NEW DELHI: Prime Minister Modi announcements for the small and medium businesses comes at a time when the World Bank has shown that India has moved up significantly in the ease of doing business rankings.
The Prime Minister, along with his government, in the lead up to the 2019 polls, announced a series of policy measures to help micro, small and medium enterprises (MSME’s). The big picture of his policy is access to finance. Loan requests of up to Rs. 1 crore will be approved online in principle in less than an hour.
One specific reason why this policy is important for the government is that this is a support base of the party. They were hit hard in 2016 when demonetisation was introduced then followed by GST in 2017. The policy introduced now will look to offset the losses suffered over the past couple of years. The Economic Times editorial called this a welcome benefit for MSME’s – “The benefits announced by the Prime Minister for the micro, small and medium enterprises (MSME) are welcome. Small finance banks can raise money from the debt market and service MSMEs that cannot access the debt market directly”.
The RBI and the government have differences when it comes to easing lending restrictions to improve liquidity. Lending to small businesses is a risk when you take into account the level of non-performing assets (NPA’s). According to data from the RBI, banks have not pulled back from lending to medium and small enterprises. The government’s concerns were of low liquidity to these small entities as 11 state owned lenders operate under the Prompt Corrective Action (PCA).
For some, the onus is on the banks to follow through. Chandrakant Salunkhe, founder and president of the SME Chamber of India, said in part, “Banks have to change their mindset if such outreach programmes are to meet their objectives. Else, these measures will remain an election gimmick”. To this, non banking financial companies (NBFC’s) have increased their share of offering finance to MSME’s in recent years. Bank lending to small scale industries fell from a little over 3% of GDP in 2013-14 to 2.2% in 2017-18. NBFC’s providing credit however went up from almost 8% in 2015 to a little over 11% in 2018 so far.
There is understandable hesitancy on the part of public sector banks in lending to MSME’s as many of these loans go bad. The level of NPA’s rose from 13% in 2016 to a little over 15% this year. Private sector banks and NBFC’s are better at managing bad debts. The RBI last month gave incentives to banks to allow flow of funds to NBFC’s. The Indian Express editorial welcomed the new policy putting it in the context of past policies of GST and demonetisation – “If demonetisation and GST ultimately leads to an ecosystem, wherein MSMEs are able to obtain better access to formal finance and without fear of harassment by tax/enforcement authorities, the short-term pains may still turn out to be worth having endured”.
By focusing on MSME’s, the government has provided a boost for an industry that creates about 120 million jobs where almost 30% of the country economic output comes. The failure of IL&FS is seen as another key reason why a source of funds for MSME’s has dried up.
The industry has given the government a thumbs up for the latest policy efforts. The Tirupur Exporters Association (TEA) welcomed the new policy. President of TEA, Raja M. Shanmugham thanked the Prime Minister and hoped that the struggling industry would be helped through exports bouncing back. Apart from the TEA, the Synthetic and Rayon Textile Export Promotion Council (SRTEPC) and the Clothing Manufacturers’ Association of India (CMAI) have thanked the government for the latest policy announcement.
As the policy comes into effect, the gains, short and long term will remain to be seen. However, as the government and RBI are in a public rift on policy and functioning, the industry needs a steady hand in helping to restore confidence in the credit market and for that both need to be in relative sync.