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The Micro, Small and Medium Enterprise (MSME) Landscape in India is a growing pillar of the Indian economy that contributed significantly to the economic and social development of the country. MSMEs act as complementary units to the large industries and thus ensuring their sustenance is important. In accordance with the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME), revised as of July 1st 2020 are classified as below.
As per the official MSME data 2019, there are around 633.88 lakh MSMEs in the country, 51% of which are situated in the rural areas and 49% in the urban areas.
Size of Market
According to a World Bank report, MSMEs contribute a huge 31% to India’s GDP and 45% of manufacturing output. In addition, they constitute 40% of exports from the Indian market - thus being a major source of foreign exchange earnings for India. While MSME’s have been growing rapidly, the rate of growth has been falling consistently - halving from 15% in 2012-12 to approximately 7% in 2015-16.
According to an RBI Report, about 97 percent of MSMEs operate in the informal sector. As per National Accounts Statistics 2012, the share of informal (unregistered) sector manufacturing MSMEs in total GDP is estimated at around 5 per cent. According to Mr. S. Mundra, Deputy Governor of the RBI (2016), a large number of these firms depend on informal channels because of easy accessibility and availability of credit without any documentation hassles and mortgages, even though the rate of interest on such loans may be very high.
Understanding Indian MSME Landscape
As per the studies conducted in 2018, it has been observed that roughly 15% enterprises are registered. Given the vast range of MSME’s in India, they can be categorised based on the following parameters:
● Size of the firm
● Industry
● Geography: According to the Annual Report of the MSME Ministry (2019-20), the State of Uttar Pradesh had the largest number of estimated MSMEs with a share of 14.20% of MSMEs in the country. Top 10 States accounted for a share of 74.05% of the total estimated number of MSMEs in the country. These top 10 states are (in decreasing order of share of MSMEs): Uttar Pradesh, West Bengal, Tamil Nadu, Maharashtra, Karnataka, Bihar, Andhra Pradesh, Gujarat, Rajasthan and Madhya Pradesh. A complete state-wise distribution of estimated number of MSMEs can be found in the Appendix.
Sectoral Break up within Manufacturing
Since the biggest sector has been identified as Manufacturing, we decided to deep dive into the sector. Moreover, manufacturing has proven to play a key role in most growth stories of the world. For instance, China has pivoted itself as a great upcoming power with an enormous economic growth story primarily because of its prowess in manufacturing.
In the words of Prime Minister Narendra Modi, “I tell the world, ‘Make in India’. Sell anywhere but manufacture here. We have the skill and talent for it.”
We found the three biggest sectors within manufacturing as - crop and animal production, food processing and textiles. We decided to do a sectoral analysis of the issues in financing of MSMEs, focusing on these top 3 sectors. The top 10 sectors within manufacturing MSMEs are given below:
Manufacturing sub-group break-down (Engagement in lakhs )
Overall MSME Analysis
In order to understand the fundamental problems faced within the top three sectors in manufacturing, a detailed root-cause analysis has been undertaken to deep dive into the sectoral issues in the MSME credit landscape.
ROOT CAUSE ANALYSIS
Access to timely and adequate credit by MSMEs at a reasonable cost is essential for growth of the sector. The institutions lending to MSMEs in India regulated by Reserve Bank include Scheduled Commercial Banks, SCBs (Public Sector Banks, Private Sector Banks including Small Finance Banks, Foreign Banks, Co-operative Banks and Regional Rural Banks) and Non- Banking Financial Companies including NBFC- MFIs. In addition to this, Securities and Exchange Board of India (SEBI) regulates the institutions engaged in providing or mediating capital to MSMEs such as SME Exchanges, Angel Investors, Venture Capital and Private Equity.
At an aggregate level, the banking sector has credit outstanding to MSMEs of approximately ₹17.4 trillion ( ₹ 17.4 lakh crore ) as on March 31, 2019. SCBs account for 90% of the share of this, although NBFCs have grown at a healthy rate in recent years.
