India's MSMEs: Thousands In Financial Stress

This means they will either be denied more credit by banks, which is necessary for their very survival, or forced to take high-cost loans from 'blade' finance firms, or even be forced to liquidate. This could not only jeopardise the livelihood of crores of workers, but also reduce India's manufacturing output significantly.  

There are more than 6 crore MSMEs in India registered with the Udyam Registration Portal and Udyam Assist Platform (UAP). Only about 40 per cent of them avail bank credit.

The MSME sector, the backbone of the Indian economy, continues to remain a 'stepchild', with stigmas attached, especially when it comes to credit from banks, despite the Narendra Modi government’s thrust on boosting manufacturing growth.

Once an MSME unit is categorised as an SMA, banks shut their eyes to its legitimate credit needs, often ignoring the fact that they have orders which can be used as guarantees. Often, all banking activities of such units are frozen, making it far more challenging to survive.

According to the Federation of Indian Micro and Small and Medium Enterprises (FISME), these SMA framework triggers are automatic and computer-driven, hence lacking any mechanism that takes into account the qualitative reasons for repayment delays.

Once an account is marked as SMA, credit rating firm CIBIL is notified, making it difficult for the firm to seek any further assistance.

PM Modi recently said that MSMEs will have a key role in the National Manufacturing Mission. The initiative will not only help the country’s MSMEs and small entrepreneurs, but also open up new employment opportunities nationwide, he said.

About 35,000 have shut down since the Covid pandemic. Importantly, the sector is crucial for employment generation. It has employed more than 28 crore people.  

“If India is to unlock the full potential of its MSME sector, it must encourage stronger linkages between small enterprises and large corporations,” PolicyCircle noted. 

People directly connected with the sector said that more MSMEs may be forced to dissolve if policy support does not come in time. 

MSME Rating Woes

While Finance Minister Nirmala Sitharaman has asked public sector banks to set up in-house credit assessment mechanisms for MSMEs, there are no concrete plans in place.

“It is almost impossible for MSMEs to acquire an investment grade rating, which the large companies can get. So lower investment ratings would mean higher interest rates and demand for additional collateral security — this is a critical problem for the sector,” Anil Bhardwaj, secretary-general of FISME told The Secretariat.

Third-party rating should not be applied in the case of MSMEs, Bhardwaj said. In Europe, MSME loans are given similar treatment to retail loans.

The slowing domestic growth rate, along with rising geoeconomic risks, has hit the MSME sector the most.  

“What is required is quick implementation of policy announcements. They often remain on paper. With the kind of risks we are witnessing today, we have to be nimble in taking the necessary measures," said Divyendu Roy, who runs a medium-scale unit making soyabean extraction machines on the outskirts of Delhi.

Though this year's Budget has outlined several fresh measures with a focus on increased credit access, entrepreneurial support, and sector-specific initiatives, the sector needs these policy announcements to be effectively implemented.

According to a McKinsey report in India, MSMEs have been facing "structural barriers, such as the high cost of compliance and finance, that have tended to constrain their growth." 

Importance of MSMEs In the Global Economy

Globally, MSMEs, the core of the economy for most societies, account for 90 per cent of businesses, providing more than 70 per cent of employment. 

In the US, SMEs have accounted for two out of every three jobs added in the past 25 years, the McKinsey report noted. In emerging economies, MSMEs created seven out of 10 new formal jobs over the past decade.