The MSME sector in India, which accounts for 30% of the country’s GDP and 50% of exports, wants the government to address an “unease in banking” for small businesses.
Finance Minister Nirmala Sitharaman should resolve this issue in the interim budget, says the Federation of Indian Micro and Small & Medium Enterprises (FISME).
Anil Bhardwaj, secretary-general of the federation, says the bank ombudsman scheme is ineffective and appears to favour the lenders over the customer. A big weakness is that it does not make it mandatory for the ombudsman to deliver reasoned or speaking orders. Because of this, most cases are just dismissed or decided arbitrarily without giving reasons, he says.
FISME also highlights that banks levy a foreclosure charge on loan prepayment or when a borrower wishes to switch banks because of unsatisfactory services. These charges, ranging from 2-4%, contradict the RBI’s Code for Micro and Small Enterprises (MSE), which advises against such penalties, says Bhardwaj.
Bank loan rating: A big pain point
Another industry’s pain point pertains to the application of bank loan ratings (BLR). If the exposure of banks to an MSME account is beyond a threshold, banks insist on getting a third party rating known as BLR from RBI or SEBI-approved rating agencies. The trouble is that historically, these rating agencies were brought in to rate listed companies and assign A,B,C type of ratings. The same agencies were suddenly mandated to rate MSMEs for short-term “solvency” with the same set of formats.
The results have been disastrous, says Bhardwaj of FISME. Hardly any MSME got investment grade rating, which means higher interest rates and demand for additional collateral security. “In RBI’s own admission, BLR rating was not meant to be a permanent policy but a stopgap arrangement in 2007 until banks developed their own robust risk assessment models. It’s time the BLR ratings are junked. Almost all MSMEs feel exploited by rating agencies,” Bhardwaj says, requesting the FM to address this in the budget.
Bank guarantees
It is estimated that the size of public procurement in India is almost one third of its GDP — close to $1 trillion. For MSMEs, it assumes even greater importance because the central government mandates 25% procurement from the small businesses. MSMEs taking part in such procurement are required to furnish bank guarantees (BGs), performance guarantees. Banks charge huge sums for such service from MSMEs. This locks up valuable working capital for the small companies.
FISME says it has consistently highlighted the global practice of furnishing BGs through insurance companies, which neither insist on margin money nor demand collateral security but charge for usage period. Notably, the finance minister announced the option of replacing BGs with insurance surety in the Union Budget in 2022. However, this is restricted to NHAI projects only. FISME wants a clear road map for MSMEs to get this facility.
Policy support needed
Home Textile Exporters Welfare Association (HEWA) sees the upcoming budget as an opportunity for the FM to increase the export promotion budget for textiles, so that more companies can participate in international events. “In a major global fair, we found only 170 Indian companies, compared to China’s 1,500,” says Vikas Singh Chauhan, Director, Home Textile Exporters Welfare Association (HEWA).
He suggests the government establish “India marts” in public-private partnership modes at leading geographies. The same model brings a huge difference in China’s share of global trade presence, he says. “We propose a PLI-like scheme for micro and small firms with an investment cap of Rs 10 crore, focusing on specific clusters. We also request an increase in the interest subvention scheme subsidy from 2% to 5%, applicable to both manufacturer and merchant exporters. The government should also expand the Shipping Corporation of India to create a global shipping presence, breaking the monopoly of larger shipping lines,” adds Chauhan.
Better jobs and support on ESG handling
MSMEs are vital to generate employment for blue-collar workers. But there is a mismatch in availability and requirement of blue-collar skills, says think tank CUTS International.
Pradeep Mehta, the Secretary-General of CUTS International, emphasises that the budget should prioritise the right kind of employment — focussing not only on job quantity but also on ensuring the provision of good and better jobs for the masses.
Another challenge that Mehta wants the upcoming budget to address is the lack of environmental, social, and governance (ESG)-related support for MSMEs. He says ESG is critical for the integration of MSMEs in both global value chains (GVCs) and regional value chains (RVCs). “MSMEs are increasingly acknowledging the significance of ESG considerations. However, they need more policy support to ease the compliance burden associated with ESG practices. From an Indian standpoint, ESG investing is still in the early stages. Therefore, the FM should look at establishing a specific framework designed for implementing ESG by MSMEs,” says Mehta.
