The vibrancy of the Micro, Small and Medium Enterprise (MSME) sector in the macroeconomic context cannot be overstated as it accounts for 7% of India’s GDP, 45% of total manufacturing output, and 40% of Indian exports while employing over 117 million people. Given the critical importance of the sector, due attention from the financial system must be accorded to address the challenges inherent in servicing this segment.
Recognizing the significance of the sector, the Central Government announced a host of initiatives for the MSME sector. Confederation of Indian Industry (CII) welcomes the announcements made by Honorable Prime Minister Shri Narendra Modi on 2nd November 2018, unveiling twelve key initiatives launched by the government. Some of these include:
- With regard to access to credit for the sector, the Government has announced the launch of the 59-minute loan portal to enable easy and quick funds for needy MSMEs.
- Two percent interest subvention for GST registered MSMEs on fresh/incremental loans.
- For exporters who receive loans in the pre-shipment and post-shipment period, the Prime Minister announced an increase in interest rebate from 3 percent to 5 percent.
- Increasing the quota of compulsory procurement by PSE/PSUs from MSMEs from the existing twenty percent to twenty-five percent is another welcome move.
- Clusters of Pharma MSMEs will be formed where 70 percent cost of establishing these clusters will be borne by the Union Government.
- The Prime Minister also spoke of social security for the MSME sector employees. A mission will be launched to ensure that they have Jan Dhan Accounts, provident fund and insurance.
Smaller enterprises have always faced challenges in terms of access and cost of credit. Currently, they face the additional risk of financial stress due to the liquidity crunch.
A major source of financial stress for MSMEs is the non-timely payment and even non-payment (and subsequent litigation) of dues.
Based on the feedback and consultations with stakeholders, CII has come up with a set of recommendations for the short term which may be considered by the Government, RBI and other relevant authorities for dealing with the current liquidity related problems.
Measures to be taken in the Short Term
Recommendations for RBI
- The Turn Around Time (TAT) for requests for sanction/ enhancement of limits for working capital/ term loans to be fixed basis the product and amount of loans up to a specified amount. For sanctions/ enhancement of limits for working capital / term loans, the time limit for sanction may be fixed at 15 days from the date of application and for disbursement, the time limit may be fixed as 15 days from the date of sanction.
- Collaterals sought by Banks to be limited to 133% of the exposure rather than unlimited collateral in sync with the limited liability principle.
- Personal Guarantees to be taken only in the case of collateral shortfall and not otherwise where sufficient collateral is available from firm’s resources.
- In case of collateral shortfall, personal guarantees to be taken from Whole time / Executive Directors only and should be limited to 133% of the exposure as mentioned earlier. Further, personal guarantees should not be taken from External Directors, who provide guidance and have no role to play in the day to day operations. The External directors see the Operational results once a quarter at Board Meetings, while Banks see the account on an ongoing daily basis with detailed reports on monthly basis covering assets and liabilities. Banks are best equipped to detect Operational weaknesses through their frequent monitoring. It is unreasonable to expect the External Directors to do so and hold them responsible.
- Requirement to return Bank Guarantees (BGs) to close claim period needs to be removed. The sanctity of the claim period as stated in the BG should be honored and any existing anomalies to be removed.
- Charges for the BGs for over 2 years to be debited on an annual basis and not upfront as a step to ease cash flow pressures on the MSMEs. Annual BG charges for longer period validity should be lower for subsequent years due to diminishing efforts required by the Bank.
- In line with the “No Claim Bonus” discounts for Insurance, those MSMEs having no defaults should progressively receive discounts on the “normal” margin requirements for these facilities commensurate with their lower risk profile.
- Standard rate of Margin Money for Loans and Bank Guarantees to be capped to 15%. However, if BG is issued by another Branch than home branch of an MSME, 100% margin money is often demanded. A standard procedure may be prescribed that the BG can be requested to be issued from any branch, similar to the facility of any branch banking. To enhance checks and balances, the request for BG may be routed through the Home Branch both for control as well as to ensure that the sanction limits are not exceeded.
- Banning of Letter of Undertakings (LoUs) for Buyer’s credit is having a liquidity impact on industry. It is recommended that LoUs must be permitted in such cases where the company is looking to incur capital expenditure.
- RBI may allow banks to sanction Buyers Credit facility to MSMEs, wherever import of raw materials or components is done under Letter of Credit (LC) established by the bank. Conversely, LC on maturity be allowed to be converted to Buyers Credit. This eases liquidity of MSMEs to a great level. (when banks establish LCs, they have undertaken enough of precaution and security. Hence, Buyers Credit against such LCs carry no risk to banks.)
- There is considerable hardship for MSMEs in the event of bounced Cheques, the beneficiary MSME suffers lack of liquidity due to lengthy delays in obtaining relief from the Courts. Hence, bounced cheques should trigger a notice from beneficiary bank to the Drawer’s bank to:
- Take into record the event of bounced cheque on Clients Credit Rating
- Pay an Inconvenience Fee of 10 percent of the cheque face value to the bank it was deposited for clearance of which 1% is retained by the bank and 9% is credited to the beneficiary MSME
- RBI has imposed an add-on condition where any concession or relaxation provided in its stringent norms applicable only if total exposure (both fund and non-fund-based limits) below Rs 25 crores. We recommend that this condition should be applicable to all MSMEs registered as per MSMED Act 2006.
Recommendations for the Government
- The government may instruct all Central Ministries to clear all pending dues of MSMEs within a stipulated date. A mechanism can be devised for immediate release of all such pending dues. And all claims should be called/ invited by the Ministry of MSME with a one-month Public Notice.