Putting MSME on growth curve

Declining trend of bank credit to the sector needs to be reversed to make MSMEs backbone of the economy

By Author Dr K Srinivasa Rao   |   Published: 2nd Mar 2018   12:09 am Updated: 1st Mar 2018   10:44 pm

India’s GDP growth touched 7.2% in Q3 of FY18 and the medium-term outlook is around 7%. According to advanced estimates of the Central Statistics Office, the contribution of industry to the GDP was 31.6% in FY16. It is set to drop a notch to 30.6% in FY18. Despite the ongoing flagship policy campaigns — Make in India, Skill India, and Digital India — contribution from the industry sector is moving south.

Contrary to the aspiration to raise the contribution of manufacturing, a part of industry, from 18.1% now to 25% by 2022, the trends are not in tune. Start up India, Stand up India and Mudra loan schemes are also aligned to supplement entrepreneurial growth but results are yet to manifest.

If industry is to grow, the role of Micro, Small and Medium Enterprise (MSME) will be critical. As per the data up to March 2016, there were 51.3 million MSMEs employing 120 million with a share of 45% in exports. MSMEs in the manufacturing sector account for 33.4% of the GDP while in the service sector their share is 24.6%. Demonetisation and GST have hit this employment-intensive sector hard. Its restoration is in progress. Realising the importance to revive the MSME sector, Budget FY19 provided certain supportive measures.

Micro, Small and Medium Enterprise (MSME)

Relief to MSME Sector

The key sops include reduction of corporate tax from 30% to 25% for entities with a turnover of up to Rs 250 crore, which was hitherto available up to Rs 50 crore. Import duties on some of the electronics and other items have been raised by 5 to 10% to create domestic demand. The RBI provided a respite to GST-registered units by granting 90 days more time to repay loans of up to Rs 25 crore. All advances become NPAs in 90 days whereas MSME loans will now turn NPAs only after 180 days.

Besides, MSME units are now redefined based on annual revenue instead of self-declared investment in plant and machinery (P&M). This is to improve ease of doing business. In a high-tech environment, huge machinery may not be needed. Units having an annual revenue of less than Rs 5 lakh will be micro enterprises. Those with Rs 5-75 lakh will be classified as small whereas entities earning revenues of Rs 75-250 lakh will be known as medium units. The move is expected to enable entrepreneurs to access loans on simpler terms as the size is decided on the revenue generated and not on investments in P&M.

Globally, the sector is known as the Small and Medium Enterprise (SME) as was in vogue in India prior to the enactment of the MSME Act on June 16, 2006. There is, however, no standard global definition of SMEs because ‘small’ and ‘medium’ size of a unit is relative to the size of individual economies.

According to the Organisation for Economic Cooperation and Development (OECD), SMEs are units employing up to 249 people, i.e, micro – up to 9 employees, small 10-49 and medium 50-249. Many countries determine the size of units based on the number of workers engaged. Globally, SMEs have an important role to play in achieving sustainable development goals and in fostering inclusive innovative industrialisation.

Role of Institutional Credit

Funding is essential to sustain the growth of the MSME sector. The RBI has prescribed lending norms to MSMEs as a sub-target under priority sector lending for banks. They are required to lend 7.5% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher. The sub-target for MSME for foreign banks with 20 branches and above operating in India would be made applicable post 2018.

The RBI has also widened the scope of priority sector lending to those in the service sector. All loans extended to MSMEs in any sector, irrespective of size of the loan, will qualify for priority sector and upper per borrower cap is removed. This will encourage banks to extend large-sized loans to the sector.

However, despite such a mandatory provision, bank credit to the MSME sector is on the decline. RBI data shows that the total bank loans to MSMEs in December 2015 stood at Rs 26,95,200 crore. Instead of increasing, the outstanding loan amount came down to Rs 26,34,100 crore by December 2017, marking a negative flow of credit during the past two years. The reason for low credit flow could be on account of ongoing asset quality woes of banks and lack of financial literacy among the entrepreneurs to access loans from formal lenders. The flow of bank credit to MSME needs intense focus to revive them.

Developmental Initiatives

In order to create positive market sentiments, a joint MSME index has been evolved by bringing together Sidbi-Crisil and MSE. The sentiment index – CRiSidEx was launched recently. It will go a long way in forming market stability and in supporting visibility of the MSMEs. Earlier, Sidbi in collaboration with the NSE, took the initiative to set up an e-discounting platform to support financing of MSME receivables. The platform was meant to be the trade receivables engine for e-discounting of receivables — TreDS.

Many States are now working towards an MSME-friendly ecosystem by creating own ease of doing business index. They are also aggressively holding investor conferences to invite foreign investments. Bur what is more important is to educate entrepreneurs to formalise their production and sales through the GST network.

Once formal production activities are recorded, it will be easy to access loans. Lack of ability to build credit history is the crux of limitation in accessing credit from banks. Unless industry departments of States collaborate with MSME associations/organisations, voluntary agencies to implement policies designed for the growth of MSMEs, the sector will not be able to command the backbone status in the economy that it deserves.

(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)