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ISSUES IN MSME FINANCING
The main issues observed in the MSME financing landscape are broadly categorised as following:
- Low creditworthiness for investments for the banks
- Low propensity of the financial institutions to finance MSME needs instead of larger corporates
- High probability of loan default
The scheduled banks do not prefer to give credit to the MSMEs sector because banks consider it as a risky area for investment because of its low growth rate, high processing cost, low creditworthiness and poor flow of information. Providing a loan by bank is a very lengthy and formalistic process and the cost of credit is also very high. The owners of MSMEs have to present different types of documents before banks to prove their worthiness. Because of these difficulties MSMEs show less trust on financial institutions and banks for raising funds and therefore mostly depend on its internal sources i.e. personal savings, loan from relatives, and loan from local money lenders. The small size is also a big problem for this sector. This sector has poor infrastructure that’s why the production capacity is very low and production cost is very high. Thus, this sector can’t enjoy large production and because of the increasing NPAs, they tried to avoid granting loans to MSMEs. The other problems like poor technology, lack of skilled manpower, marketing problems, delayed payments etc are also faced by this sector and these problems negatively affect it.
Financial institutions have a propensity to fulfill the financing needs of the large enterprises rather than that of the MSMEs. Supply of bank credit towards the MSMEs is far below their demand for the formal credit and it leads to the financing gap in the MSME Sector. Access to timely credit is essential for the growth of the MSMEs in India and its unavailability may impede the development of the MSME sector. Another issue that hinders availability of Bank credit for the MSMEs is the problem of information asymmetries. It basically means that the borrower has more information than the lender on his ability to pay back the loan, the type of projects with the firm and the viability of those projects.
The capital needs of the MSMEs either can be met by internal funds available with the firm or by the use of debt capital from the external sources. MSMEs lack of access to timely credit still remains a major issue and it requires immediate government attention. Unlike the large enterprises, Micro, Small and Medium Enterprises rarely have any access to the capital markets and therefore, the possibility of raising funds through equity is out of question for the majority of the MSMEs. In the absence of the equity capital, MSMEs need to look for support from the banks and financial institutions in order to meet their financing needs. The other informal sources of funds available to the MSMEs are trade credit, private money lenders and borrowing from friends. Private money lenders such as Sahukars, Mahajans and Shroffs charge a very high interest on the credit amount provided to the MSMEs, which usually is exploitative in character. The MSME borrowers are therefore, clutched into the vicious cycle of credit needs and in a number of cases are forced to shut down their units.
MSMEs have become prominent contributors in the Indian economy but at the same time, they keep on facing the various financial constraints which impedes their growth, innovation capability and performance. Lack of access to formal credit has been highlighted as the major barrier by the majority of the small entrepreneurs and there are a number of factors that can be identified to explain the severity of this problem.
MSMEs as uncreditworthy borrowers with a very high probability of loan default and therefore, deny or ration their credit needs. Lack of access to timely credit has been accepted as the major hindrance in the path of the MSMEs and it has been pointed out as the prime reason for their slow growth. Not only in India but throughout the globe, access to finance for the MSMEs has emerged as a major challenge that needs the attention of the policymakers. Small firms are unable to have access to the formal credit and therefore are unable to expand their businesses. Most of the financial institutions consider MSMEs as unstable firms and often impose strict lending norms and high risk premiums on the loans sanctioned to the MSMEs.
MSME Credit Demand and Gap Estimates
According to an RBI Report, in India, the total addressable demand for external credit is estimated to be ₹37 trillion while the overall supply of finance from formal sources is estimated to be ₹14.5 trillion . Therefore, the overall credit gap in the MSME sector is estimated to be ₹20 – 25 trillion.
MSME Borrowings
Front the below table we can see that, most MSMEs rely on Self financing their enterprises and do not go to Institutional sources (Formal sources) for financing.
