On 23 July, adorning a white-violet silk saree, a confident Nirmala Sitharaman, India’s Finance Minister stood tall on the hallowed floor of Parliament while presenting the much-awaited union budget 2024-25. She said, “This budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing.” The Centre has formulated a package covering financing, regulatory changes and technology support for micro, small and medium enterprises (MSMEs) to help them grow and compete globally.
But now comes the big question— Does Finance Minister Sitharaman’s budget provide special attention to MSMEs? Well, what unfolded after her second shortest speech (85 minutes) was one section of the MSME sector applauding the Modi government's budget left, right and centre, however, several stakeholders felt it did not go far enough.
Presenting the budget, the FM proposed to enhance the limit of Mudra loans to Rs 20 lakh from the current Rs 10 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category. Pradhan Mantri Mudra Yojana (PMMY) was started in 2015 to provide loans up to Rs 10 lakh to small and micro enterprises from commercial banks, small finance banks and non-banking financial corporations. Notably, the government has sanctioned Mudra loans worth Rs 5.4 lakh crore in the last financial year.
“The increase in the Mudra loan limit for beneficiaries who have successfully repaid their previous loans will support micro and small enterprises in scaling up their businesses. Additionally, it will promote a more transparent and trustworthy business environment in the country by incentivising responsible borrowing and repayment practices,” said Vijay Kalantri, Chairman, WTC Mumbai and President, All India Association of Industries.
Experts told BW Businessworld that MSMEs will benefit significantly from the credit guarantee scheme, new assessment models by public sector undertaking (PSU) banks, and increased Mudra loan limits. A crucial initiative is the introduction of a credit guarantee scheme for MSMEs in the manufacturing sector, which will facilitate term loans for machinery and equipment purchases without the need for collateral or third-party guarantees. This scheme, backed by a self-financing guarantee fund will ensure substantial support, they noted.
What’s For MSMEs
Sitharamn announced a credit guarantee scheme for facilitating term loans to MSMEs for the purchase of machinery and equipment without collateral or third-party guarantee. She said that the initiative will operate on the pooling of credit risks of such MSMEs. Notably, a separately constituted self-financing guarantee fund will provide, to each applicant, a guarantee covering up to Rs 100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reduced loan balance.
Tanmay Kumar, Chief Financial Officer (CFO), Shiprocket told BW that the introduction of a credit guarantee scheme and a self-financing guarantee fund providing coverage up to Rs 100 crore per MSME is expected to greatly improve access to affordable and timely finance, thereby enhancing the global competitiveness of MSMEs.
To make credit more accessible to MSMEs via a new, independent and in-house mechanism, the Modi government declared that public sector banks (PSBs) will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment. They will also take the lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy.
“This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system,” the FM said.
According to the Kinara Capital MSME survey, analysing data regarding 23,682 small businesses, more than 89 per cent of the MSMEs have indicated investing in growth initiatives as the reason for seeking business loans. The optimism was evident across all three key sectors, manufacturing, trading and services.
The manufacturing sector has been a key driver of gross domestic product (GDP) growth and with MSMEs contributing over 45 per cent of the manufacturing output in the country, it is imperative to implement specific schemes to support their growth. “By introducing a credit guarantee scheme for facilitating term loan access for MSMEs for the purchase of machinery and equipment without collateral or third-party guarantee, and announcing the establishment of a self-financing guarantee fund to cover up to INR 100 crores. The government has laid out a road map to enable the growth of manufacturing sector MSMEs,” said Hardika Shah, Founder and Chief Executive Officer (CEO), Kinara Capital.
In India, manufacturing sector machinery requires extensive investment, making higher ticket loans a necessity for these businesses. The enhanced and focused credit facility being made available is expected to enable manufacturing MSMEs to invest in the machinery and equipment they need to improve and expand their operations. “This, in turn, will empower them to expand their production capability, undertake larger projects, and boost competitiveness. The focus on rewarding responsible borrowers through the updated Mudra loan criteria is a positive move as it will foster a healthier lending ecosystem,” Shah added.
What Didn’t Work Out?
Though Modi government's new budget highlighted the importance of MSMEs, by providing easier access to credit, tax relief and digitalisation incentives. However, these steps are not sufficient to address the systemic challenges faced by the cash-strapped sector.
In the budget, while there are mentions of digitalisation, it does not address the need for better infrastructure and technology support and experts in the industry time and again have highlighted how there is a need for a robust framework to integrate MSMEs into the digital economy by investing in digital infrastructure and training.
Citing the awareness gap, about 65 per cent of tech MSMEs are struggling due to the limited awareness about available tools and resources, according to a paper released by Nasscom and Meta. Additionally, financial constraints significantly hinder tech-enabled MSMEs from adopting AI technologies, with 59 per cent of surveyed enterprises citing budgetary limitations as a barrier to investing in necessary tools and resources.
Apart from that, the MSME sector even today is hindered by a complex web of regulations and taxes, which impose significant compliance costs and bureaucratic obstacles, hindering their growth. Although the budget offers some respite, more needs to be done to streamline the regulatory environment. To unlock the sector's true potential, a thorough overhaul of the regulatory framework is essential, complemented by improved access to financing, which would empower MSMEs to thrive and reach their full capacity.
