Credit and Finance for MSMEs: First, the great news. India is amongst the quickest-increasing economies, post-pandemic measured by Bloomberg and the World Bank at 9.2 %. Industrial Production (IIP) surged by 29.3 per cent in May 2021. The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 61.2 in May 2021, although, disappointingly it shrank to 48.1 in June 2021. This post-pandemic development projection encourages the micro, tiny, and medium enterprises (MSMEs) constituting the powerful provide chain in manufacturing for a dream-run post-2022 as soon as the cascading impact of the pandemic subsides.
There also has been a surfeit of policy adjustments in the sector with an outlook for development in trade via the instruments planned for it. Factoring Amendment Bill 2021 authorized by the Parliament purported as benefiting the MSME sector demands unique consideration. It fundamentally ignores that the sector is predominantly micro and tiny with proprietary and partnership firms constituting 98 per cent of the total firms, with quite a few of them unregistered either on the union government or state governments’ MSME portals. Numbers displayed in the public domain are also deceptive as there has been no census. Some research from the OECD, IMF, and World Bank also did some extrapolation to the MSME Census, 2006.
RBI information on the sector offers only the quantity of accounts and not the quantity of enterprises – that as well is not segregated scientifically into manufacturing and services. At least, as the authors of the paper rightly concluded, GST information synchronization helped clean up of the information relating to trading and services sector units. Regarding manufacturing units, despite the fact that the UK Sinha Committee referred to as for money-flow-based lending, no bank has set up the architecture needed for it. Banks have turn out to be adept at providing numbers which their bosses want. They invariably place the onus on the program. State Level Bankers’ Committee increasingly finds it hard to resolve the concerns of revival and restructuring. RBI circulars on the sector do not reflect the understanding of the sector at the ground level. RBI acts naturally more as a guardian of Banks’ interests than that for the enterprises.
A 2018 study on the MSME finance gap in India by the International Finance Corporation (IFC) estimated the general demand for finance by MSMEs in India to be about Rs 87.7 trillion ($1.18 trillion), comprising a debt demand of Rs 69.3 trillion and an equity demand of Rs 18.4 trillion. After excluding enterprises that are financially stressed, enterprises that have been operating for significantly less than one year, enterprises that have been rejected by monetary institutions, and enterprises that choose informal sources of finance, the study estimate the viable debt demand in the sector to be Rs 36.7 trillion.
Factoring and Bill Discounting
Accounts Receivables, identified as the Factor, is paid by one more entity, identified as the assignor, is handled by a bank or NBFC registered below the Companies Act. Factoring assists enterprises to monetize their receivables swiftly and tackle money-flow complications conveniently and in time. The Act, as amended in July 2021, has extended the scope for the operation to as numerous as 5,000 NBFCs topic to RBI regulations that adhere to, a jump from just two elements presently operating – SBI Global Factors and Can Factors, the two subsidiaries of the Banks that hold them, viz., State Bank of India and the Canara Bank – the two public sector banks.
Both the factoring firms have seen minimalistic demand, specifically from the MSME sector. As per RBI recommendations, it is mandatory that when the seller uploads the invoice, its acceptance by the purchaser must be visible on the portal, and in case the purchaser uploads the invoice, the seller should accept the invoice for factoring.
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After the Goods, Services Tax (GST) has been introduced, quite a few banks and NBFCs vastly expanded their bill discounting operations benefiting MSMEs. GST enabled tracing and tracking of the transaction in between the purchaser and the seller of goods and services digitally. Both the banks and NBFCs trading in such bills have been charging prices of interest greater than the standard working capital although such transactions turn out to be the most important portion of the working capital.
Government eMarketplace (GeM) and TReDS are the other two varieties of e-enablement of bills of exchange transactions exactly where each the purchasers and sellers have to register on the associated platforms by payment of the needed costs. The threshold of turnover of Rs 500 crore to deal on TReDS has been a hindering element for the speed of transactions.
Even as per the revised definition of MSMEs, the tiny enterprise will have a turnover of Rs 50 crore, and the medium enterprise will have a minimum turnover of Rs 250 crore. In other words, this will advantage only mid-corporate and corporate borrowers obtaining a turnover of Rs 500 crore.
Factoring units immediately after acceptance by the counterparty will go for auction. The bid acceptance will be the closing time of the day (at 4 pm) and settlement will have to take spot inside a day thereafter generally, and two days outdoors the reduce-off time. TReDS presents non-recourse financing to SMEs wherein if the corporation delays the payment, the bank treats it as an NPA. So, each will advantage the corporates. The quantity of interest will be calculated by the portal that gives flexibility to the purchaser or seller to spend it. Since invariably the origination requires spot at the seller’s finish, banks and NBFCs will charge interest upfront and not at the back finish or buyer’s finish. Further, this element mechanism also includes the payment of extra charges. External credit rating is crucial for the elements and TReDS.
Speed is the essence of delivery – irrespective of whether goods or payments. Such speed can be achievable only when the complete information is digitized. All MSEs in manufacturing must be incentivized to turn out to be digital. Irrespective of the turnover, just about every enterprise has to place in all its information on the program and that will allow transparency, accountability, and access to different services that the governments are inclined to give.
B. Yerram Raju is an economist and threat management specialist. He is also the author of the book — The Story of Indian MSMEs. Views expressed are the author’s personal.