Don’t Rely On Banks To Provide Succour To MSMEs

Many of the recommendations one reads about the revival plans post Covid-19 impact focuses primarily on encouraging banks to provide more loans to micro small and medium enterprises (MSMEs) to improve their liquidity.

However, recent history is a witness to the repeated failure of banks to support the government in its policy initiatives.

Take these examples:

• Demonetisation did not yield the intended results and over 99 per cent of the demonetised currency found its way into banking system, one of the key reasons being the inept/corrupt bank officials.
• During natural disasters (such as Chennai floods), government had obtained assurance from banks to provide automatic enhancement of 20 per cent additional working capital limits to MSMEs, but the scheme remained largely on paper with hardly a handful of MSMEs benefitting from such schemes.
• Banks have assiduously shunned CGTSME scheme (Credit Guarantee Trust for Small and Medium Enterprises), a scheme meant to improve better credit access to MSMEs, despite government assurance to reimburse up to 75 per cent of credit loss in the event of default. Several other countries have made much better use of this scheme to help their MSMEs grow.

Given the above track record of banking system and their apathy towards MSMEs, it would be counter-productive if the government relies on the same banks to deliver its revival package to MSMEs.

Here are a few alternate solutions that the government must actively make use of to ensure the funds directly reach the MSMEs.

1. GST Deferral Scheme

The government can announce a goods and services tax (GST) deferral scheme for MSMEs where the MSMEs can collect the GST from its customers, file the necessary returns and treat the GST amount due as a low interest/no-interest loan repayable in five years.

This would immensely help improve the liquidity position of MSMEs. At the same time, the government can securitise these receivables through bonds without hurting its fiscal elbow room.

2. Forbearance In TDS Remittance

The principle of tax deducted at source (TDS) is that the payer acts as an agent of the government to collect and remit the TDS. A small leeway, of say three-four months, can be given only for MSMEs by extending the due date for remittance of TDS. This again will immediately help improve liquidity position of MSMEs so that they can prioritise salary payments of its employees during this tough period.

3. Payroll Protection Loan Through EPFO

The provident fund (PF) of almost all organised sector employees has now been linked to Aadhaar and duplications have been eliminated with the universal account number. With the innovative PMRPY scheme (where government remits two-thirds of employer contribution to PF) several MSMEs have started enrolling their off-roll staff into PF which has resulted in a sharp jump in number of employees under PF enrolment.

These have paved way for a well-designed payroll protection programme through EPFO – a fully automated loan disbursal by EPFO to the tune of 12-month payroll based on three-year track record would benefit millions of MSMEs in availing loans.

4. RBI Liquidity Window For NBFCs

The current TLTROs (targeted long term repo operations) announced by Reserve Bank of India (RBI), to the tune of Rs 50,000 crore, through banks with a stipulation to disburse at least 50 per cent to smaller non-banking financial companies (NBFCs) is a welcome move, but falls way short of the total requirement.

NBFCs are closer to the ground than the banks, and have a much better infrastructure to disburse loans to dealers, traders, asset financing for two-wheelers/commercial vehicles and consumer durables.

Demand for most of these products is linked to availability of finance, and NBFCs are better positioned to provide these financing.

However, after the IL&FS fiasco, access to capital has become a big challenge for most NBFCs, especially the smaller ones. A liquidity window by RBI to the tune of Rs 1 lakh crore for NBFCs to be availed by issuance of commercial paper or certificate of deposits (CP/CD) of one to three year tenure, with a limit of up to 1.0x net owned funds, would have a dramatic impact on boosting consumer demand as well as improving liquidity for MSMEs.

5. Extended Export Credit Through EXIM

Export-dependent sectors such as cotton/textile/garments have been worst hit because of the Covid-19 and their travails are not likely to end anytime soon, given that most developed countries to which they export seem to be the worst affected ones in this crisis.

However, the positive aspect of this crisis is the en masse exodus likely from China. A well-designed supplier credit scheme for those importing from India, executed through EXIM Bank with adequate funding, can help India to capture a good part of this Chinese exodus, especially in sectors like textile and electronics.

6. Credit Guarantee Scheme, Under A New Fund

The existing CGTSME scheme is completely broken as the claims by banks have been frequently dishonoured by CGTSME citing technical deficiencies in paperwork, etc. This has fully eroded the confidence banks have in CGTSME scheme, and the banks have completely shunned this scheme now.

It would take much longer for the government to reinstate this lost confidence; a better solution would be to form a new institution, under the aegis of SIDBI, and capitalise it to the tune of Rs 10,000 crore, with clearly defined guaranteed loan targets. This would enable over Rs 5 lakh crore of loan disbursement at a reasonable 2 per cent claim ratio.

7. Fund Of Funds For AIFs

The SIDBI routed fund-of-funds for alternate investment funds (AIFs) is stuck currently for want of capital, though several of the AIFs have met the investment criteria and have got in-principle sanction.

Urgent capitalisation of SIDBI and quick disbursal of the fund-of-funds to these AIFs will help several MSMEs to access this pool of funds to help improve their liquidity.

In a recent brilliant move, Tamil Nadu Apex Cooperative Bank has opened a gold loan window at subsidised interest rate to avail loan against gold jewellery. For several micro enterprise entrepreneurs and self-employed, this move will prevent them from falling into debt trap of money lenders at usurious rates.

In another welcome announcement, the central government has announced a package to clear all dues to MSMEs on priority.

A similar move by each state government will have a salutary impact on the liquidity position of several MSMEs. The CREDS scheme for discounting bills of government, public sector understandings (PSUs) and highly-rated private companies can also be used to deliver the relief package by encouraging its wider adoption as well as some interest subventions.

The central and state governments should explore several other such institutions (MFIs, chit funds, cooperatives etc) to deliver relief packages to the MSMEs rather than blithely relying on the commercial banks to provide more loans to MSMEs as banks have not lived up to expectations in such past crises.