India’s micro, small and medium enterprises (MSME) sector, known as its engine of growth, contributes 31 per cent of its GDP, 45 per cent of exports, employs over 124 million people and creates nearly 1.3 million jobs every year. The entrepreneurial growth and development they contribute are not restricted to the urban areas only. Of the 55.8 million MSMEs, 59 per cent are based in rural India.

But the absence of adequate and timely bank finance, high cost of credit, non-availability of suitable technology and over-regulation impede the growth of this sector.

Among the aforementioned constraints, the availability of finance and financing costs are the two key factors that directly impact the growth and survival of the manufacturing and services MSMEs. As per the IFC report 2018, the overall finance demand by MSMEs is estimated to be about ₹87.7-lakh crore of which about ₹69.3-lakh crore is the debt requirement. Of this, about ₹48.5-lakh crore is required for working capital and ₹20.8-lakh crore is the capex investment required for fixed assets.

But of the total debt requirement of ₹69.3 lakh crore ($1.07 trillion), only ₹10.9 lakh crore is raised from formal sources and as much as ₹58.4 crore is raised from informal sources.

Though private and public banks, NBFCs and FIIs all make up the formal financial ecosystem to provide the desired capital, there is a huge gap in catering to the financing requirement of the MSME sector leading to most MSMEs preferring to raise capital from informal resources. This preference is due to ease of access, speed of disbursal and need of minimal documentation.

The Modi 2.0 government should focus on the following measures to enhance credit access to MSMEs.

Availability, interest rates

The RBI should consider a minimum of 200 basis point reduction in rates and enable banks to triple credit growth to MSMEs. To create the industries of the future, access to long term funding is crucial at competitive interest rates. The irony today is that an individual can purchase a luxury car worth crores through bank/NBFC financing within a day, but an MSME entrepreneur cannot purchase a machine for the same value without onerous requirements and the personal guarantees of promoters.

By offering differential Cash Reserve Ratio and Statutory Liquidity Ratio for banks lending to the MSME sector, improving credit availability and taking remedial measures to enhance the effectiveness of the Credit Guarantee Scheme, the RBI can help the MSME sector create 20-25 million new jobs over a few years, curtail inflation and improve export competitiveness.

In sync with the limited liability principle, collaterals sought by banks from MSMEs should be limited to 133 per cent of the exposure rather than insist on unlimited collateral. Personal guarantees should be taken only in the case of collateral shortfall and not where enough collateral is available from a firm’s resource.

In case of collateral shortfall, personal guarantees must be taken from whole-time and executive directors only and not from external directors who provide guidance and have no role to play in the day-to-day operations of the business. Bank officials should be insulated from honest failures.

The requirement to return bank guarantees (BGs) to close the claim period needs to be removed. The sanctity of the claim period as stated in the BG should be honoured and any existing anomalies removed. Charges for the BGs for over two years should be debited on an annual basis and not upfront. This step will ease cash flow pressures on the MSMEs. Annual BG charges for long-term loans should be lower for subsequent years in line with the diminishing effort required by the bank.

Policymakers should also consider discounts on normal margin facilities for MSMEs with no defaults with low risk profile, on the lines of the “no-claim bonus” for insurance premiums.

Akin to London Stock Exchange, other global stock exchanges should also be invited for easy and affordable equity. More social venture funds must be encouraged and the IPO process simplified to encourage more companies to access capital markets.

The results of the recently concluded elections show the confidence of Indians in the BJP government and PM Narendra Modi. Apart from other policies, it’s time for Modi 2.0 to free MSMEs from the challenges on hand to create a ‘ Nirmukt ’ manufacturing ecosystem that can propel the Indian economy and empower MSMEs to make a difference globally.

The writer is past Chairman, CII-Western Region. The views are personal

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