Impact of COVID-19 on Indian MSME Sector: 16th September 2020

Impact of COVID-19 on Indian Urban Mobility by Sam Ghosh 19th July 2020

Impact of COVID-19 on Indian MSME Sector by Sam Ghosh 16th September 2020
Indian MSME Sector Challenges to the MSME Sector Impact of COVID19 Future of MSMEPolicy Framework
Executive Summary
● The Micro, Small, and Medium-sized businesses or the MSME sector contribute around ⅓ of the Indian
GVA and half of the total exports.
● Despite the great significance to the Indian economy, the sector deals with a lot of issues including lack of
credit availability, low technology penetration, and cash-flow issues often created by their lower negotiating
power dealing with the formal sector businesses.
● The pandemic not only restricted revenue sources for many of the MSMEs but also created issues with
credit availability, labor availability, transportation, and cash-flow.
● The government of India has taken various measures to increase credit availability to the sector - from
changing the definitions of MSMEs to credit guarantee schemes.
● Although, the availability of credit may not be the silver bullet for the sector as the low credit uptake may be
the result of low demand for credit.

Indian MSME Sector

Indian MSME Sector
● As per the Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation (MOSPI), the Share of
MSME Gross Value Added (GVA) in total GVA during 2016-17 was 31.8%.
● As per the Directorate General of Commercial Intelligence and Statistics (DGCIS), the Share of MSME related
Products in total Export from India during 2018-19 was 48.10%
● As per the annual report of the Ministry of Micro, Small and Medium Enterprises, in the MSMEs filed Udyog Aadhar,
~89% are Micro Enterprises.
Data: Ministry of MSME
Definitions as per MSMED Act 2006
“Micro” enterprise: an enterprise where investment in plant
and machinery does not exceed Rs. 25 lakh.
“Small” enterprise: an enterprise where the investment in
plant and machinery is more than Rs. 25 lakh but does not
exceed Rs. 5 crore.
“Medium” enterprise: an enterprise where the investment in
plant and machinery is more than Rs.5 crore but does not
exceed Rs.10 crore.
Role in Indian Economy MSME minutiae Employment Location Ownership

Indian MSME Sector
● As per National Sample Survey 73rd round 2015-16, there were 63.4 million MSMEs in India. Out of which
32.5 million were located in rural areas.
● By activity, 23 million MSMEs were involved in Trade, 19.7 million in Manufacturing and rest in other
activities.
Data: MOSPI

Indian MSME Sector
● In percentages, 36% of MSMEs were involved in Trade, 17% were located in the rural areas.
● 31% of MSMEs were involved in Manufacturing, 18% were located in the rural areas.
Data: MOSPI

Indian MSME Sector
● MSMEs employed ~111 million people as of 2015-16.
Data: MOSPI

Indian MSME Sector
● Uttar Pradesh and West Bengal had a disproportionately higher number of MSMEs (~14% each), followed
by Tamil Nadu, Maharashtra, etc
Data: MOSPI

Indian MSME Sector
● 96% of MSMEs were proprietorships as of 2015-16.
Data: MOSPI

Challenges to the MSME Sector

Challenges to the MSME Sector: Cash-Flow issues
● As MSMEs are often ancillary to larger companies, they face the chronic problem of delay in payment from their
business customers.
● RBI Survey: “44% of MSMEs engaged in manufacturing activities faced delay in payments”
○ “ones not receiving timely payment mainly belonged to basic metal and metal products, engineering,
construction, and infrastructure related industries.”
● Although there are provisions in the MSMED Act 2006 (Chapter V) to deal with the delayed payments, MSMEs are
often scared of using the provisions fearing loss of business.
● RBI introduced Trade Receivables Discounting System (TReDS) to deal with this issues
○ “TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small
and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates
and other buyers, including Government Departments and Public Sector Undertakings (PSUs).”
Cash-Flow Issues Access to Credit Infrastructure

Challenges to the MSME Sector: Lack of access to Credit
● IFC-Intellecap Report 2018: The overall demand for both debt and equity finance by MSMEs is estimated to be Rs.
87.7 trillion (USD 1.4 trillion), which comprises INR 69.3 trillion (USD 1.1 trillion) of debt demand and Rs.18.4 trillion
(USD 283 billion) of equity demand
● The addressable credit gap was estimated to be Rs. 25.8 trillion (USD 397 billion).

