Relief for MSMEs

Plan to double collateral-free loans can, however, be a spoiler

A Reserve Bank of India (RBI) committee set up to look at the problems of domestic micro, small and medium enterprises (MSMEs) has suggested welcome measures, including creating a Rs 5,000-crore stressed asset fund that could operate on the lines of the Textile [Upgrade] Fund Scheme. The committee also said instead of making MSMEs register with various authorities, the permanent account number (PAN) should be made sufficient for most of the activities and the focus should be on market facilitation and promoting ease of doing business for the sector. The committee suggested that to eliminate the delayed payments problems faced by MSMEs, which they also cannot take up legally because of low bargaining power, the MSME Development Act (MSMED Act) should be amended, requiring all MSMEs to mandatorily upload their invoices above an amount to an information utility. In another interesting suggestion, the panel has recommended a government-sponsored fund of Rs 10,000 crore to support investment by venture capital and private equity funds investing in the MSME sector. The Small Industries Development Bank of India (Sidbi) should play the role of a facilitator to create such a platform. This is expected to help MSMEs that largely rely on informal sources for equity, which includes own saved funds and funding from family and friends.

 
The broad suggestions of the committee make ample sense because there is no doubt that the MSME sector needs help. An inequitable distribution of funds has been one of the most persistent problems that the economy has been facing. Too little of the capital is distributed to MSMEs, as commercial banks have considered them  to be highly risky to lend. That is understandable because the RBI’s latest Financial Stability Report itself highlighted concern with the growing number of loans that were going to small businesses. In 2017 and 2018, more and more loans had been given to MSMEs. The RBI report highlighted these loans and suggested that “such a sharp increase [in loans] may require examination of possible dilution of credit standards further and additions to supervisory strategy for PCA banks”.

 
In that context, however, the panel’s suggestion to double collateral-free loans to the segment, including for the Pradhan Mantri Mudra Yojana (PMMY) and Self-Help Group-based entities, can be risky, if accepted. Consider the Micro Units Development and Refinance Agency (Mudra) loans, where too many best practices in loan origination have been neglected while authorising and disbursing loans. Ensuring repayment has also been a challenge. The Mudra loans scheme is showing signs of becoming the next source of major non-performing assets (NPAs). Gross NPAs in the scheme reportedly went up by 69 per cent to Rs 16,480.87 crore for the fiscal year ended March 2019 from Rs 9,769 crore a year-ago. According to credit-rating agencies, the ratio of NPAs in the scheme is now being underestimated and may be between 10 and 15 per cent of advances. While the very nature of the business of borrowers under Mudra is susceptible to volatility and annual cycles, the surge in NPAs shows banks are not putting in efforts to monitor them to ensure timely repayment. It is noteworthy that private sector banks, which have generally been better at minimising NPAs, have not gone all in on such lending the way that public sector banks have. A hike in the collateral-free loans would hardly solve the problem.