Of Pandemic and MSME

B Sivaraman

For MSME lenders, Covid-19 is an existential threat; yet, the post-pandemic world would need their credit more than ever,” observed Economist, the leading business magazine from UK. How enfeebling the pandemic has been to the MSMEs in India and what the banks are doing to strengthen them?

Incidentally, a Rs3-lakh crore credit guarantee programme under the Emergency Credit Line Guarantee Scheme (ECLGS) was the highpoint of the Atmanirbhar Bharat programme announced by FM Ms Nirmala Sitharaman in My 2020 to revive the sick MSMEs and thereby to stimulate the economy. Has it worked? Has the Atmanirbhar Bharat really helped in bringing around the MSMEs and given them a substantial llifeline. Or, are majority of them are still in the red? On 28 June 2021, i.e., more than a year later, Ms Sitharaman had to expand the ECLGS by 50%, or an additional Rs.1.5 lakh crore and the total quantum of the credit expansion to MSMEs under it is Rs.4.5 lakh crore. This itself is an indirect admission that the original limit of Rs.3 lakh crore was inadequate. Though it can also be interpreted as fiscal prudence, the meager recovery in the economy itself is a confirmation that Modi’s Atmanirbhar Bharat was grossly inadequate to stimulate the economy. What about the impact of it on the MSMEs in the past one year?

The findings of a telephone survey of 2029 MSMEs conducted by a team from the Science, Technology, Engineering Park (STEP), an incubator promoting tech innovations in MSMEs attached to the Regional Engineering College (REC), Trichy, clearly shows that more than 40% of the sick MSMEs still remain shut. The MSMEs are not really out of the woods.

The survey findings have been uploaded in the official website of STEP-REC. Some of the findings are really shocking. 94% of the surveyed MSMEs reported reduction in sales in the fiscal year 2020–21 due to the pandemic, 42% of them reported more than 50% fall in sales, and 91% of the MSMEs reported loss. While 63% of the surveyed MSMEs suffered a loss of less than Rs.5 lakhs in that fiscal year, 27% suffered a loss of Rs.6–10 lakh and 10% above Rs.10 lakh. 44% of the 1900 reporting MSMEs said they were not working since 1 April 2020 and only 10% of them were working in near-full capacity after making allowance for the lockdowns. 33% of them had laid-off workers, 28% of them had imposed wage-cuts, and 23% of them had retrenched workers outright. This is nothing short of a catastrophe.

How good is the recovery from the point of view of workers’ job-losses? Though the survey doesn’t clarify whether the workers were locals or migrant workers, it shows that only 31% of the laid-off or retrenched workers came back to the MSMEs seeking work after they restarted the work after the lockdowns ended.

Giving a profile of the surveyed MSMEs, the survey says that 72% of them are more than 5-year old, 86% of them had investment upto Rs.50 lakh, 92% of them had sales turnover of less than Rs.1 crore while only 2% of them had a sales turnover above Rs.5 crore and 69% of them employed upto 10 workers and 8% above 20 workers.

One of the most intriguing finding of the survey is that while 694 of the 1900 responding MSMEs (36.52%) reported that they managed to cope up with the loss by resorting to bank borrowings, 631 MSME owners (33.21%) said they borrowed from other sources. 285 sold their assets while 400 invested more of their own funds. Why one-third of the MSMEs had to borrow money elsewhere and not from the banks to meet their entire credit needs? From NewsClick, we talked to some MSME owners and branch managers.

Varadharjan Venkataraman, who owns an SME unit New Century Enterprise in Ambattur Industrial Estate, says that banks have temporarily kept the applications for new MSME loans pending and are clearing only the MSME loans under the ECLGS as they have to fulfill quotas in this regard.

Commenting on this survey, VSS Sastry, a bank official in Karnataka who just retired as an official in Canara Bank, confirmed that the banks are reluctant to clear fresh MSME loans thanks to their own NPAs burden and higher credit risk for MSME loans arising out of the pandemic impact and low economic take-off despite the economy technically coming out of recession. Pointing out the weaknesses in the REC-STEP survey, he says, “The survey has been conducted more than one year after Prime Minister Narendra Modi announced the Atmanirbhar Bharat Abhiyan scheme on 12 May 2020 and Finance Minister Nirmala Sitharaman announced the ECLGS credit guarantee scheme for MSMEs on 21 May 2020. Naturally, the survey questionnaire should have included a pointed question on whether the MSME respondents applied for a bank loan under the Atmanirbhar Bharat loan guarantee scheme or whether they had applied for any fresh MSME loans and what was the outcome. Absence of such a question was a major shortcoming of the survey”.

This apart, Sastry says: “The Centres policy is that the public sector enterprises (PSUs) should source 25% of their procurement from MSMEs and some state governments like that of Uttar Pradesh have also fixed a similar quota of 25% procurement for state PSUs but by December 2019, by government’s own admission, only 10% of the procurement had been done from MSMEs by the Central PSUs. But the government has not clarified why this was so. This survey also did not go into such an issue. There are other issues like possible power tariff hike under the proposed new National Electricity Policy 2021. The survey, though a very good and timely one, could have made even better contribution for an independent outcome-based performance evaluation of the concerned government schemes at a micro level if they had also included such relevant questions also”.

Though a small sample survey limited to Tamil Nadu, this must be more or less reflecting the MSME realities at the all-India level with only a small margin of error. Coming one year after Atmanirbhar Bharat Abhiyan, it is all the more disturbing. By MSME Ministry’s own figures, the MSMEs have emerged as the major growth engine for the economy and exports in the present phase. The survey findings show that the government needs to do much more.

The economic advisors immediately around the Prime Minister might have correctly come up with a proposal for re-financing the already indebted but sick MSMEs through the ECLGS for their revival. But encouraging emergence of new MSMEs is as much—or, perhaps more—important than additional lending to the already borrowed and sick MSMEs from the point of view of fresh impetus for growth in the economy. But unfortunately the government support to MSMEs was largely limited to a couple of credit guarantee schemes for the indebted MSMEs and no scheme for vastly expanding lending to the new MSMEs was there. No wonder, the results were not very impressive over the peak pandemic year of 2020–21 as shown by the survey. Beyond the circle on Modi’s economic advisors whose inputs have not clicked so far, the PMO should keep its eyes open toward such independent surveys which bring out the stark realities. Otherwise, Atmanirbhar Bharat would continue to remain a half-hearted and ineffective measure.

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Frontier
Vol. 54, No. 10, Sep 5 - 11, 2021