“Despite a significant reduction in import duties for various sectors, the semiconductor sector, which is expanding in the country, did not see similar relief. The budget also did not address the addition of any new sectors into the PLI scheme nor the extension of the sunset clause of the existing PLI system,” Kalantri asserted while talking about missed points in the budget, as far as the MSME sector is concerned.
Money Problems
The credit gap faced by MSMEs in India is estimated at more than USD 400 billion, according to IFC. With the MSME sector expected to grow from the current 630 to 750 lakh units, there is an emerging need for more players to provide credit options to these businesses to address the gap.
The Union Finance Minister stated that the Small Industries Development Bank of India (SIDBI) will open new branches to expand its reach to serve all major MSME clusters within three years and provide direct credit to them. With the opening of 24 such branches this year, the service coverage will expand to 168 out of 242 major clusters.
“While the IBC was a revolutionary reform, it had several loopholes that were often exploited, leading to large haircuts and significant losses for creditors. The integration of advanced technologies could improve debt recovery processes, potentially enhancing the risk-taking capacity of creditors by reducing the frequency and impact of such losses,” added Kalantri.
The budget places significant emphasis on generating employment through enhanced skilling initiatives. India, with its demographic dividend, has the potential to become a global manufacturing hub. However, skill deficiencies remain a major barrier to realising this potential.
Kalantri added that providing financial support for higher education loans, coupled with investments in vocational training, will contribute to developing a highly educated and skilled workforce, thereby supporting India's ambition to become a leader in global manufacturing. The paper released by Nasscom and Meta also revealed that about 72 per cent emphasised the necessity for AI training programs underlining the importance of skill development in facilitating adoption.
“Integrating advanced technology systems into the IBC will streamline resolution processes, making it easier for MSMEs to navigate financial difficulties. SIDBI's plan to open 24 new branches will enhance the accessibility of financial services, providing crucial support for MSMEs across the country. Together, these initiatives will strengthen the financial ecosystem for MSMEs, ensuring timely assistance and smoother operations,” added Shiprocket’s Kumar.
Experts noted that the expansion of SIDBI’s presence will improve accessibility for formal credit for MSMEs as it will cover 168 major MSME clusters out of the 242 in the country. This expanded reach will fast-track the financial inclusion of MSMEs. “One good measure is to give stressed loans a chance at revival before they become NPAs, every such small step counts because earlier it seemed that once you are out of favour or out of step of what is seen as normal, you were left to fend for yourself,” noted Amit Prasad, Founder and CEO, SatNav Technologies.
Prasad added that people creating IPR on the hardware or software side should be treated separately as those revenues are possible to scale exponentially, sales can happen worldwide and margins can be much higher. Thus while businesses needing more labor do need support, the others also can get some thrust in future years.
Controversial 45-days Payment Rule
The budget introduced various initiatives to support Indian MSMEs, but surprisingly it gave a miss to highly anticipated review of the newly implemented 45-day payment rule. This rule, effective since 1 April, mandates buyers to settle payments with MSMEs within 45 days of receiving goods or services, or face taxation on the outstanding amount.
Despite concerns from MSME associations about potential contract cancellations and tax burdens on suppliers, the government chose not to revisit this rule, leaving the 45-day payment deadline unchanged. Another area needing attention is raising the percentage of bank credit to NBFCs (other than NBFC-MFIs) for onward lending to be classified as PSL assets from 5 per cent to 10 to 15 per cent, Shah asserted. The MSME sector is often susceptible to cash flow fluctuations due to delayed payments, seasonal variations, and macroeconomic challenges.
“Extending the timeline would provide MSMEs with much-needed breathing room as customer payments frequently arrive within this period. Maintaining a good credit record is likely to continue being an important consideration for accessing formal funding and therefore pursuing growth opportunities, even if the larger framework of credit assessment changes. So this would be an important move, to help MSMEs avoid the NPA tag,” Shah stated.
In recent years, the MSME sector has continued to face a credit gap challenge amounting to Rs 39.24 lakh crore as per a FICCI report. Out of the total 6.4 crore MSMEs, only 14 per cent have access to formal credit mechanisms. Credit outstanding to the MSME Sector as of 30 September 2022 was Rs 20.7 lakh crore, as per the Reserve Bank of India (RBI).
The cash-intensive sector has an estimated Rs 10.7 lakh crore which is 5.9 per cent of the gross value added (GVA) of Indian businesses is locked up annually as delayed payments from buyers to MSME suppliers, according to a report by D&B and Game.
While the proposed measures are promising, there is scope for further strengthening these efforts. One of the aspects that can contribute to driving the government’s mission of empowering MSMEs would be revisiting the cap on the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme. In 2023, the CGTMSE cap was revised to allow for MSME loans to have interest rates not exceeding 21 per cent per annum. While this is an improvement from the previous cap of 18 per cent, it still excludes MSMEs that require unsecured small-ticket loans.
“A reconsideration of the interest rate cap and guarantee cover under the CGTMSE scheme is essential to enable the scheme to deliver its full potential for MSMEs across the board. It will encourage more lenders to come on board and offer loans to even smaller MSMEs, and at the same time improve loan terms for end borrowers,” Shah told BW.
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