Challenges to the MSME Sector: Lack of access to Credit
● One of the issues with MSME credit is the lack of information required for the assessment of creditworthiness.
Lenders face challenges in credit risk assessment owing to a lack of financial information, historical cash flow data,
etc.
● Still, the default rates across all MSME segments continue to be lower than large corporate NPA rates as per
TransUnion CIBIL.
● MSME loans by banks qualify for Priority Sector Lending classification.
● In August 2019, RBI further incentivised banks to lend to MSMEs through the NBFC sector. Bank credit to registered
NBFCs (other than Micro Finance Institutions) for on-lending to micro and small enterprises up to ₹ 20 lakh per
borrower are eligible for classification as priority sector lending.
● MSMEs face difficulty in raising equity capital due to their smaller size.
● JAM Trinity (Jan Dhan, Aadhar, and Mobile Number based Identification) along with the GST system are being used
to create a transactional database for the MSMEs. These databanks can be used for credit assessment, especially
for working capital credit.

Challenges to the MSME Sector: Infrastructure bottlenecks and Competition
● MSMEs lack expertise in product development, technology adoption, and marketing strategy.
● MSMEs are also found to be slow at adopting new technologies and accept e-payments.
● RBI Governor: “Low levels of technology adoption deprives them of potential economies of scale”.

Policy Framework

Policy Framework: The Micro, Small and Medium Enterprises Development (MSMED) Act 2006
● The MSMED Act 2006 is meant to encourage the growth of the MSME sector in India and make them
competitive to their global peers.
● This act creates the legal recognition of an “enterprise”. It is important given many MSMEs are not
registered as companies.
● This act also defines Micro, Small, and Medium-sized enterprises.
● This act creates the legal framework for National Board for Micro, Small and Medium Enterprises.
● This act also created the legal framework for the Micro and Small Enterprises Facilitation Council.
● Chapter IV of the MSMED act deals with the promotion and development of MSMEs, availability of credit, procurement
preference, funds, and grants.
● Chapter V of the MSMED act gives the MSMEs legal options to deal with the delay in payments.

Policy Framework: Trade Receivables Discounting System (TReDS)
● TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro,
Small, and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from
corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
● Presently, the following three platforms are registered with the Reserve Bank of India for operating as a
TReDS Platform:
○ Receivables Exchange of India Ltd (RXIL)
○ TReDS Ltd (Known as Invoicemart)
○ Mynd Solutions (Known as M1 Xchange)
● GOI (MSME Ministry) issued notification S.O. 5621(E) on November 02 2018, which mandates all registered
companies with turnover of more than Rs. 500 Crore (Rupees Five Hundred Crore) as per the last available
audited financial statements and all Central Public Sector Enterprises (CPSEs) to get themselves registered
on the TReDs Platform to ensure cash liquidity for MSME Suppliers.

Policy Framework: Public Procurement
● Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012:
○ Every Central Ministry /Department / PSUs are mandated to set an annual target for 20% procurement
from micro and small enterprises.
○ There are other provisions related to special benefits for small businesses owned by SC/STs etc. .
● Government e-Marketplace (GeM):
○ The GeM is a public procurement portal for central and state government offices.
○ GOI is taking many steps to onboard MSMEs on the GeM platform.

Policy Framework: Credit Guarantee Fund Scheme for Micro and Small Enterprises
● The Ministry of Micro, Small and Medium Enterprises, GoI, and Small Industries Development Bank of India
(SIDBI) established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.
○ Scheduled commercial banks and select Regional Rural Banks (which have been classified under the
'Sustainable Viable' category by NABARD) are eligible for under the scheme.
○ This facility makes loans and/or working capital facility up to Rs.100 lakh per borrowing unit available
without any collateral security and / or third-party guarantee, to a new or existing micro and small
enterprise.

Policy Framework: Credit Linked Capital Subsidy Scheme for Technology Upgradation
● “The objective of the Scheme is to facilitate technology up-gradation in MSEs by providing an upfront capital
subsidy of 15% (on institutional finance of upto Rs 1 crore availed by them) for induction of well-established
and improved technology in the specified 51 sub-sectors/products approved. In other words, the major
objective is to upgrade their plant & machinery with state-of-the-art technology, with or without expansion
and also for new MSEs which have set up their facilities with appropriate eligible and proven technology duly
approved under scheme guidelines.”
Other Schemes for MSMEs

Impact of COVID19

Indian
MSME
Sector
Supply-Side
Issues
Loss of Revenue
Liquidity Issues
Credit Crunch

