“The number of companies using platforms like ours will increase. As for bank loans, we have to wait for the central bank’s guidelines,” he said.
Ketan Gaikwad, Managing Director (MD) and CEO, Exchange Receivables Ltd. of India (RXIL), in his own words, there are many moving parts in the measures for Micro, Small and Medium Enterprises (MSMEs) in the Union Budget.
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Take the move to reduce the buyer turnover threshold from Rs 500 crore to Rs 250 crore in the invoice discounting platform, Trade Receivables Discounting System (TReDS). According to Finance Minister Nirmala Sitharaman, this will involve 22 more central government companies and 7,000 more businesses. But few companies have publicized the perennial itch of big companies ignoring MSMEs in invoice settlement. On the lending front, banks have been encouraged to extend accommodation to MSMEs even if they are in the special mention account category for reasons beyond their control (this will be supported by a government promotion fund guarantee). Informally, bankers say they do not want to clash with the Reserve Bank of India (RBI) supervisory staff. What happens if such loans become non-performing assets? And given the moratorium nature of these decisions, bankers would prefer to seek guidance from the RBI.
Credit crunch
The 2019 Report of the Expert Committee on Small Businesses (chaired by UK Sinha) noted that most large companies trade with SMEs on credit, and these companies face financial difficulties as buyers do not pay invoices on time. Meanwhile, SMEs are reluctant to file complaints against large buyers or take them to court to enforce contracts. In effect, buyers are using SMEs instead of banks. Discount systems such as TReDS have provided a partial solution, but the problem remains.
According to CRISIL Ratings’ half-yearly ‘MSME Report’ (June 2023), the sector’s debt requirement is over Rs 100 trillion. Of this, 70% is earmarked for working capital requirements alone. “Only a quarter of debt is formally raised and the cost of capital from the informal segment is prohibitively high. Hence, understanding working capital needs across sectors and clusters is critical,” said Pushan Sharma, Director (Research), CRISIL Market Intelligence & Analytics. The same report also states that one in five MSMEs (by value) are expected to have increased working capital compared to pre-pandemic (FY20) levels. Moreover, with limited information and no high-frequency data points, assessing working capital is difficult. CRISIL Ratings addresses this shortfall through primary research and proprietary analysis of data pools.
According to the June 2024 Financial Stability Report, the number of invoices uploaded and financed on TReDS is expected to grow by over 56% from 2022 to 2023, with the success rate remaining stable at 94%. However, Gaikwad points out that “out of the 46.9 million businesses registered on the Udyam portal, only 82,000 SMEs are registered across all TReDS platforms (RXIL, Invoicemart, M1xchange), so there is huge potential.” Prakash Sankaran, a colleague at Invoicemart, opines, “TReDS volumes have grown steadily since inception, much of it post-pandemic. We must continue to add supportive measures to expand participation. We are heading towards TReDs 2.0.”
When I asked Ashwani Kumar, MD and CEO, UCO Bank, how he viewed the plan, he said, “Building a robust technology infrastructure and improving customer awareness are the major challenges that need to be addressed. We have developed the in-house capabilities to address them.” He further added, “This government initiative will smooth the flow of credit to MSMEs, which will help foster entrepreneurship, create jobs and boost credit in the MSME sector, ultimately propelling India towards becoming a $5 trillion economy.” This is politically correct.
What Sinha’s report highlighted are inescapable facts. The data shows that the average days of debt for MSMEs is very high, consistently exceeding 90 days. The total working capital cycle (in days) for these enterprises was consistently 300 days (“very long”, according to the report). “This resulted in long working capital cycles, high inventory turnover and exacerbated by very low bandwidth available from creditors,” the report said. No subsequent study has been done on these issues.
Then there is the larger structural issue of liquidity. Credit Deposit Ratio (CD) is at its highest in the last two decades at just below 80%. Banks are unlikely to cater to the needs of MSMEs at full strength. There is also added pressure to maintain high quality liquid assets under RBI’s proposed Liquidity Coverage Ratio framework, which is meant to address outflow of retail deposits due to internet and mobile banking. The proposed changes are set to come into effect from FY26 and it is quite possible that banks will take a fresh look at their credit growth and business plans from early FY25.
Tough business
Additionally, there are issues that go beyond finances: building regulations, for example, need to be reviewed and streamlined to accommodate increased manufacturing capacity.
The Global Coalition of Mass Entrepreneurs asserted in its 2023 report that small businesses are vital to economic growth and will create opportunities for the 90 million workers who will be looking for work by 2030.
According to the Ministry of Statistics and Programme Implementation, the share of MSMEs in the total Indian manufacturing output was 35.4 per cent in FY22. According to the data dissemination portal of the Directorate General of Commercial Intelligence and Statistics, the share of MSME-designated products in exports was 45.7 per cent in FY24.
Small but beautiful.
