Liquidity crunch and lack of access to formal credit hamper the growth of MSMEs in Karnataka
The smell of the fumes and whirring sound of machines can be constantly felt as one walks on the streets of Bengaluru’s industrial areas. Lines of buildings across the streets stand tall, housing, big machines, multiple metal bars, aluminium sheets, wielding guns, and ancillaries. In these numerous Micro Small and Medium Enterprises (MSME) are millions of workers in stained shirts, loose pants and faded sarees who break a sweat every day and owners who fight a thousand battles to keep the place up and running.
One of these MSME’s is Cosmos Engineering, a machine tools manufacturing company in Peenya Industrial Area. One of the major problems its owner K Biswas faces is liquidity crunch and lack of working capital caused by delayed payments and increase in input costs. “Over the last 3-4 years, the cost of raw materials has increased by 20-30 percent and suppliers ask for immediate payment,” Biswas said.
Although these companies are supposed to face a penalty for making late payments, they escape it by issuing backdated cheques and clearing the accounts, he added.
The supply cycle of the buyers and MSMEs are inconsistent, wherein the buyers themselves take an extended period of time to fulfil their orders, considering the huge size of operations they handle. Hence, they have to wait for their own payments in order to pay off the MSMEs, causing the time discrepancies in clearing payments, he explained.
In order to address this problem, the MSME ministry launched a delayed payment portal called MSME Samadhan. A portal that enables MSMEs to directly register their cases against their buyers. However, this initiative has not solved the problem completely. Out of the total 1,10,424 cases registered on the portal, only 13.6 percent cases have been disposed and 54.6 percent cases are yet to be viewed and are under consideration.
Dr JR Bangera, member of National MSME Board, said, “the delayed payment act is a toothless act.” The act mandates buyers to payback within 45 days and pay with interest if delayed further. However, if MSMEs insist on and strictly try to implement, they risk their customer relationship and loose future orders, hence a lot of companies don’t even register a complain,” he said.
This cycle of not receiving payments on-time but being required to make upfront payment for procuring raw materials, amidst rising input costs and margin erosion causes liquidity crunch and shrinking of working capital. While this problem can be solved by taking loans, access to formal credit turns out to be the next big hurdle faced by MSME’s.
A report by the Association of Chartered Certified Accountants (ACCA), states that almost 50.7 million businesses or 80% of India’s 63.4 million MSME’s lack access to traditional lending channels. The credit gap for Indian MSMEs has expanded dramatically in the last five years, reaching USD 380 billion according to WHO estimates, the report said.
Biswas said that getting a loan from the banks is a very difficult task. “We can get loans only when our books are good but when we are in a crisis, have poor accounts, the time when we actually need laons, banks don’t approve,” he said. Enterprises do not fulfil their eligibility criteria or can afford to give collateral, he added. Biswas also said that the various government schemes announced to help MSME’ s have been of little help. The reduction in interest rates is very nominal and companies still need to have collateral, he added.
Explaining why companies can’t give collateral, Umashankar, president of Rajajinagar Industries Association said that, because our business requires multiple loans, most times we would have already pledged our goods and machinery for previously availed loans. Hence, it is not an option to give a collateral every time we need a loan, he added.
While MSMEs blame the lending sector of not being helpful, the banks have their own reasons for rejecting loan applications from MSMEs. Raghvendra Danti, a bank manager for the loans section said that firstly the banks examine external factors i.e., the type of industry the company functions in, its risks and assessment how promising the segment is. “This is where most enterprises are denied of loans, because they belong to the MSME sector even if the company profile is good.” This is because the MSME sector is cyclically affected by the changes in the industry, he said. Some companies do not show exact financials as they transact in cash and their money does not flow through bank channels, this becomes another drawback to grant even if the banks know they are capable of repayment and their turnover is good, Danti explained.
Credit Guarantee Trust Fund for Micro & Small Enterprises (CGT MSE), Credit Guarantee Scheme for Subordinate Debt (CGSSD), Guaranteed Emergency Credit Line (GECL), Emergency Credit Line Guarantee Scheme (ECGLS), SIDBI Make In India Loan For Enterprises (SMILE) and Loans under 59 minutes programme are some of the prominent schemes by the government under which loans are sanctioned to MSMEs.
