Micro, Small and Medium Enterprises- bigger problems

Business Capstone

The MSME sector faces uncertain times and a long list of problems due to the pandemic.

Bengaluru: Micro, Small and Medium Enterprises are one of the hardest hit sectors in India due to the pandemic. The production activities came to a halt during lockdown. Further, the pandemic disrupted supply chain, procurement of raw materials, and enterprises suffered due to lack of labour force. A survey done by the SKOCH group states that 25-30 million jobs might have been lost in the sector owing to the pandemic.

Kantharaju, Manager of Profuse technology, a Medium enterprise said, “We used to have 30 employees before the pandemic, now only 12 employees work here. Our production has gone down by 75 percent as compared to production before the pandemic.” Teknic Euchner Electronics Pvt.ltd stated a list of problems they faced because of the pandemic and subsequent lockdown like loss of production, increase in the price of raw materials, substantial increase in costs of logistics, increase in operational costs etc.

Lack of employees is one of the major problems faced. According to the data provided by Karnataka Small Scale Industries Association(KASSIA) around 23 enterprises across Bengaluru called KASSIA asking assistance in recruiting labour. Their Udyog Sahayavani Survey report stated that,  out of the 71 industrialists who called the help desk, 38 percent needed financial assistance, 30 percent inquired about manpower requirements and 18 percent for other queries. Along with these problems, some enterprises have also not received payments from their clients which has in turn led them to financial losses and has made it difficult for them to procure raw materials for further production. Karigowda, proprietor of Nanjundeshwara steel said, “We have incurred losses of Rs. 4 to 5 lakhs and we are still waiting for payments from our clients.” The centre also mandated state governments to pay the dues to enterprises that were involved in public sector undertaking. A report states that centre and states owed over Rs. 34,500 crores to the MSMEs.

The Centre has taken steps to revive the sector through six measures under Aatmanirbhar Bharat. The definition of MSMEs was revised to include more enterprises so that they are able to avail the benefits of the schemes. Along with this, the government had also announced a collateral-free automatic credit line of Rs. 3,00,000 crore as Covid relief in May 2020, where the government acts as guarantee to the banks for the loans borrowed by the enterprises. 

Vishal Gowda, Electrical Engineer and Supervisor at NP Engineering said, “Our production has decreased by 40 percent. Our annual turnover used to be Rs. 6 crores annually, our turnover will be definitely lesser than that for this year.” He did not want to reveal the expected turnover for 2020-21. He also said that he had neither availed any benefits from the scheme nor was he aware of any schemes announced under Aatmanirbhar Bharat. Mr. Karigowda also said along similar lines that he was not aware of any schemes. 

In the report and survey done by KASSIA, many enterprises had problems taking loans under the collateral schemes and had come to KASSIA for assistance. One such complaint that they received was from Mr. Gajanana, proprietor of AS industries, who said their enterprise wanted to take a loan from the Emergency Credit Line Scheme (ECLGS) for MSMEs under distress, but the bank was delaying the process; However a 2020-21 Annual report by Ministry of MSME states that Rs. 1,37,587.54 crore has been sanctioned and Rs. 92,090.24 crore has been disbursed upto 3rd August, 2020 out of 3,00,000 crores that was sanctioned.

Abhijeet Biswas, Assistant Professor of Finance at Institute of Management Studies, Banaras Hindu University said that one of the major problems in availing the benefits of the loan is information asymmetry. He explained, “Information asymmetry is when one party has more information than the other. In most cases the bank does not have enough information about the enterprises because they operate in a very opaque manner. Usually they are not familiar with the norms of the banks and that is why they find it difficult to get loans. Because of insufficient information about the borrowers the banks hesitate to lend money.”

