February 17 2022: The Micro, Small and Medium Enterprises (MSME) is a highly vibrant and dynamic sector of the Indian economy with over 60 million (6 crore) units, providing employment to over 110 million (11 crore) people ( next to Agriculture), having 28% share of GDP and 40% of exports. Like other sectors, MSME also has been adversely affected in terms of productivity during COVD 19.
Issues affecting MSMEs include access to finance, global and domestic markets, improving R&D and adopting modern & affordable technologies, lack of marketing platforms and distribution network, affordable skilled labour and revision in labour laws taking care of the enterprises without compromising the interest of the workers.
The Ministry of Micro, Small, and Medium Enterprises has published a draft policy document to promote competitiveness, technology upgradation, infrastructure, cluster development, dedicated credit, procurement of products & financial assistance to MSME. It invited stakeholders, industry associations, MSME units and the general public to share suggestions and comments on the Draft Policy. The purpose is to firm up adaptive and inclusive National Policy for Micro, Small, and Medium Enterprises.
Link to Draft Policy in PDF here
We bring you some industry responses and comments the draft policy:
Meghna Suryakumar, Founder & CEO, Crediwatch: MSME is a dynamic sector that provides employment to 11 crore+ people. Pushing for insurance coverage to MSME employees under Ayushman Bharat in the policy gives the impression that the government is invested in their interests and their well-being, which is significant for the industry and all the people it employs, to function at their optimum level.
It is important to bring MSMEs to the fore. The policy has listed down setting up a marketing development fund. This is a vital step towards boosting MSME’s visibility. An increase in advertisements and marketing banners, more outlets set up across cities, and the like will lead to more awareness regarding MSMEs. Also, an important step would be connecting them with the right businesses.
Lack of affordable credit is the major deterrent to MSME growth. Availability of credit is a function of the ability to assess credit worthiness. Digitization plays a crucial role in ensuring that there is access to data to help assess credit worthiness. To accelerate governments digitisation drive, one should consider having an incentive / benefits framework to incentivise an MSME on the basis of the extent of its digital adaptation.
Incentivizing small businesses to improve their digital adoption is a need of the hour. This will ensure that they are included in the mainstreaming of alternative credit assessment frameworks
To ensure strong supply side growth, creditworthiness assessment criteria need to be relooked based on aforementioned alternative data points. Credit scoring models/institutes which rely on these data points should be promoted and benchmarks should be fine tuned to accommodate such associated data types. This will open avenues for assessing "new-to-bank" customers which are laggards to economic/credit policy benefits and most vulnerable to event specific downside risks (such as the recent pandemic). Also, this will allow efficient pricing of credit risk for such accounts and inturn reduce supply side bottlenecks i.e. banks ability to price credit risk while lending.
There is an urgent need to evolve credit assessment models that go well beyond the traditional credit assessment parameters. With so many new categories of data emerging, credit assessment needs to change too.
Suggestions
1. As a part of intergovernmental roles and responsibilities, the panchayat raj network can be utilized to spread awareness about the MSME initiatives. This will help the government in mobilizing the MSME economy from urban to rural areas.
2. The centralized policy should cover the basic necessities like power supply, water supply, land availability, etc, and other policies like providing subsidies, establishing training centers, etc can be left up to the state government to manage. This will help states compete with other states for providing add-on infrastructure to attract and develop the MSME economy.
3. For skill development initiatives, private or government-managed edTech platforms can be used to scale up the reach and accessibility. This is a cost-saving approach as a physical infrastructure setup is not required. Also, MSME stakeholders can easily access these platforms through basic smartphone and internet connectivity.
4. An electronic dispute management system will help MSMEs to raise complaints/concerns using the internet. This online dispute management system should be made available for private technology players so that it can be used for further analysis and MSME risk profiling.
5. A mandatory training/curriculum around dispute management is required at the time of registration. This will spread awareness about the proposed dispute management system. This will also help MSMEs in managing disputes at an early stage.
6. The proposed knowledge management system should be made publicly available. This will allow educational institutes and technology startups to plugin their analytics engines to provide predictive insights. MSMEs can use these predictions to avoid/capitalize on future losses/gains.
7. A separate IP protection regulatory body will be required in the future to address MSME-specific IP issues and disputes.
8. Enable a framework for MSMEs to leverage their utility (Electricity, Mobile) data footprint along with other alternate data to provide real time insights to lenders to enable them to price risk on the back of this data collateral rather than a ‘hard’ collateral. Thereby providing better credit access to MSMEs who primarily have cashflows and dataflows as collateral rather than Fixed assets.
9. Standardise KYC and Loan documentation/ Terms for MSMEs to reduce TAT for loan processing. Also standardisation will enable Lenders to better securitise these loans for capital market investors to create capacity to lend more to the sector. This can lead to better interoperability of loans to enable MSMEs to switch lenders like in the case of housing loans providing them better control over their destiny. (Crediwatch operates in the space of business analytics, GST analysis, credit risk intelligence, and insights on businesses.)
Rohit Garg, Co-Founder and CEO – Smartcoin – an NBFC lending money to MSMEs:
The regulatory framework for MSMEs in India is quite complex and differs from state to state. The Draft National Policy ensures that all state policies on MSMEs are in line with national regulations.
The gap between credit and MSMEs is evident now due to the pandemic, and financial assistance is one of the most important aspects for small and medium enterprises to function, recover and progress. This decision by the government aims to stimulate efficiency and productivity of MSMEs to generate income, employment and become a part of the domestic and global value chains.