Almost the entire sector today is dependent on loan against property. Working capital is not easy to come by. Over the past one year, SKOCH has advocated for a cash flow lending system based on GST paid invoices that are accepted by the buyer. The lending should be linked with invoices and cash flow and it must be collateral free. This could be achieved through a second window on TReDS, possible due to a combination of liberated data and agreement between MSME seller and TReDS platform lenders, for obtaining cash flow lending for its invoices using the GSTN. While the announcement for app-based lending was made by the Finance Minister during budget, it is important that it is operationalised immediately to help bail out the ailing MSMEs during COVID-19 crisis.
In today’s technology world, the large corporates have an automated system—ERP—to clear the invoices. During good times it used to take 60-days. Economic slowdown further lengthened the payment cycle to 120-150. Now with lockdown, the ERP systems have become dysfunctional. This, coupled with lack of access to credit and COVID-19 has made it impossible for MSMEs to see the payments coming through. The question remains: can these invoices be discounted?
It is feared that MSMEs—the key pillar of the Indian economy and the second largest provider of jobs—will no longer enjoy the same status post COVID-19. Continuous lack of access to credit has led to closure of facilities and layoffs. The pandemic has posed an existential crisis for the MSMEs.
The Reserve Bank of India (RBI), in a recent announcement of three-month moratorium on payment of instalments of term loan outstanding, deferring of interest rate on working capital and also not considering the deferment for NPA is expected to benefit a lot of MSME borrowers. The RBI’s measures are estimated to inject Rs 3.74 crore liquidity in the economy. This has come in as a relief but there is a lot more that needs to be done.
It is time that the government provided specific relief measures to the small businesses, which are amongst the worst hit. The need to working capital and cash flow lending is more pronounced during these times than ever before.
Keeping the above in mind and to pursue the cause of MSMEs to take it to the next level, SKOCH Group launched a series of webinars consultations called ‘India Responds: How Can SMEs Survive the Corona Virus?’ The first webinar consultation successfully concluded was participated by domain experts and stakeholders from banking, financial services, think tanks, policymakers, industry, chartered accountants, consultants and economists. The issues that were discussed included: 1) India Advantage; 2) Implications of Rs 1.7 lakh crore rescue package announced by the Finance Minister; 3) Implications of RBI announcements; 4) Managing Cash Flow; and, 5) Managing Working Capital.
The webinar consultation returned the following five policy recommendations that the government must implement on a priority to help MSMEs in this hour of crisis:
Definition of MSME
Currently, the MSMEs in India is categorised based on investment made in plant and machineries (excluding investments in land and building) if they are operating in the manufacturing sector and investment in equipment for service sector companies.
As per the Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, manufacturing enterprises with investment in plant and machinery up to Rs 25 lakh is classified as Micro, between Rs 25 lakh to Rs 5 crore is classified as Small and from Rs 5 crore to Rs 10 crore is categorised as Medium. In the case of service sector, enterprises with investment in equipment up to Rs 10 lakh is categorised as Micro, Rs 10 lakh to Rs 2 crore as Small and Rs 2 crore to Rs 5 crore as Medium.
Although the Cabinet had cleared replacement of investment based definition with one based on turnover, yet the Act could not be amended through the Parliament. There is an urgent need to look into change in criteria of definition. As it holds today, it so appears that the manufacturing industry has hijacked the MSME policy. While a manufacturing unit may still have investment in plant and machinery, what about the services or trading companies, who have close to nil investment in plant and machinery, question experts. Therefore, what is recommended that the definition is based on turnover keeping in mind GST filing rather than investments, which generally are depreciating assets. This investment based categorisation is plagued with multiple issues and acts as a barrier to the new enterprises.
There is an urgent need to allow Aadhaar based e-Sign in all situations requiring a customer signature – whether the customer is an individual, a partnership or a private limited firm. Currently signatures involve visiting a branch or an agent visiting the customer and hence requires physical contact. Given the current crisis, when the physical movement is restricted and still the contracts are to be executed, e-Sign can come as a breather. Also the cost has to be zero so that all the business transactions by MSMEs including non-NBFC FinTechs can be done sitting at home.
In January 2020, the RBI allowed video-based authentication as an alternative to the accepted e-KYC practices. Such verification will be Aadhaar-based, either online or offline, RBI said. This was proposed in the report of the Expert Committee on MSMEs headed by U K Sinha. Such video KYC can be done through Google Duo or Apple FaceTime, the committee had recommended.
Video KYC so far has remained a cumbersome process according to many MSMEs. This, in fact, necessitates that e-KYC in its digital avatar can be used by all the other financial institutions. While technology has enabled it and it is possible to do one single e-KYC that can be equally accessed by anyone so that the small enterprises are not hassled for either multiple KYCs or Video KYC. All financial institutions – banks, NBFCs etc – should be allowed to use KYC of existing bank via digitally signed bank statement of existing bank as a valid e-Doc.
UPI based payments are extremely low cost but limits enforced have reduced its practical adoption and acceptance. UPI can be used for making and collection of payments as well. As of now, the UPI collection product enables collection, but it is limited to Rs 2,000 only. If it is increased, the lenders can lend as well as collect money easily. It is therefore recommended that UPI-based recurring mandates could be allowed and increase limits to Rs 2 lakh with immediate effect to help ease the situation.
(Gursharan Dhanjal can be reached at email@example.com)
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