Despite all the measures announced by the Centre to get the MSMEs out of distress, a survey done on 7,000 MSMEs in India shows that 25 percent of enterprises closed down during the pandemic. The official at District Industries Centre, (DIC) Rajajinagar, Bengaluru said that they are not aware of any MSMEs being shut in any of the Industrial areas in Bengaluru since they haven’t received any notice from the proprietors. A report stated that the central government has no data on the enterprises that may have shut down during pandemic and subsequent lockdown. Both KASSIA and DIC did not have the data on Bengaluru either. Mamata, Admin Manager at Electronic City Industries Association said that none of the MSMEs in the Electronic city Industrial Area were closed to pandemic, but however, she said, they faced major difficulties. She said, “Most of the MSMEs in Electronic city functioned during lock down with minimal manpower and staggered timings to ensure social distancing.  Manpower shortage due to employees fleeing to their native caused major worry post lock down for a few weeks.”

TS Umashankar, Secretary, Rajaji Nagar Industrial association said that they don’t have exact data on how many enterprises may have closed because of the pandemic since the proprietors don’t inform. But he said that out of 150 factory sheds in the area 10-15 may have closed permanently because of the impact of the pandemic. “The employees have stopped coming to work. Earlier, we could at least find migrant workers to fill in vacancies but even they are leaving and going back to their hometowns because of the fear of lockdown. Apart from this we are not able to commit to the delivery schedules of the customers because of all the uncertainties. The production has come down because of not being able to procure raw materials.” He added that even though the government schemes under Aatmanirbhar Bharat might help them and the banks are ready to provide loans, there was no opportunity to invest the money. “Where will we invest the loan if our material itself is not moving. The government says it is ready to give us Rs 10-15 lakhs from the credit line scheme but here, there is a lack of employees, irregular power supply. We are losing both jobs and turnover.”

Mr Biswas explained that even though the government launched specific schemes like ECLGS to combat Covid enterprises were hesitant to avail the benefits of the scheme because they do not even have opportunities to invest the amount and generate returns. He said, “There are numerous schemes but the problem is most are not aware of these schemes and also until and unless the labour problem is resolved no amount of financial support can resolve the situation. The proprietor alone cannot run the enterprise even if he gets the loan. So the government has to win back the trust of the labourers, try to get them back to metro cities and vaccinate the bulk of the population.

Contribution of various sectors to India’s GDP 2019
Sourced from statista.com

The schemes announced for MSMEs were based on 2013 data. CRSIL report states that MSMEs are likely to log a revenue contraction of 17-21 per cent this fiscal. Mr Vinay Kumar Sharma, Assistant Professor in department of finance at Baba Ghulam Shah Badshah University has published a paper on growth of MSMEs in India. He said, “The Current situation is very bad and the future is looking quite uncertain. The only way to improve the situation is to increase the pace of vaccinating people, specifically labourers and employees working in MSMEs. As per the reports by CARE based on the survey of 305 respondents, the majority of the respondents are of the view that the situation is likely to worsen in the coming six months and only 12 percent of the total respondents are expecting their business may improve.” He suggested that the government should go for the facility of easy credit at concessional rate for MSMEs, tax concessions, at least six month moratorium and delayed GST payments.

The Ministry of MSME website mentions that India has around 30 million units which provides employment to over 70 million people and manufactures more than 6000 products. Bengaluru alone has over 2.6 lakh MSMEs and Karnataka as a whole, houses 7.6 lakh MSMEs. The effects of the pandemic for this reason have a greater impact on the state as well as the country. In his paper, Mr. Vinay states that there are around 198.7 lakh unregistered MSMEs in India. He said that the unregistered MSMEs won’t be to avail benefits of the schemes announced by the Centre. “The Government would not know about closure of such units,” he said. The lack of availability of consolidated data on the effects of pandemic on this sector has made it difficult to assess the severity of the situation. 

Prof. Venkatalakshmi MN, Head of Department of Economics, SBRR Mahajana First Grade College, Mysuru had a slightly positive outlook on the situation. She said, “Pandemic affected every business and MSMEs are no exception. Due to the pandemic the foreign demand for their commodities has drastically come down including domestic demand. But as per the data published by ILO 40-50 percent of the MSMEs in India have gone digital. Instead of closing down the units temporarily and using digital platforms they are expanding their business, because they cannot expect people to visit their establishments to buy commodities in this situation.” She added that these units can definitely use digital platforms to create a market for their products based on the knowledge of their potential buyers.


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