In May, the government sought to provide liquidity support worth Rs 3.7 trillion to MSMEs, mainly in the form of complete or partial government guarantees on loans and through equity infusion in three measures: Collateral-free automatic loans, subordinate debt for MSMEs and equity infusion through MSME funds.
However, despite government support, MSMEs will still take time to revive growth. Most of them cater to large enterprises and act as their Original Equipment Manufacturers (OEMs) or as ancillary suppliers. Thus, their actual revival depends on the performance of large enterprises.
While large firms in the pharma, financial services, FMCG, manufacturing, mining, power and infrastructure sectors are slowly coming back to action, many other sectors are not in good shape. This is mainly due to weak consumer sentiments about the future or safety concerns. It is going to take the next two to four quarters for the recovery to happen. MSMEs focused on sectors like hospitality, tourism, real estate, and white goods would take longer to recover.
“The government package has helped some MSMEs with loans to keep their enterprise going. Unless the recovery is quick, many of them may not be able to service the loans and end up losing not only their net worth but also their assets which would have been collateralised. Thus, the banks could end up with NPAs. So, the path ahead is laden with risks laced with optimism,” Aditya Narayan Mishra Director and CEO of CIEL HR Services, told THE WEEK.
The exodus of migrant workers have also created labour shortages for MSMEs in the areas where lockdown has been withdrawn, and economic activity has been started. Experts say that the delayed payment to the MSMEs by the government and the private sector has added to their struggle of staying afloat. The government has thus been urging the corporates and instructed government-owned entities to release payments to the MSMEs and improve their payment practices.
One of the biggest initiatives by the government was to change the definition of MSMEs which now includes a greater number of firms within the formal classification of MSMEs. This is expected to help in the transition of the 'mindset' of small and medium firms. They are now aiming to grow higher without the fear of losing out on the benefits given to MSMEs.
The revival in the pent up demand, the gradual opening of the economy and restoration of normalcy in the supply chain is expected to support businesses, whether large or small. Experts say that the government should take a systematic approach post-COVID-19 to address the need of the MSMEs facing credit defaults and permanent business closures.
“The measures to revive the MSMEs should be categorized as short term, medium-term and long-term relief measures and should offer step by step guidance for the recovery of medium and small-scale business. Policy measures addressing all segments of MSMEs together might lead to unequal distribution of benefits. For instance, revising the turnover limit for medium enterprises upward to Rs 2.5 billion from Rs 1 billion means that a greater number of companies will be eligible for the benefits that the government has enlisted for the MSME sector. This also calls for detailed monitoring of the delivery system so that smaller and micro-enterprises do not get crowded out in this process," remarked Dr Arun Singh, Chief Economist at Dun and Bradstreet India.
"It should be noted that the micro and small firms are at a greater disadvantage to securing loans from formal institutions than medium enterprises as they have limited financial literacy. Lower levels of regulatory adherence and financial discipline by MSMEs makes them a higher risk for banks,” he added.
The current situation demands that in order to restart the MSMEs to their full capacity the government should support and make required arrangements to bring back the migrant workers. Market sources say that at the same time the government should consider a direct benefit transfer for MSMEs, similar to what was done for the jan dhan accounts to take care of the immediate expenses that cannot be met due to the loss of income.
From the difficulty of paying salaries to the likelihood of a labour shortage, MSMEs face many challenges.
“The most important challenge is paying salaries, discharging vendor bills, and other fixed expenses. With hundreds of shramik trains running to help reach labourers to their hometowns, MSMEs will face scarcity of labour and there would be a dire need to bring them back. At the same time, MSMEs desperately need money in debt or any other form. Lenders are ready to give credit only to those with good conduct. With the NPA ratio already 10-14 per cent in 2019, this year could see a sharp rise in MSME insolvencies. There is also the uncertainty of consumer demand which will take its own time to come back to normal. Thus, it would be difficult for MSMEs to get steady cash flows due to sales,” remarked Ram Iyer, Founder and CEO, Vayana Network.
With government support in the form of new lines of credit, MSMEs have got the support to extend their runway but the demand scenario is something that will still keep haunting them for long. The revival of consumer demand will be crucial for MSMEs.
“As demand continues to be tepid, the road to recovery for MSMEs is going to be a long-winding one and conserving cash will be crucial for the longevity of businesses. The clamour for 'Vocal for Local' has led to a shift in consumer sentiment, encouraging the narrative of Make in India in manufacturing—[this] will benefit MSMEs that manufacture and produce goods and services locally,” said Akash Hegde, co-founder and MD, ShakeDeal.