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MSMEs and Economic Lockdown

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May 11, 2020

What is the issue?

With economy on a standstill in times of the lockdown, here is a look at its impact on micro, small and medium enterprises (MSMEs) and the modes of financing them.

What comprises the MSME sector?

  • MSME sector form the second-biggest employer in the country with a 31% share in India’s GDP.
  • Section 7 of the MSMEs Development Act, 2006 specifies the size of the MSMEs on the basis of investment.
  • Among manufacturing units, micro enterprises are those that have invested up to Rs 25 lakh in plant and machinery.
  • The comparable figure for small units is Rs 25 lakh-Rs 5 crore and for medium units, Rs 5 crore-Rs 10 crore.
  • For services, the investment thresholds are lower - up to Rs 10 lakh, Rs 10 lakh-Rs 2 crore and Rs 2 crore-Rs 5 crore respectively for the categories.

Why do they need more attention now?

  • Unlike big industries, the MSMEs’ resilience during the current crisis is lower.
  • Many of the MSMEs are probably eating into their capital to stay afloat.
  • The RBI has already asked banks to offer a three-month moratorium on loan repayments by such units.
  • Beside, the RBI has arranged for opening a window from where banks can borrow money and lend to the sector.
  • However, banks are afraid of loans given to these units turning bad.

How has the credit support been?

  • A recent study shows that the MSMEs' exposure to the financial system in December 2019 was Rs 11.04 trillion.
  • Of these, the share of very small businesses (up to Rs 10 lakh exposure) is Rs 54,000 crore.
  • In December, in commercial credit (excluding agriculture and retail), the share of MSMEs (up to Rs 50 crore exposure) was a little less than 28%.
  • The maximum loans were in the Rs 1 crore-Rs 15 crore basket (Rs 8.74 trillion), followed by Rs 15 crore-Rs 50 crore (Rs 4.68 trillion).
  • Notably, the corpus of less than Rs 10 lakh loans was the smallest, at Rs 93,000 crore.
  • Maharashtra has the maximum share of MSME credit, 17.36%, followed by Tamil Nadu (10.77%), Gujarat (8.85%), Delhi (7.13%) and UP (6.5%).

How creditworthy are MSMEs?

  • Loans to the MSME segment had grown 4.7% between December 2018 and December 2019.
  • Indeed, the bad loans in the segment have been on the rise over the past few years and reached 12.6% in December 2019.
  • The study keeps the Rs 2.32 trillion MSME exposure of banks in the highest risk bracket (of this, the micro units’ share is just about Rs 13,600 crore).
  • But there are millions of creditworthy borrowers outside this.
  • The study has found that 74% of the close to 8.9 million MSMEs is creditworthy.
  • The banks must grab this opportunity to fuel growth in the economy as well as their loan books.

What are the other hurdles in financing MSMEs?

  • The banking system is the main source of money for the MSME segment.
  • Added to this, the microfinance institutions (MFIs) meet the credit needs of retail borrowers at the so-called bottom of the pyramid.
  • Notably, there is not much stress in the portfolio of micro loans offered by the MFIs and NBFCs (non-banking financial companies).
  • So, presently, they are not suffering from risk aversion but most of them do not have the money to lend.
  • Initially, the banks were reluctant to offer moratorium to the MFIs and NBFCs on their repayment of loans to the banks.
  • They had felt that it was meant for the loans given for productive purposes and not to financial intermediaries.
  • Now, most banks are offering the moratorium to MFIs too.
  • But the Small Industries Development Bank of India (SIDBI) and Micro Units Development and Refinance Agency Ltd (MUDRA) are not that liberal.
  • Notably, these two government agencies have around Rs 3,000 crore of exposure to the MFIs.
  • Apparently, the NBFCs and MFIs borrow primarily from banks and on-lend to their customers.
  • If the banks close the outlet, then NBFCs and MFIs cannot survive, which could in turn hamper the economy; this needs intervention.

 

Source: Business Standard

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