By B Yerram Raju Institutional reforms are least spoken of in the Draft National MSME Policy. The policy has missed the labour-intensive sectors to address the inclusivity issue. When the policy mentions demographic dividend, full advantage can be derived only when the small enterprises in manufacturing are encouraged and a strong link between the micro […]
By B Yerram Raju
Institutional reforms are least spoken of in the Draft National MSME Policy. The policy has missed the labour-intensive sectors to address the inclusivity issue. When the policy mentions demographic dividend, full advantage can be derived only when the small enterprises in manufacturing are encouraged and a strong link between the micro at one end, and medium and large, at the other, becomes crucial. The link between educational and technology institutions to provide low-cost internships with state funding is very necessary.
Raising human capital is extremely important in the emerging context, particularly to address the issue of growing inequality and curb crony capitalism. Protectionism to invite FDI in large measure would run counter to the goal of Atma Nirbhar Bharat.
Convergence
While the policy mentioned the need for convergence between various Ministries, agriculture, food procurement, commerce, industry, housing and urban affairs, rural development, skill development, it omitted the finance ministry. Access to finance continues to be the Achilles’ Heel of the MSMEs. It also expressed its intention to develop model bylaws, memorandums and norms for regulation of MSMEs that produce over 6,000 products. Several products have regulations. While synchronisation of regulations may not be possible for so many products, there are 60 product orders issued during the British times which can be either eliminated or minimised.
These call for institutional mechanisms for achieving convergence on one hand, and ease of doing business on the other. The best policy for the sector should target the following keeping the federal principles in view:
•If the union government is keen on giving benefits to the MSEs, there must be a specific policy tilt in favour of manufacturing MSEs comparable to South Korea, Malaysia, Italy, France, Indonesia, Thailand and Taiwan (hardware IT).
•Land should be available in clusters at long lease with mortgageable lease-hold rights.
•Labour code that has the prospect of implementation with the States framing the rules should have a bias to the MSEs.
Access to Credit
Banks should be mandated to lend manufacturing MSEs at a defined per cent of Aggregate Net Bank Credit at an elevated level from the present 7%. Term lending and working capital norms should be eased with the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) guarantee limit of up to Rs 5 crore. The guarantee fee should not be more than 1% of the limit up to Rs 2 crore lending and 2% for a higher limit. Cash-flow – and order-book based lending should be the norm for working capital availability.
Credit Rating
While the RBI and banks desire that rating is left for the financing institutions and not to any external credit rating agency to avoid conflict of interest, the CIBIL score should not be the binding factor as such a score has several variants often inconsistent with the requirements of the MSEs.
This pain point for the sector has become intense after the removal of subsidy for meeting the cost of credit rating. Banks’ internal rating mechanism should consider sector risk, business risk, enterprise risk, and management risk apart from financial risk. The rating system should include parameters such as GST compliance, direct tax compliance, PF and ESI compliance, export compliance and promoter net worth for the small and medium while for the micro, the banks should look to the due diligence of the entrepreneur and his family background initially and compliance of its own terms and conditions.
Handholding, Mentoring
Prior to 2000, banks used to engage the small-scale industries through mentoring, counselling and handholding services. The face of public sector banking has changed phenomenally due to technology introduction and profit orientation in preference to social commitment. Under these circumstances, many micro and small enterprises suffered. Sidbi’s SME Credit Counsellors’ programme did not take off to the expected level. MSMEs need responsible counselling at the right time and right facilitation. It needs peripatetic trainers and private corporate and academic institutional tie-ups so that the stock of job profiles from Industrial Training Institutes and polytechnics would improve.
It is, therefore, necessary that the policy should provide for such services through a separate institutional mechanism with the least cost to the MSEs. District MSE Development/Promotion Councils as suggested in the policy document is ideally placed for such service. But they should be separate outfits attached to the DICs and funds should be directed from the union Budget for the purpose.
In the present policy climate, the State”s role is ideally seen to be minimal, to correct market distortions rather than to actively intervene in the economy. This policy shift has led to a call for reducing subsidies and withdrawing all forms of protection to MSEs be it product reservation or fiscal concessions. However, government regulation of economic activity and intervention through various supportive measures are common even in free market economies – the US, Germany and Japan being examples.
The phenomenal export-driven growth of the East Asian economies in the 80s and 90s, often based on small and medium enterprises, was made possible through state intervention — education and skills for the workforce, and high-quality infrastructure initially, and later, through targeted industrial policies. Enough global evidence can be seen in the draft policy document.
National Champion programmes of Malaysia and Singapore go beyond financial interventions to provide nonfinancial support — such as advisory, transformation, capability-building, and networking opportunities. Identifying private companies can be cultured and incentivised to take up counselling.
Telangana Industrial Health Clinic Limited provides a responsible engagement model since over 100 MSEs secured such advice. Though initially, they approached for financial support, after discussions, they realised the need for strategic interventions in their supply chains. Banks and NBFCs do not have sufficient time and staff to look after such functions. Government should focus on this area.
Accreditation for NPAs
NPA declaration should be subjected to State government-accredited agency’s scrutiny if the unit is proceeded against the collateral under Sarfaesi Act. Revival and restructuring of manufacturing MSEs should also be subjected to such third-party accreditation. When such third party scrutiny is allowed for the corporate sector under RBI instructions, there should be no regulatory issue if similar facilitation is extended to the MSMEs.
Grievance Redress
It is time the state put in place a grievance redress for the MSE sector at the State and district levels with participation from leading small enterprise association representatives. A retired Judge, an economist, a retired banker with empathy for the MSMEs, an official of industrial infrastructure company, two representatives from the associations and the Commissioner of Industries/GM, DIC (Convenor) is the suggested composition of the committee. This is no substitute for the Industrial Facilitation Council, insofar as addressing the issues of delayed payments to the MSEs, particularly when the Finance Minister announced in the Budget that within ten days, 75% of the arbitration amount shall be remitted to the claimant.
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