Accessibility to Credit:
PSL Norms
Bank’s lending to the Micro, Small and Medium enterprises as under is eligible to be reckoned for priority sector advances:
a) MSMEs engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time is reckoned for priority sector advances.
b) MSMEs engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006
Priority Sector Lending
Considering the targets and sub-targets for banks under the priority sectors, it has been observed that 18% of the adjusted net bank credit is available for the agricultural sector from the domestic scheduled commercial banks which is evident in the number of schemes available for MSME credit. Further, only 7.5 is available for the micro-enterprises. More details on priority sector lending can be found in the appendix.
Average Credit Ratings for MSMEs
Credit rating is not mandatory but it is in the interest of the MSE borrowers to get their credit rating done as it would help in credit pricing of the loans taken by them from banks. Most MSMEs currently do not get credit rating scores due to the high cost attached to the same.
Sectoral Analysis for Lack of Financial Capital
Studying the information above, it is evident that the top-three sub-sectors namely food processing, textiles ,and crop and animal production represent 60% of the entire share of the Micro enterprises. Considering they constitute the maximum share in the Micro set-up, it will be ideal to study these sectors in detail to get a deeper understanding of the challenges faced by multiple stakeholders in the MSME credit landscape. Therefore, this paper delves into the said sub-sectors in detail and also highlights tailor-made recommendations for the policymakers.
Crop and Animal Production Sector, Hunting and Related Service Activities
Within multiple categories of crop and animal production ranging from growing perennial and non-perennial crops to rearing livestock, we have chosen poultry and dairy sectors due to their availability of data and insight.
According to the IMARC Group, the Indian poultry market, consisting of broilers and eggs was worth INR 2,049 Billion in 2019. India today is one of the world’s largest producers of eggs and broiler meat. The poultry industry in India has undergone a major shift in structure and operation during the last two decades transforming from a mere backyard activity into a major industry with the presence of a large number of integrated players. This transformation has involved a sizable investment in breeding, hatching, rearing and processing activities.
Figure: Movement of credit in the Poultry Sector
The poultry and dairy industry and its MSMEs make use of a variety of MSME credit, technology, infrastructure and employment generation schemes. These include Credit Guarantee Trust Fund for Micro & Small Enterprises (CGT SME), Domestic Market Promotion Scheme and Export Market promotion scheme. For instance, GoI provides financial assistance to the individuals for establishing Poultry Estates and Mother Units for Rural Backyard Poultry (for unit of 1,500 chicks per batch); a Poultry Venture Capital Fund for farmers, NGOs, cooperatives, SHGs which encourages poultry farming in non-traditional states (25% of outlay as back ended capital subsidy, 10% margin, rest bank loan) through the DAHD website. Various bank provide poultry and agricultural loans such as:
- SBI Poultry Loan for the existing as well as new farmers for setting up poultry shed, feed room, and other equipment
- SBI Broiler Plus Loan to the farmers under contract farming
- PNB offers loans for the construction of sheds & purchase of equipment. It also provides production loans for buying day-old chicks, feed, medicines, etc.
- HDFC Bank provides financial support to farmers with experience in cultivating cash crops, plantations, poultry, animal husbandry, dairying, seeds, warehousing, etc. HDFC also finances the supplies for Agri inputs such as seeds. HDFC bank provides loans for the setting up of small poultry (layer/broiler) for farmers & agricultural laborers. Farmers can get a loan amount up to 100 percent on the cost of the asset or project cost
- IDBI poultry loan which benefits the existing & new farmers for setting up poultry shed, feed room & other equipment
- Federal Bank Agri-Allied Loans for animal husbandry, dairy and poultry
However, according to FICCI’s sectorial paper (2020) on dairy, it has been observed that these sectoral investment and credit schemes are highly limited to a few regions in the country and only focus on limited components of the value chain which tend to restrict funding for other purposes such as animal health care, quality fodder etc.