In Bengaluru, the Small Industries Development Bank of India (SIDBI) is one of the major loan disbursal agencies. Nitin, manager of SIDBI, said that, manufacturing MSME’s often apply for loans. Sometimes they get rejected because their balance sheets are not built because of which the bank can’t assess their ability. Speaking about the implementation of the schemes, he said, the SMILE scheme was stopped two years ago as Reserve Bank of India (RBI) stopped issuing money for the scheme. For the loans under 59-minute scheme, there are 8-10 applications pending. The CGT MSE scheme however functions well and has many applications and disbursals, he added.
The Karnataka Small Scale Industries Association(KASSIA) had said in a pre-budget memorandum to the finance minister that the Loans under 59-minutes program has remained only on paper in Karnataka. Banks place hurdles after giving in-principle acceptance online, it had said.
The CGT MSE scheme has approved over seven lakh guarantees in FY22, the second highest in eight years, according to the government data. However, the MSME Ministry Development Commissioner Shailesh Kumar Singh, recently in a panel discussion said, even though the CGTMSE scheme has been very successful, the fact remains it is still extremely difficult for MSEs to get credit.
Explaining why it is still difficult to obtain loans, Bangera said, although nationalized banks are working for the schemes, the ground level implementation is bad. There is no experienced staff that knows how to approach loaning to the MSMEs. Lenders are supposed to assess the companies previous loan records and current requirement and grant loans under the scheme that suits best, however, they do not do it.
Even if the MSMEs do manage to get the loans, they struggle to repay on-time due to the nature of their business. Most times, this puts them in the Non-Performing Assets (NPA) category of the banks, thus making them ineligible for further loans.
Shivakumar R, secretary of Peenya Industries Association (PIA) said that even when companies get loans after trying multiple times, they can’t repay instalments in time because customers delay payments and MSME’s don’t receive money for months. “We have requested the government to extend the repayment period from three months to six or nine months, this will help us maintain our repayment tracks,” he said. Due to problems like these, 15 percent of the industries in PIA closed during the pandemic and still 30 percent are in a really bad shape and there is a high probability of them shutting down, he added.
It’s not just the nature of business and repayment structure that’s at fault, lack of able entrepreneurship by the proprietors is also a factor for the ill-functioning of MSME’s. Gopinath Rao, Deputy Director of MSME Development Institute, Bengaluru, said, “A lot of proprietors don’t have enough knowledge about the procedures and technicalities in obtaining loans, all they know is that they are eligible for certain schemes to get loans.” Company’s loan application gets rejected because they don’t produce the right documents most times. The Institute runs a portal that registers complaints and problems faced by MSME’s, through which it helps resolve issues between banks and owners. The portal receives 6-10 complaints every day and the institute keeps resolving them, he added.
“Timely and adequate availability of credit is sine qua non for growth of MSMEs,” said Ramesh Dharmaji, Ex-Chairman of SIDBI and advisor for Global Alliance for Mass Entrepreneurship. Availability of loans helps in managing liquidity. Without loans MSMEs tend to use short term sources for long term use, he said. Loans are the only option because equity capital is always expensive and in short supply. Availability of timey credit, resolution of delayed receivable issue has to be addressed by various stake holders to help MSMEs grow. Also, availability of subordinate debt, quasi equity will be useful, he said. However, MSMEs too have to learn better cash management to reduce dependence on loans, he added.
In order to ensure better availability of credit, awareness too has to be increased. Bangera said, only 30 percent of MSMEs are aware about the schemes offered by the government. “The approach by lenders has to change and banks should approach MSMEs and popularise the government schemes,” he said. “The finance ministry also has to come down heavily on this, and ensure effective implementation,” he added.
The rise of fintechs, digital banking and NBFCs could be a solution to close the credit gap. Dharmaji said that the gap is closing with the advent of digital banking and fintechs. “Banks are working closely with NBFCs to reach to various sectors and geographies which the bank cannot serve. GOI and RBI are advising banks to work proactively work with NBFCs to enhance the flow of credit to MSMEs,” he added.
Karnataka houses 7.6 lakh MSMEs of which 2.6 lakh are in Bengaluru and the sector employs nearly 2.6 crore people. Peenya Industrial Area alone has 8500 MSMEs.
MSMEs contribute 30 percent of India’s GDP. The share of MSME-related products in total exports from India during 2018-19 is 48 percent. The estimated number of workers in non-agriculture MSMEs in the country is 11 crore. MSMEs are often considered to as India’s backbone for this reason.
The MSME Act of 2006 included a wide range of sectors, as well as the service sector and small and medium businesses. Currently, India’s MSME sector is divided into two categories: manufacturing and service industry. It is further classed as micro, small, and enterprise based on their investments in plant and machinery or equipment.