The Micro, Small and Medium Enterprises (MSME) sector not only generates large job opportunities at comparatively lower capital cost but also help in industrialisation of rural and backward areas. They are complementary to large industries as ancillary units. In India, MSMEs comprise 95 per cent of total industrial units and contribute nearly 40 per cent to the total industrial output and exports.
However, they have a potential to make a much higher contribution, if the barriers to their growth are removed. The most significant challenge faced by them is access to finance. About 40 per cent MSME lending is done through the informal sector, where the interest rates are much higher than that of formal sources. Other challenges are in areas of ease of doing business, access to technology, marketing and exports.
While several policies and schemes for MSMEs have been introduced over the years, the utilisation of most schemes has not been to the extent desirable, owing to limited awareness as well as difficulties in accessing the same by the MSMEs. There is a need to strengthen the policy framework for MSMEs to ensure adequate support enabling them to grow and expand their business. Greater synergy between large corporates and MSMEs will help India to take on the world.
To address its biggest worry, the government should review the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to make it more effective for enabling greater credit flow to units in the MSME sector. Most MSMEs today need to provide 100% collateral for business loans, which severely restricts their growth. Banks are however reluctant to lend under CGTMSE. To make the scheme attractive to lenders and benefit MSMEs, following steps are needed:
- Reduce the lock-in/ waiting period for lenders participating in CGTMSE scheme to invoke guarantee from 18 months to 6 months
- The capping of 14 per cent rate for banks and 18 per cent rate for NBFCs (including the cost of guarantee cover) is restrictive. Pricing should be left to market forces
- Processing fee should be excluded from Rate of Interest (RoI) and capped at 2 per cent
Apart from making access to credit easier, other key recommendations are:
- Expedite the change in definition of MSMEs based on annual turnover as against the current classification based on investments in plant and machinery.
- Enhance priority sector lending target for micro enterprises (from current 7.5 per cent of Adjusted Net Bank Credit to at least 12 per cent).
- Bank loans to NBFCs for on-lending to MSMEs should be made eligible for classification under the priority sector lending of banks. The practice was discontinued abruptly in 2011.
- Amend the notification issued by the Ministry of Corporate Affairs that requires mandatory half yearly return by companies receiving supplies from MSMEs to state the amount of payment due to MSMEs and reason for delay to address the delayed payment issue.
- Redefine the classification limit for NPAs of MSMEs from current 90 days to 6 months. This would provide relief to MSMEs who often miss the 90 days window owing to delay in receiving payments.
- Reserve Micro and Small Enterprises (MSE) services for purchase under the scheme of reserved items for purchase from MSEs. Currently, there are no services under the reserved list of 358 items for purchase from MSEs.
- Review various rules governing e-commerce retail exports to encourage larger MSME base to tap the potential of e-commerce to improve exports.
- Announce setting up of a Market Intelligence Cell for MSMEs that maps specific foreign markets for specific MSME clusters; and accordingly provide information and training to MSMEs about consumer preferences, product specifications, technological developments and trade agreements.
- A compendium of all schemes and incentives available for MSMEs (including all sectoral schemes that may be applicable to MSMEs) should be published online and also disseminated widely to MSMEs.
Medium term agenda:
- Set up an exclusive ‘Export Facilitation Centre’ in PPP mode to promote exports of products and services from MSME sector. It can be established in each state with the cooperation of the state government and apex chamber like FICCI.
- There are around 55 lakh self-help groups (SHGs) in India with around 10 members/group, mostly comprising women. The government should focus on transforming at least 5% of these SHGs into SMEs in its tenure of 5 years. FICCI is currently working on one such model through the MILAP initiative in Maharashtra.
- Expand the network of technology centres and incubation centres for MSMEs across the country. Skilling for Industry 4.0 can be included in these centres.
- Establish international alliances for technology transfer with various developed and developing countries that give high priority to innovation and technology. This institutional mechanism will thereby facilitate innovation driven entrepreneurship in the country.
- Testing and certifications should be made convenient and cheaper for MSMEs. It is required that a mechanism/tie-up should be developed that testing can be done at Indian centers whereas certificates for the same test could be issued from various global testing centers. Alternatively, Indian testing certificates should have global acceptance.
- Multiple registrations with multiple government agencies for various purposes should go away for MSMEs. Inter-ministries co-ordination should be improved to bring out one or maximum two registrations for businesses to carry out all business activities to improve ease of doing business for MSMEs.
(The author is Chair, FICCI National MSME Committee and Director, Touchstone Gems & Jewellery (India) Pvt Ltd)