Challenges in the dairy and poultry sector:
The dairy and poultry sector faces multiple challenges for availing credit such as low transparency, elaborate documentation procedures with the smaller dairy setup, compliance challenges and lack of access of credit for production facilities in the dairy and poultry sector. The below mentioned challenges in the sector have been prevailing for almost decades in the country and are the main roadblocks which tend to hamper the growth of the sector owing to non-availability of credit. A few main challenges have been highlighted below:
Collateral and Terms of Repayment: In most of the credit schemes mentioned above, the collateral asked for is 50% (in advance). This may not always be feasible for the MSME owner/founder. Also, only the Federal Bank scheme provides for upto 9 years for repayment, rest all the schemes that are available for the dairy and poultry purposes are for 5 years which acts as a roadblock while availing the credit. Another challenge is regarding obtaining insurance for the cattle. Many farmers have suffered losses due to natural calamities like landslides and floods. Though the central government (NABARD) and the State Disaster Relief Funds are offering insurance covers for animals owned by these farmers, the implementation has not taken off on a large scale. Lack of awareness among farmers concerning purchasing insurance, passive participation from insurance companies, and livestock insurance have not been made mandatory.
Lack of quality testing infrastructure and trained work-force: There is a lack of adequate quality testing infrastructure at milk collection centres. The problem is compounded by the lack of trained manpower to undertake quality testing. With regards to availing the benefits of the credit schemes, the banks conduct an official audit and require the dairy and poultry producers to adhere to certain licenses and infrastructure standards. However, due to their size, these dairy and poultry MSMEs often find it difficult to capture market opportunities and are unable to achieve economies of scale, hence, the vicious cycle of limited funding tends to continue.
Low productivity: Low productivity per animal hinders development of the dairy sector. Despite being the world’s largest milk producer, India’s productivity per animal is very low, at 987 kg per lactation, compared with the global average of 2038 kg per lactation. It is a result of ineffective cattle and buffalo breeding programmes, limited extension and management on dairy enterprise development, traditional feeding practices and non-compliant veterinary practices as per international standards. The primary reason for the low animal productivity stems from the lack of funding for animal health issues as one of the main subject heads. Considering the parameters of funding for Dairy and Poultry, the guarantee schemes mainly focus on the infrastructure facilities and neglect animal healthcare and protection of animals against diseases.
Scarcity of quality fodder resources: According to FICCI’s sectoral research (2020) scarcity of quality fodder acts as another major constraint in the development of both the dairy and poultry sector. This can be again attributed to the limited credit guarantee schemes available for the usage of quality fodder. As a result, MSMEs in both the dairy and poultry sectors end up availing the substandard feeds which are available and hence there is a chronic shortage of good-quality feed available for animals.
Lack of information on operational MSME and credit schemes available: Another critical issue faced by the dairy and poultry sector is lack of data on availability on MSMEs which are into the production of various types of green fodder. Unlike food crops, the Agriculture Ministry does not collect data on fodder crops whose availability poses a serious challenge in increasing productivity. According to the vision document of the Indian Grassland and Fodder Research Institute (IGFRI) 2030, there is no agency to provide precise data on fodder crop production, productivity, and adoption of improved varieties and technology for effective policy formulation. Because of this, both the MSMEs and the Government are unaware of the number of companies operating in this ecosystem and the credit schemes available for their benefit.
Policy recommendations for the Crop and Animal Production (primarily dairy and poultry) sector:
The following recommendations have been suggested to improve the timely availability of credit in the above-mentioned sector.
● Collaboration with Private Entities: Government should tap into the private sector to ease some of the monetary burden and allow the private sector to take the limit.
● Insurances: An insurance provided by the Government against variable feed prices could be provided to the crop and dairy and poultry farmers to ensure constant or growing output.
● Infrastructure development and diversification: To enhance quality and efficiency of the dairy sector, it is suggested to develop the required infrastructure for cold-chain involving bulk milk cooling, efficient transportation and logistics at the grassroots level.
● Input supplies: An adequate supply of inputs like balanced feed, processed paddy and wheat straws along with veterinary care and breeding support services should be provided at minimal costs by the Government to encourage the development of the sector
● Technological Advancements: Dairy and poultry industry may adopt Block-Chain technology for storing data related to livestock and enabling the financial institutions, insurance and developmental agencies to use the data to facilitate financial support without the requirement of an intermediary.
