Memo to Modi: Don’t forget MSMEs

Micro, small and medium enterprises (MSMEs) are the backbone of the Indian economy. Few sectors in India can function at peak efficiency without the active participation of MSMEs as a critical part of the upstream and downstream supply chains. For MSMEs to thrive and economies to thrive, it is important to create a stronger and more beneficial ecosystem by addressing certain key issues. I hope the Union Budget 2023-2024 will galvanize the MSME sector by implementing these reforms and policy directives.

There are three key issues we need to address – delayed payments, access to financing and, at a larger level, putting entrepreneurship in mission mode through the National Entrepreneurial Mission (NEM).

Delayed payments and access to finance are long-standing industry issues that require ongoing solutions with immediate effect. The Global Alliance for Mass Entrepreneurship (GAME) Late Payments Report 2022 highlights the magnitude of the delayed payment problem, which accounts for 5.9% (Rs. hindered by the delayed payment. Eighty per cent of this estimated amount is owed to micro and small enterprises, amounting to Rs 855 trillion.

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This issue requires a multi-pronged strategy in which delayed payments must be added as an indicator to the Ease of Doing Business 2.0 (EoDB 2.0) being developed by the Ministry of Industry and Internal Trade Promotion. Second, while the government’s Samadhaan portal partially addresses late payment issues by allowing suppliers to report issues, enabling online dispute resolution (ODR) will ensure that all payment-related disputes are effectively resolved.

To further empower MSMEs, the government must allow them to act independently against negligent buyers and come up with a formula for delaying payments that directly affects the cost of borrowing for large buyers, while introducing a mandate to ensure that Miniratnas, Maharatnas and Navratnas conduct Trade Transactions Receivables Discounting System (TReDS).

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Access to financing for MSMEs is a well-known problem. Recent data shows that between 33% and 41% of micro businesses are denied loans because they need more collateral and/or a good credit history, while 21% of companies require more application paperwork.

Evidence suggests that non-banking financial companies (NBFCs)/fintechs are better suited to serve MSMEs due to their higher handheld support capabilities, lower customer acquisition and collection costs, and lower non-performing assets ( NPA). However, NBFCs/Fintechs rely heavily on banks for funding, with only the top 30 gaining 80% exposure to the banking sector. Furthermore, given the risk-averse nature of banks and stringent policies related to portfolio health, NBFCs/FinTechs receive funding from banks at high interest rates, forcing them to lend to MSMEs at higher interest rates. Furthermore, influential NBFCs need a favorable policy environment and hand-held support to flourish.We need to look at some policy changes to unlock low cost credit flow for NBFC/fintech serving MSMEs

Given the unpredictability of the market, businesses with fewer than five employees employ seasonal hiring practices and employ migrant workers who may not be registered with the state. However, the government must take these into account and come up with a comprehensive social security plan. An “emergency overdraft facility” is required to allow existing and new businesses easy access to funds. Given the unique challenges faced by MSMEs, the government must also provide a longer grace period for GST and NPA norms.

To catalyze and accelerate entrepreneurship, a national entrepreneurship mission is needed to help small and micro entrepreneurs build sustainability, scale and critical mass. There is a need for targeted interventions to assist entrepreneurs who have formally started or run formally registered businesses in both urban and rural areas with an earning potential between Rs. 10+ jobs created or registered within 3 years.

NEMs can help expand existing programs, free up capital, and strengthen regulatory frameworks, while also easing compliance processes by identifying unnecessary or overlapping regulations, rationalizing, decriminalizing, and updating compliance. This mission can include developing spatial hubs—a healthy, diverse and inclusive entrepreneurial ecosystem—in selected locations.

MSMEs are in a state of constant change. NEM may revitalize existing infrastructure such as incubators and accelerators, industrial estates and capacity building facilities. It can create a common grid of legal, tax, HR governance, audit and other shared service providers. NEM can partner with NBFCs and fintechs to develop custom solutions to grassroots issues faced by women and other vulnerable groups, such as lack of credit scores and collateral in their names.

If we cross the 8 billion mark on the global population, one of the daunting prospects facing the country is unemployment. MSMEs hold the key to solving this problem and have the full potential to solve it – as long as we do our part to help them take off!

(The author is the co-founder of GAME, the founder and CEO of 1Bridge, and the president of TiE Bangalore)

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