At recent functions to celebrate quarter century of the National Stock Exchange (NSE), some focus revolved around how the Indian government and the Reserve Bank of India (RBI) have been working overtime to empower MSMEs (micro, small and medium enterprises). Will it work and trigger a new regime of growth across the country, asked many?
Their worries were understandable.
I have a feeling that it could now work, especially after the serious efforts by RBI and the recent allocation of Rs 300,000 crore to Mudra (Micro units development and refinance agency) Bank in the budget. It appears pretty clear that the Narendra Modi government is trying its level best to nurture the MSME segment. For those who are not aware, it merits a mention that MSMEs provide maximum employment from the non-agriculture sector in the country.
This February, the government redefined MSMEs on the basis of their annual revenue, replacing the earlier definition that relied on self-declared investment on plant and machinery. It’s an interesting move and is expected to improve the ‘ease of doing business’, avoid unnecessary inspections and at the same time enable authorities to verify claims of businesses using the sales data they have from the GST Network, the company that processes goods and services tax (GST) returns.
The time has come to remove the ambiguity about investments in plant and machinery. The government’s definition based on turnover is more rational and objective.
There were reasons to push through the changes.
First, the definition was frozen in 2006. Now, after more than a decade of continued erosion in the value of the rupee, the thresholds had become impractical. Frankly, adjusting for inflation would have required enhancing the limit by 2-3 times. Again, there are many sectors where MSMEs have substantial share such as pharmaceuticals, auto component and food processing, all demanding a manifold increase in the investment limit. Worse, the investment-based definition created an uneven field for older enterprises vis a vis new enterprises. Setting up a production unit today would require several times more investment than the one built 10-20 years ago to produce the same product with similar quantity. And finally, to prove that a unit fell in a specific category, MSMEs ran around chartered accountants (CAs) to certify the value of plant and machinery. There are countless examples in India where large enterprises also under-reported the investment, got CA certificate and partook in the public procurement earmarked for MSEs.
When it comes to the USA, the world’s most developed country, SMEs’ contribution to its gross domestic product (GDP) is almost 50 per cent. The small firms in the USA accounted for 64 per cent of all new jobs generated between 1993 and 2011. This percentage is equivalent to 11.8 million of the 18.5 million net new jobs. This percentage was at an all-time high in 2004, when small businesses contributed to 50.7 per cent of the US GDP.
In Germany, 37 per cent of total corporate turnover is generated by SMEs. They actually account for just under 55 per cent of added value. In 2012, SMEs there employed roughly 60 per cent of all people in jobs requiring social insurance contributions.
The idea, hence, is to push MSMEs to create a difference in the country’s economic scenario, and include NBFCs (non-banking finance companies), which are making similar efforts with their credit analysis procedure that makes it easier for MSMEs in understanding their financial needs. After all, MSMEs must have a total grip on how much to be borrowed and that funds are utilised well.
Some of the financial companies are earning eyeballs because they have back-tested their credit model with large banks and put in place an effective risk analysis, driving MSMEs to turn digital-ready, to enhance efficiency of their lending process.
In many cases, MSMEs are evaluated on the basis of their ability, stability and intention to repay across more than 120 parameters, processed through access to more than 400 data points. Now, this is interesting because I feel a strong algorithm always helps finding the apt lender for borrowers on the basis of borrower’s profile. In some cases – peculiar to the Indian market – MSMEs new to credit or with poor credit history face tremendous difficulty in getting funds from traditional avenues. This very process needs to be made hassle-free, making it convenient for MSMEs to access credit easily. A company can use technology and analytics tools, analyse thousands of data points acquired from various sources, to assess the creditworthiness of small businesses rapidly and accurately.
The broad idea is to help in funding MSMEs and enabling their inclusion into the mainstream of the economy. That, in my opinion, is the biggest challenge for MSMEs because many have still not created a tech-enabled process that builds credit insights through a variety of available business and behavioural data. Unless that is created, MSMEs will continue to face trouble.
The financial companies must ensure some effective credit appraisal and push for modern workflow automation. Eventually, the gap between MSMEs and organised lending must reduce fast in India, modern technology must multiply productivity of workers and lower operational risks and detect frauds at a nascent stage. RBI has increased the repayment period before MSME loans are classified as bad loans from 90 days to 180 days.
Finance and its availability, one must remember, are the biggest deterrents for the growth of MSMEs in India. There must be great ideas, like startups are showing lights at the end of the tunnel, and there should be companies empowering small businesses and merchants to meet their working capital requirements. There needs to be a financial revolution that ensures the availability of funds as and when required. In short, MSMEs need to develop a stable working capital base.
Only then Bharat, which is India, will rise!!
(The writer is chairman of Sanjay Dalmia Group)