A detailed list of recommendations along with the success stories across the globe have been mapped below for reference.
I. Root Cause: Collateral and Terms of Repayment
Solution: Collaboration with Private Entities
- Government should tap into the private sector to ease some of the monetary burden and allow the private sector to take the limit. For instance, “Rangewell”, a UK-based private company offers favourable conditions for financing poultry farming and is application-based. The Government can create a repository of such international firms and set up a platform specifying the application process to disseminate correct information amongst the farmers/producers
- An insurance provided by the Government against variable feed prices could be provided to the crop and dairy and poultry farmers to ensure constant or growing output. As of now, the Government provides livestock insurance against the death of cattle and permanent disability cover for animals. There is a need to widen the scope of the insurance available to cover the risks against variable feed prices.
II. Root Cause: Lack of quality testing infrastructure and trained work-force
Solution : Infrastructure development and diversification
- To enhance quality and efficiency of the dairy sector, it is suggested to develop the required infrastructure for cold-chain involving bulk milk cooling, efficient transportation and logistics at the grassroots level. Infrastructure facilities can also be integrated with other agro-processing activities including fruits and vegetables for the holistic growth of the sector
- Government needs to introduce programmes on advanced breeding methods and infrastructure such as artificial insemination, embryo transfer etc.
- Diversification: It will be desirable to diversify the existing product-mix to production of high value products having long shelf life to improve economic efficiencies. For instance, more focus on buffalo milk based specialty dairy products will be unique with regards to the availability of a large proportion of buffalo milk.
- The majority of the poultry farmers prefer the poultry business as their family business but they were not having adequate experience. Hence, it is suggested that they may be given adequate information, education, communication and orientation training programmes. For this, skill building should be initiated by combining vocational and entrepreneurship training programmes for the small dairy and poultry enterprises. A course module focusing on MSME credit highlighting the dairy and poultry schemes should be introduced to ensure the flow of information to the right target audience.
III. Root Cause: Scarcity of quality fodder resources & Low productivity
Solutions: Input supplies
- An adequate supply of inputs like balanced feed, processed paddy and wheat straws along with veterinary care and breeding support services should be provided at minimal costs by the Government to encourage the development of the sector.
IV. Root Cause: Lack of information on operational MSME and credit schemes available
Solutions: Technological Advancements
- Dairy and poultry industry may adopt Block-Chain technology for storing data related to livestock and enabling the financial institutions, insurance and developmental agencies to use the data to facilitate financial support without the requirement of an intermediary. For instance, Arla Finland, a dairy company launched a blockchain platform in 2018 named “Milkchain” on its organic UHT milk. Danone launched its “Track & Connect” blockchain on the Aptamil & Nutrilon baby formulas in China. In France, Nestlé partnered with Carrefour to use blockchain on their Guigoz Bio 2 and 3 range of infant milk. Carrefour, the biggest French retailer, is also a blockchain user for its fresh whole milk Carrefour Quality Line (FQC). Other examples include Bright Food in China,Vinamilk in Vietnam, El Ordeno in Ecuador.
Food Processing Industry:
The food processing sector is critical to India’s development, for it establishes a vital linkage and synergy between the two pillars of the economy, industry and agriculture. Agriculture still accounts for over 35% of the national incomes and over 2/3 of the working population. Due to this, despite India being one of the largest producers of agricultural commodities in the world, agricultural exports as a share of GDP are fairly low in India relative to the rest of the world. The same proportion is around 4% for Brazil, 7% for Argentina, 9% for Thailand, while for India it is just 2%. Below are few of the pressing challenges faced by the food processing industry:
Challenges and Loopholes in the Food Processing Industry:
The Food Processing sector faces multiple challenges for availing credit such as Lack of awareness, elaborate documentation procedures with the compliance challenges and lack of access of credit for production facilities in the food processing sector. The below mentioned challenges in the sector have been prevailing for almost decades in the country:
Lack of access of credit: The Emergency Credit Line Guarantee Scheme (ECLGS), which is being provided by the National Credit Guarantee Trustee Company (NCGTC) to banks, NBFCs and Financial Institutions (FIs), is provided only to existing borrowers, and no no new borrowers can into play. Any loan taken by a promoter or director in his personal capacity will not be covered under the scheme. The loan account should be less than or equal to 60 days past due as on 29th February, 2020 and the borrower has not been classified as SMA 2 or NPA by any of the lenders. A borrower must also be registered under GST, unless the business is not required or exempted from having a GST registration.