Impact of COVID19: Loss of Revenue
● Survey by Care Ratings 10th July 2020:
○ ⅓ respondents have faced revenue losses of over 50% in the last 3 months.
○ Over 60% of the respondents have been unable to pay full salaries to their staff. However, only a quarter of
those surveyed has retrenched their staff.
○ Nearly half the respondents feel that they stand to benefit from the change in the definition of MSMEs and a
major part plan to increase their size.
○ The prevailing anti-China sentiments have not bought about noteworthy changes in terms of fresh business for
the larger number of those surveyed.
○ Most of the respondents (65%) expect that it would take 12 months and more for their business to get to
normal.
○ Nearly half of those surveyed expect their business situation to improve in the next 6 months.
Loss of Revenue Supply-Side Issues Liquidity Issues Credit Crunch

Impact of COVID19: Loss of Revenue
● Magma SPJIMR June 2020:
○ 83% of respondents expected the impact on revenue would be lower than 50%. Half of the businesses
expected the impact to be 20%-50%.
○ Overall business sentiment termed “Not Negative” with 62.67% of respondents is neutral or positive about
their business outlook.
○ 58% of respondents resumed their business in the survey period.
○ The impact on earnings is marginally higher for smaller firms.

Impact of COVID19: Supply-Side Issues
● Labor problems:
○ The lockdowns had caused a mass exodus of migrant workers from urban areas.
○ The MSMEs, especially those located in urban areas were affected negatively.
○ The labor shortage persisted even after reopening.
● Logistics and raw material issues were created by the pandemic.

Impact of COVID19: Liquidity Issues
● Lower revenues, as mentioned before, created liquidity problems for the MSMEs.
● As the lockdowns started, large companies held back large amounts of payments to the MSMEs
complicating the liquidity issues.
○ As per rating agency Brickwork Ratings, large companies held back nearly Rs 3.3 lakh crore payable
to MSMEs.
○ Government agencies issued various warnings to deal with the situation.
○ GOI started pushing for expedited payment clearance to the MSMEs.
● As small companies do not have much cash reserve, this liquidity crisis may lead to an existential crisis for
many small businesses.

Impact of COVID19: Credit Crunch?
● The credit uptake by the MSME sector is severely affected - far greater than the large companies. The
MSME sector is dependent on the NBFC sector. There was already a liquidity crisis in the Indian NBFC
sector after the defaults by Infrastructure Leasing & Financial Services Limited (IL&FS) in 2018. The
situation has been worsened by the COVID 19 creating credit availability issues for the MSMEs.
● Although, the slowing credit uptake by the MSME sector cannot be completely attributed to credit crunch but
demand for credit. Transunion CIBIL reports in April 2020 “Reducing utilization levels of working capital limits
in MSMEs has been one of the reasons for lowering of credit exposure for the segment“.
Data: RBI

Future of MSME

Future of MSME: Policy: Revision of MSME Definition
● GOI has revised the definitions for Micro, Small, and Medium-sized enterprises.
● The revised definition will allow extending support to a wider number of enterprises.

Future of MSME: Policy: Other Measures
● Provisioning of Rs 20,000 crore as subordinate debt to provide equity support to the stressed MSMEs.
● Equity infusion of Rs. 50,000 crore for MSMEs through Fund of Funds (FoF)
● Rs. 300,000 crore collateral-free automatic loans for MSMEs to meet operational liabilities, buy raw material,
and restart businesses.
● Disallowing global tenders in procurements up to Rs. 200 crores- to create more opportunities for domestic
players.
● Clearing of MSME dues by the Government and Public Sector Units within 45 days.

Future of MSME: Credit
● Despite credit guarantee schemes, the flow to credit to the MSME sector is very slow due to risk aversion of
the banking sector.
● RBI on 6th August 2020, extended scheme allowing existing loans to MSMEs classified as 'standard' may
be restructured without a downgrade in the asset classification.

Future of MSME: Technology
● Businessworld reports
“Approximately 30 percent of MSME either started a website or expanded to e-commerce during the
COVID-19 lockdown. Around 50 percent embraced video conferencing and WhatsApp for business
purposes. Revenue contribution from e-commerce increased close to 50 percent for MSMEs during
COVID-19.”
● Indian MSME sector is known for the slow adoption of technology. Also, lack of risk capital availability and
skilled workers makes it harder for them to adopt new tech.
● The pandemic has created a need for rapid tech adoption and may prove to be a push for crossing the
chasm.

Thank You

Impact of COVID-19 on Indian MSME Sector: 16th September 2020

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