Many MSMEs won’t survive beyond this fiscal | Economic Times

It may be a sector which has India’s $5 trillion economy dreams closely linked to it, but MSMEs continue to be in dire straits. Reeling from the impact of the pandemic coupled with financial woes that debilitate their ability for a bounce back, MSMEs will need to navigate through a tough path even in the times ahead.Now - six months since the first lockdown - doubts and uncertainties remain, especially for those businesses which are in non-essential categories. Despite a slew of government measures announced to bail out the sector amid the virus outbreak, the on the ground reality tells a different story. ET Digital reached out to a cross section of experts to understand what the future heralds for this sector which found itself at the forefront of the unprecedented crisis.Rajiv Chawla, Chairman, IamSMEofIndia says that the revival of businesses has largely depended on the sectors they operate in. “Businesses which are in essential services, in goods manufacturing or in services, have revived back. Firms in healthcare, pharma, ICT/IT, transport and logistics and those in food processing have not just revived, but in many cases have shown growth too. In contrast, all the businesses that are in the non-essential category such as travel or luxury goods are still not doing good,” he highlights.Ripple effectThe effect of the virus also percolated to other aspects of the value chain which led to reduced competitiveness for the sector. Jayanth Mutha, Director of agri-electrical company Himlite Products says that while recovery has been varied depending on the sector, there has been a ripple effect such as a spike in raw material prices that came by. “A crisis inevitably leads to such issues. Since mid-April, raw material prices for manufacturing industries have all shot up. It was similar during GST. It all leads to higher cost of production which affects the industry beyond the crisis,” he laments.Though Mutha’s business has picked up in the last couple of months, he doesn’t mince his words on the government measures not living up to expectations. Funds doled out as part of the economic stimulus package, change in definition of MSMEs and extension on loan restructuring for the sector were among the government measures announced during the lockdown to offer a breather.“Government measures would have, at best, helped 20% in the overall scheme of things. It was a temporary relief. The change in the definition of MSME was supposed to be implemented long ago. The working capital stress still exists as money is not flowing freely. For instance, there has been a 30-40% increase in my working capital. There are payments from people still to come and money is yet to be paid back,” he avers.The fine printIndustry experts concur with Mutha saying that the government’s liquidity package essentially will reach only those who already have banking and a bank loan. Besides, the role of many banks, financial institutions in lending under the Emergency Credit Line Guarantee Scheme (ECLGS) has also come in question. “These haven’t done enough. Out of the scheme’s target, only 50% has so far been achieved. Further, it's very difficult to avail 20% of the credit line, especially if an MSME has multiple banking channels. If you have got loans split across banks, how many banks will you go to avail the scheme? So, despite the government’s best efforts, these aspects remain a pain area,” adds Chawla.78308669And then there are other woes. The Fund of Funds (FoF) scheme announced in May was supposed to provide Rs 50,000 crore equity support to MSME. However, the mega scheme remains on paper as its details are still awaited. Besides this, the moratorium has now ended and banks are demanding their dues. This implies a huge stress on SMEs, especially those that are yet to see revival such as tourism and hotels. Even for the firms that have recovered, new loans are not seeing quick disbursals.SMEs have also not been too hopeful about the support coming in from the private players for small businesses, saying that such funds don’t really address the actual needs of the sector. “It helps them to improve their image and get more vendors. It is more of an image building exercise than anything else,” adds Mutha.Can there be a new dawn?So, is there a way out of the misery that is still shadowing this sector? Mohammad Athar, Partner - Economic Development and Infrastructure, PwC India says that while the Atmanirbhar Bharat stimulus is directed towards the MSMEs, ensuring last mile delivery of credit and improving the turnaround time of banks, interest and tax subsidies, effectively communicating the policy benefits could help revive the sector. “Further to the subsidy, fostering a business-friendly environment and providing non-credit support to the MSMEs like mentorship, linkages with supply chains and marketing support could further help them recover and flourish,” he says.78308681The need to ease friction in last mile credit delivery was also raised in PwC India’s report in August, ‘Full Potential Revival and Growth,’ which says that one of the biggest challenges that MSMEs grapple with is the inability to obtain credit through formal sources. “Improving the last-mile delivery of credit has been shown to be crucial for the stimulus to actually reach its intended beneficiaries,” the report stated.The report added that MSMEs, though may lack formal records and collateral, do have data that accumulates as a result of business related transactions. Consolidation of data sources such as rental information, social media, mobile phone payments and utility payments can be used to help more MSMEs get formal credit, the report highlighted.Other measures that the government can execute in a timely manner can also aid the sector at this point. Animesh Saxena, President, Federation of Indian Micro and Small & Medium Enterprises (FISME) is of the view that government proactiveness in releasing MSME payments stuck with PSUs and government entities can be a step in the right direction. “The government should also not cut down on their purchases with the MSME sector. Currently, new purchases and new orders to the sector are at a low level. Further, interest on interest should not be charged from them as demand is already low, and most firms are operating at only 30-40% of their capacities. After September, if MSMEs have to pay interest on interest, it will be a tremendous burden on them,” he cautions.Saxena admits to the MSME sector being in deep trouble because of a lack of demand. “Surviving beyond this financial year will be a big problem for many MSMEs,” he adds on a grim note.For small businesses which continue to find ways to keep the business cycle up and running, the next few months are bound to be challenging in the midst of scarce cash flows, demanding market conditions, changing consumer sentiments and very high virus infection cases. Resilience and grit will once again be the need of the hour. Survival, perhaps, would then be the only real strategy for a bailout in the times to come.