Lack of awareness: Most of the MSMEs are not aware of the financial schemes and options that are available to them. They also are inaccessible to a lot of the schemes as most schemes work on credit ratings and most MSMEs continue to remain unaudited and thus without a credit rating.
Inefficient Procedures: Long term loans are not in plenty, and the paperwork to get the loan is difficult. Most MSMEs are not tech savvy. The food processing industry has a high concentration of unorganised segments, representing almost 75% across all product categories. Thus, causes the inefficiencies in the existing production system.
They have very low profit margins (between 6 - 10%), thus taking a loan adds to the burden.The credit period given by suppliers to food processing units is too short.
Demand of processed food is mainly restricted to urban areas of India.
Policy recommendations for the Food Processing Sector:
The following recommendations have been suggested to improve the timely availability of credit in the food processing sector.
● Compulsory auditing of MSMEs at the end of the year, undertaken by the government and for the government to assign a credit score to the MSMEs
● Introduction online forms for application to the schemes, one which does not require too much time and effort.
A detailed list of recommendations has been added below for reference.
I. Root Cause: Lack of access of credit
Solution:
Compulsory auditing of MSMEs at the end of the year, undertaken by the government and for the government to assign a credit score to the MSMEs. When the auditing is done on a regular basis, it will ensure that the MSME has a credit rating, which makes the MSME eligible for loans from banks.
The other solution we propose is the introduction of small loans without collateral. The absence of collateral, would ease the pressure on the sector, and allow more MSME owners to access loans easily.
I. Root Cause: Inefficient Procedures
Solution:
Introduction online forms for application to the schemes, one which does not require too much time and effort.
Textile Industry
The Indian textile industry is one of the oldest industries in the Indian economy, and India is among the world’s largest producers of textiles and apparel. The sector is extremely varied, with hand-made yarns and textiles sectors as well as capital-intensive mills sectors, and has strengths across the entire value chain, from fibre, yarn, fabric to apparel. The majority of the industry comprises of the decentralised power looms/hosiery and knitting sector. In 2019, the textile industry contributed to 7% of the industry output (in value terms), 2% to the GDP, and 15% to India’s export earnings.
The government of India has implemented a number of programmes to integrate and improve the decentralised MSMEs in the industry. Schemes like the National Technical Textiles Mission and the Technology Upgradation Fund Scheme aim to augment technological penetration and investments in this sector in order to improve overall productivity and employability.
Challenges in the Textile Industry:
High costs of capital: Compared to its export competitors, India has one of the highest costs of capital due to structural issues in financial institutions in the country– vexed taxation issues and lag in financial transmission are a few factors that contribute to this problem (Mint, 2015).
This directly affects India’s cost of production, and hence the country’s competitiveness in the global market. The current lending rate in India is between 11 to 12.5%, while China, Vietnam, and Turkey offer capital at a rate of 5 to 7% only. To add to this equation, the high-power costs in the country further push India back.
High cost of raw materials and price uncertainty affect SMEs especially. Poor weather conditions or output in other parts of the world disrupt the global supply chains and end up negatively influencing the textile industry in India, since it is heavily dependent on import of raw materials. MSMEs, who already face a shortage of funds for their raw materials, are not equipped to deal with such volatile fluctuations.
