Way Forward For MSMEs Post COVID-19

The unprecedented crisis during the Covid-19 pandemic was not restricted to the healthcare sector. Severe containment measures and curtailed business activities not just disrupted the economic fabric of the country but also exposed the structural inequalities in the informal sector of the Indian economy.

The impact of Covid-19 on micro, small and medium-sized enterprises (MSMEs) in particular has been catastrophic. The government and lending institutions have undertaken measures to mitigate the impact on MSMEs and nurse the sector back to health.

Steps Taken By The Reserve Bank of India

To boost credit flow to MSMEs, the RBI announced measures to incentivise lending to new MSME borrowers. It also extended on-tap Targeted Long Term Repo Operations (TLTRO) to non-banking financial companies (NBFCs) and extended the priority-sector lending (PSL) norms related to NBFC funding to MSMEs.

Relief For New MSME Borrowers:

As per the new RBI measures, scheduled commercial banks were allowed to deduct loans disbursed to ‘New MSME borrowers’ from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR).
The CRR is the percentage of the total deposits of the customers that commercial banks must maintain as reserves in the form of cash. The cash reserve is either sent to the RBI or is stored in the bank’s vault.

• ‘New MSME borrowers' are those MSME borrowers who have not availed any credit facilities from the banking system as of January 1, 2021.
• Banks need not maintain a cash reserve ratio for the loans disbursed MSME borrowers for the first time from January 1 to December 31, 2021.
• The exemption was available only for exposures up to Rs 25 lakh per borrower for credit extended up to the fortnight ending December 31, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier.

TLTRO:

Similarly, to help the MSME sector with ready funds, the RBI also allowed NBFCs to avail bank funding under the TLTRO scheme. Under the scheme, banks can lend to NBFCs for on-lending to MSMEs.

This was part of recognition of the role played by NBFCs in providing credit at the bottom of the pyramid to the sectors which contribute significantly to the economic growth in terms of export and employment and to augment the liquidity position of the NBFCs.

PSL:

In August 2019, banks were allowed to classify lending to registered NBFCs (other than MFIs) as PSL up to 5% of a bank’s total PSL, for on-lending to agriculture/MSME/housing till March 31, 2020. This was later extended up to September 30, 2021.

Government Budgetary And Policy Support

Fund Allocation:

To give a major thrust to the Covid-hit MSME sector, the Union Budget 2021-2022 allocated Rs 15,700 crore to this sector, compared with Rs 7,572 crore in 2020-21. This was further enhanced to Rs 21,422 crore, up by 26.71%, in the Budget announced early this year.

Additionally, to support the MSME sector in the country post Covid-19, the government announced a number of initiatives under the Atmanirbhar Bharat Abhiyan, which are as follows:

i) Rs 20,000 crore Subordinate Debt for stressed MSMEs;
ii) Rs 3 lakh crore collateral-free automatic loans for MSMEs;
iii) Rs 50,000 crore equity infusion into MSMEs through fund-of-funds;
iv) Registration of new MSMEs through ‘Udyam Registration’;
v) No global tenders for procurement up to Rs 200 crore;
vi) The Exemption limit for tax audit increased from a turnover of Rs 5 crore to Rs 10 crore.

One-Person Companies:

The government also proposed to incentivise incorporation of one-person companies (OPCs) to help startups. Under the OPC scheme:

i) NRIs would be encouraged to incorporate one-person companies in India;
ii) There would not be any restrictions on paid-up capital and turnover;
iii) Startups would have the flexibility to convert into any other type of company at any point of time.

Revised Criteria For Classification Of MSMEs:

To accomplish the goal of a self-reliant India, the central government and the Ministry of MSMEs classified a large number of additional micro and small units under this category.

This has encouraged more public and private sector participation in business enterprises, and will also benefit smaller units with more concessions and schemes.

Also, to enhance business continuity and ensure protection of workers from loss of employment, the government is providing training to graduates and diploma holders in engineering through the National Apprenticeship Training Scheme to help the MSME manufacturing sector with manpower in future.

Conclusion

The strong governmental support and the RBI’s lending norms have provided an enabling atmosphere for MSMEs to avail credit to run their establishments and to recover from the pandemic’s impact.

In terms of access to capital, well-known lending firms like IIFL Finance provide a hassle-free loan disbursal process with minimum documentation. Based on eligibility and financial requirements, a business owner can avail a loan of up to Rs 30 lakh at an affordable rate of interest without any collateral.