorsed the government’s proposal to change in the definition of MSMEs, based on investments in plant and machinery to turn-over based classification.
- The MSMEs face perineal issue of delayed payments by the buyers in spite of provisions under MSMED Act since MSMEs have low bargaining power with their buyers. The Committee recommends amendment to the MSMED Act requiring all MSMEs to mandatorily upload all their invoices, with provision of Monitoring Authority. Since these uploaded invoices would be automatically displayed on the system, the names of the defaulting buyers will be publicly known and this will act as a moral suasion and which would make the buyers to release payments in time.
- To encourage MSME units, MSMED Act has notified procurement policy for government and PSUs to procure minimum 25% of their procurement from these units. To facilitate such a procurement, there is Government portal called GeM portal. The Committee recommends that the procurement by the government/PSUs should mandatorily go through GeMs portal only.
- At the present, MSMEs require to register with various entities such as Udyog Aadhar, GSTN, NSIC, etc. Committee instead has suggested single registration making PAN as a Unique Enterprise Identifier (UEI).
- The Committee has recommended to establish Enterprise Development Centres (EDCs) within each of the district industry centres for capacity building with additional support from entities at National and State level.
- Presently, MSME clusters at various centres are functioning with the financial support of public agencies. These need to be additionally supported by the private sector funding contribution with certain tax incentives.
- It is said that MSMEs lack expertise in product development, technology adoption and marketing strategy. Here, government needs to build networks of development service providers that can provide services to the MSMEs. The Committee has also recommended for strengthening of MSMEs Export Promotion Councils (EPCs).
- Ministry of MSMEs may consider setting up of a non-profit special purpose vehicle (SPV) to support crowd sourcing of investments.
- The one of the vital recommendations by the Committee is to make the funds available for SIDBI through PSL shortfall on the lines of RIDF fund for NABARD. These funds could be made available by the SIDBI to the state governments by way of soft loans, which in turn would be deployed by the state governments for infrastructural, and cluster developments.
- SIDBI, as a nodal agency, is to create platform where various capital venture funds can contribute and through these funds, equity support would be extended to MSMEs. A government sponsored Funds of Funds (FoF) to support VC/PE firms investing in MSMEs sector be set up.
- A simple and uncomplicated rules for Insolvency and Bankruptcy Code (IBC) for MSMEs be put in place to boost the confidence of the lenders for recovery purpose.
- The Committee recommends for the creation of Distressed Asset fund, with the corpus of Rs. 5000 crores with SIDBI. This fund would assist units in clusters where a change in the external environment has led large number of MSMEs becoming NPA (For example, ban on plastics has forced many units to be closed). This would work on the lines of Textile Upgradation Funds (TUF). This would be significant size in order to make equity investments that help unlock debt, or help revive seek units.
- The present credit guarantees like CGTMSE and NCGTC are outside the purview of regulation. These are to be brought under regulation and supervision of RBI.
- MSMEs lack the capacity to cope with situations like natural calamities. Government should provide insurance coverage to employees on the lines of PMJJBY scheme. These workers need to be specifically covered under Ayushmaan Bharat – PMJAY.
- The Committee observed that MUDRA would require enhancement of in-house (or outsourced) capabilities, including underwriting, risk management, fund raising based on its own AAA rating and sharper focus on emerging trends in the market. Hence, a re-imagining of MUDRA is necessary including assessing the rationale for continuing it as a subsidiary of SIDBI. The Committee further recommends that SHG enterprises may be brought under the purview of MUDRA’s guarantee programme.
- With the increased availability of data from various sources like GSTN, IT, CIBIL, Fraud Registry and others if this data be made available to the banks for speedier and robust credit appraisal.
- The ‘PSB Loans in 59 minutes portal’ which is related to existing accounts, be also made eligible for assessing eligibility of new loans with enhanced threshold limit of Rs. 5 crores for in principle approval.
- The implementation of GST has facilitated formalization of the MSMEs where turnover data etc. would be available. Further, when Account Aggregators (AA) gets operationalized, lenders will have access to borrowers’ transactions, at a single point. These new architectures would facilitate cash flow based lending. It is therefore recommended that the banks need to move towards cash flow based lending to MSMEs.
- TReDS is an effective mechanism to solve the problem of delayed payments and liquidity issues of MSMEs. The Committee wants that this platform be scaled and recommends creation of pooled API of all TReDS platforms which in turn will enable the financers to understand the past repayment history of the buyers so as to make more informed lending decision. The Committee has also recommended second TReDS window for creating reverse factoring which would facilitate supplier financing.
- Presently as per RBI’s guidance of 2010, banks are mandated not to seek collateral security for loans up to Rs. 10 lakhs. Considering the price rise, the Committee recommends to revise collateral free loan limit to Rs. 20 lakhs. The revised limit be applicable for Mudra and SHG enterprises.
- In order to provide loan portability in seamless manners to MSMEs, the Committee recommends that RBI should come up with measures of portability of MSME loans with lock in period of 1 year.
- The Committee considered that there is a case for increase in exposure limit of Rs. 5 crore for Regulatory Retail to at least Rs. 7.5 crores, which would benefit a large number of MSMEs.
- With a view to reduce credit gap, a new intermediaries, i.e., Loan Service Providers (LSPs)-who will be an agent of the borrowers. This is recommended for the consideration of the RBI. The LSPs will offer individualised advice and should act in borrowers’ best interest, respecting fiduciary duties of disclosure, loyalty and prudence. ( the organisations like deAsra foundation would have opportunities to work as LSPs once RBI accepts this recommendation of LSPs)
- The Committee recommends creation of digital public infrastructure that will have the potential to reduce loan operating cost. This will address the issue of information asymmetry in lending space. Under the digital public infrastructure, deployment of E-Leins will lock the future incoming cash flows and would lead to better repayment rates.
The Committee has made wide-ranging recommendations as above with respect to MSMEs and adoption of many of these recommendations by RBI and government, would facilitate existing MSMEs and new MSMEs for removing bottlenecks and support the growth. The adoptions of these would as well help enhancement of employment opportunities. It is expected that the Finance Ministry would accept many of the recommendations incorporating these in ensuing budget to be tabled on 5th July 2019.
Mr. Ashok Magdum
Mr. Magdum has 37 years of experience in banking, law, finance and psychology. He was a member of the board of administration at Maharashtra State Co-operative bank, Mumbai during 2015-17.