Goods and Services Tax: GST has created distortions in the Textile and Apparel sector in India, impeding its competitiveness. The man-made fiber yarn is now taxed at 18%, while the fabric is taxed at 5%. The small businesses which buy yarn and produce fabric are directly impacted by this imbalance, affecting their sustainability. GST of 18% on man-made fibre makes the MSMEs uncompetitive against large composite mills. This problem is further accentuated as non-integrated textiles players do not get a refund of excess GST on input. Apart from the policy limitations, system errors, delay in reimbursement of input credit, untimely implementation and limited knowledge of GST has hugely impacted the MSMEs in the textile sector. Although, in the long-term GST is set to affect the apparel and textile sector of India positively, the short-term impact has brought many small-scale businesses to a complete halt. (Ambastha , M., 2018)
Fibre Neutrality: In India, cotton and manmade fibres (MMF) have differential tax treatment. Globally, manmade textiles and garments are in high demand, with the ratio of cotton-to-manmade-fibre consumption at 30:70. India, despite being the second-largest textiles exporter in the world, lags in this category because of unavailability of manmade fibres at competitive prices. In fact, of the total textiles and clothing exports from India, cotton accounts for around 75%. There is a need to align our production with the global consumption patterns.
Infrastructure bottlenecks lead to low level of reliability in the fulfillment of delivery deadlines, high transaction costs, high interest rates and low level of direct foreign investments despite the efforts made to attract them.
Policy Recommendations for the Textile MSME Industry:
The following recommendations have been suggested to improve the timely availability of credit in the textile sector.
●Setting-up of Special Economic Zones (SEZs) for the textile sector: Improvement in infrastructure and transportation facilities will reduce delivery time for Indian exports and therefore maintain competitiveness in the global market
● Protection from price volatility and fibre neutrality are additional aspects that will give a boost to this sector through appropriate subsidy regimes.
A detailed list of recommendations has been added below for reference.
I. Root Cause: Infrastructure Bottlenecks
Solution:
Special Economic Zones (SEZs) can be set up for the textile sector. Improvement in infrastructure and transportation facilities will reduce delivery time for Indian exports and therefore maintain competitiveness in the global market.
Storage facilities for raw materials need to be provided to reduce spoilage and wastage of resources.
I. Root Cause: Inefficient Taxation and Price Uncertainty
Solution:
Protection from price volatility and fibre neutrality are additional aspects that will give a boost to this sector. This can be achieved through appropriate subsidy regimes.
Taxes on different stages of this sector must be streamlined to eliminate any discrepancies.
II. Root Cause: Lack of Access to Credit
Solution:
Compulsory auditing of MSMEs at the regular intervals to be conducted, so that the government can assign a credit score to them. This will make the MSMEs eligible for bank credit.
So, What Do We Propose ?
We suggest the following as the most important recommendations which must be implemented on a priority basis:
● Stressed Fund: As suggested by the UK Sinha committee, Rs 5,000 crore stressed asset fund should be implemented for the MSME sector to provide relief to small businesses hurt by demonetisation, GST, and the ongoing liquidity crisis.
● More collateral free loans: Doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs.
● Online due diligence: With the increased availability of data from several sources, including GSTN, Income Tax, Credit Bureaus, Fraud Registry, etc., it is recommended to do most of the due diligence online and appraise the MSME loan proposals expeditiously. Fintech apps which provide credit to firms using data modelling for credit worthiness (instead of relying on previous history).
● Alternate credit scoring opens indefinite doors for a small business owner, which would not have been possible with outdated credit screening procedures of conventional banks.
A detailed list of recommendations has been added below for reference.
I. Root Cause: Lack of credit available
Solution:
Stressed Fund: As suggested by the UK Sinha committee, Rs 5,000 crore stressed asset fund should be implemented for the MSME sector to provide relief to small businesses hurt by demonetisation, GST, and the ongoing liquidity crisis. We propose doubling this amount keeping in mind the troubles caused to MSMEs due to the coronavirus situation.
II. Root Cause: Access to liquidity
Solution:
More collateral free loans: UK Sinha committee suggested doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs.
III. Root Cause: Centralization of credit availability
Solution:
Decentralize credit availability to MSMEs: This can be achieved at scale with the help of Financial technology apps that are on the rise. Eg: Ziploan
IV. Root Cause: Lack of Due-Diligence
Solution:
Online due diligence: With the increased availability of data from several sources, including GSTN, Income Tax, Credit Bureaus, Fraud Registry, etc., it is recommended to do most of the due diligence online and appraise the MSME loan proposals expeditiously.
Fintech apps which provide credit to firms using data modelling for credit worthiness (instead of relying on previous history). Eg: Acko is helping SMEs ease their financial crisis by operations on platforms like expense management solutions. It has helped churn out data that has been put to use by them in identifying the right deliverables. A July 2018 report by Boston Consulting Group pegged the digital lending itself in the next five years to be a $1 trillion opportunity in India. While a majority of these are focused largely on personal or consumer loans, a handful have found a niche in MSME credit.
IV. Root Cause: Credit-Rating Procedures
Solution:
Alternate credit scoring opens indefinite doors for a small business owner, which would not have been possible with outdated credit screening procedures of conventional banks. ACS makes use of data from various digital platforms to understand consumer behaviour for credit risk assessment and terms them eligible for credit. It demonstrates potential strength of combining data from social media usage, bill payments history, etc.
If you are interested in applying to GGI's Impact Fellowship, you can access our application link here.
MEET THE THOUGHT LEADERS
Shatakshi Sharma is a management consultant with BCG and Co- Founder of Global Governance Initiative with national facilitation of award- Economic Times The Most Promising Women Leader Award, 2021.
Prior to graduate school at ISB, she was Strategic Advisor with the Government of India where she drove good governance initiatives. She was also felicitated with a National Young Achiever Award for Nation Building. She is a part time blogger on her famous series-MBA in 2 minutes.
Naman Shrivastava is the Co-Founder of Global Governance Initiative. He has previously worked as a Strategy Consultant in the Government of India and is working at the United Nations - Office of Internal Oversight Services. Naman is also a recipient of the prestigious Harry Ratliffe Memorial Prize - awarded by the Fletcher Alumni of Color Executive Board. He has been part of speaking engagements at International forums such as the World Economic Forum, UN South-South Cooperation etc. His experience has been at the intersection of Management Consulting, Political Consulting, and Social entrepreneurship.
Ishan Tewari is a Mentor at GGI and a management consultant. He likes to mentor young GGI fellows on weekends as a volunteer in his free time.
Personally, he is a massive sports buff and loves to share his passion by connecting with like minded people too.
AUTHORS (GGI FELLOWS)
Anusheela Ghosh is a recent graduate in Psychology (Hons.) from Lady Shri Ram College for Women, Delhi University. She is working as an Associate Consultant at Samagra - Transforming Governance.
Passionate about the development sector, she has worked in a diverse range of areas, with multiple stakeholders in the system - from NGOs at the grassroot level (Child Rights & You, Kailash Satyarthi Children's Foundation etc.); to the Department of Health at Government of Delhi at the governance level; to the United Nations - SDSN at the international level.
Ankita Mathew is a postgraduate student at Ashoka University, pursuing her Post Graduate Diploma in Liberal Studies with the Young India Fellowship. She has worked as an analyst at Deloitte, where she gained in-depth experience in management and technology consulting.
Lavanya Singh is currently pursuing her MSc in Economics for Development from the University of Oxford and is a graduate from St. Stephen’s College. She is particularly interested in understanding the dynamics of poverty and inequality, and wishes to work in the field of policy research in the future
Pranidhi Sawhney is a development economist focusing on international trade, regional integration and value chain development across Africa and South-East Asia. She has about three years of experience in conducting extensive research and analysis on policy and regulatory matters across different verticals. Previously, she has worked with the ILO New Delhi, UNFPA Geneva and BRICS International Forum, among others. Pranidhi is a postgraduate in Development Management from the London School of Economics and Political Science and an undergraduate in Economics from the University of Delhi.
Shivani Raheja is a lawyer pursuing her Masters in public policy from St. Xavier's College, Mumbai. Shivani aims to direct her efforts to work at the intersection of health, law and policy to ensure that basic levels of healthcare are accessible to all.
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