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Monday, April 15, 2024

Suggestions to Rescue the MSME Sector Post COVID-19

With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of Bharat’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from Bharat.

The sector has consistently maintained a growth rate of over 10%. About 20% of the MSMEs are based out of rural areas, which indicates the deployment of significant rural workforce in the MSME sector. (Source- CII)

The important statistical data on Bharat’s MSME sector is as under-

Estimated Number of Enterprises (in Lakh)

Activity Category Rural Urban Total Share (%)
Manufacturing 114.14 82.50 196.65 31
Trade 108.71 121.64 230.35 36
Other Services 102.00 104.85 206.85 33
Electricity* 0.03 0.01 0.03 0
All 324.88 309.00 633.88 100

(Source: Annual Report of Ministry of MSME)
(*Non-captive electricity generation and transmission and distribution by units not registered with the Central Electricity Authority)

The above data does not include those MSMEs registered under

(a) Sections 2m(i) and 2m(ii) of the Factories Act, 1948,

(b) Companies Act, 1956, and

(c) construction activities falling under Section F of National Industrial Classification (NIC).

Out of 633.88 estimated number of MSMEs, 324.88 lakh MSMEs (51.25%) were in rural area and 309 lakh MSMEs (48.75%) were in the urban areas.

Contribution of MSMEs in Country’s Economy at Current price

Year MSME GVA Growth (%) Total GVA Share of MSME in GVA (%) Total GDP Share of MSME in GDP (%)
2012-13 2977623 15.27 9202692 32.36 9944013 29.94
2013-14 3343009 12.27 10363153 32.26 11233522 29.76
2014-15 3658196 9.43 11481794 31.86 12445128 29.39
2015-16 3936788 7.62 12458642 31.60 13682035 28.77
2016-17 4405753 9.4 13841591 31.83 15253714 28.90

 (Source- Annual Report of Ministry of MSME 2018-19).

Estimated Employment in MSME Sector (Broad Activity Category Wise) in Lakh

Broad Activity Category Rural Urban Total Share (%)
Manufacturing 186.56 173.86 360.41 32
Trade 160.64 226.54 387.18 35
Other Services 150.53 211.69 362.22 33
Electricity* 0.06 0.02 0.07 0
All 497.78 612.10 1109.89 100

(Source: National Sample Survey (NSS) 73rd round 2015-16)

Micro sector with 630.52 lakh estimated enterprises provides employment to 1076.19 lakh persons, which accounts for around 97% of total employment in the sector. Small sector with 3.31 lakh and Medium sector with 0.05 lakh estimated MSMEs provides employment to 31.95 lakh (2.88%) and 1.75 lakh (0.16%) persons of total employment in MSME sector, respectively.

MSMEs share in Exports

The MSME sector in Bharat is contributing more than 40% to exports. It can be seen from the Table below that the share of MSME exports has increased from 43% in 2012-13 to 49% in 2017-18.

Share of MSME exports in total exports

Year Total  Exports Exports by MSME Share of MSME Exports* (%)
2012-13 300400 127992 43
2013-14 314415 133313 42
2014-15 310352 138896 45
2015-16 262291 130768 50
2016-17 275852 137068 50
2017-18 303376 147390 49

(*Decimal points rounded off)
(Source: RBI & Press Information Bureau/Directorate General of Commercial Intelligence and Statistics (DGCIS))

The following top ten States together accounted for a share of 74% of the total estimated number of MSMEs in the country:

Bank Credit to MSMEs

At an aggregate level, the banking sector has credit outstanding to MSMEs of approximately Rs.17.4 trillion as on March 31, 2019. SCBs account for 90% of the share of this, although NBFCs have grown at a healthy rate in recent years. MSME loans worth Rs 2.32 lakh crore are at a higher risk of becoming non-performing assets (NPA) as they fall in the highest risk category of 7 to 10, according to credit information firm TransUnion Cibil.

Needless to emphasise that MSME sector is the back bone of the economy along with agriculture in Bharat. As the current situation is very fluid with lot of uncertainty the government and RBI are closely monitoring the same and making few adhoc policy announcements after due assessment of the likely impact of the COVID19 on the country’s economy in general and MSME in particular.

Government’s Initiatives

Finance minister Nirmala Sitharaman had announced in March, 2020 that government would bear the 24 per cent contribution of both employee and employer combined to the Employees’ Provident Fund for the coming three months. The minister had also announced raising the default threshold by MSMEs from Rs 1 lakh to Rs 1 crore to prevent triggering of insolvency proceedings against small businesses.

Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012 under MSMED Act amended in November, 2018  mandates 25% annual procurement from MSEs by Central Ministries/Departments/Public Sector Enterprises (CPSEs) which include 4% from MSEs owned by SC/ST and 3% from MSEs owned by Women entrepreneurs.

Procurement by CPSEs from MSEs

Year  No. of CPSEs (Reported) Total procurement (Rs. Crs) Procurement from MSEs Share in the annual procurement Procurement from MSEs owned by SC/ST Entrepreneurs (Rs. Crs) Share in the annual procurement
2017-18 170 114042.05 26357.46 23.11% 544.72 0.48%
2018-19 162 152620.40 40303.26 26.41% 823.87 0.54%


Sections 15-24 of The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 deal with the issues relating to the Delayed Payments to Micro and Small Enterprises (MSEs) by the buyers to the MSE supplier.  In the case of delay in payment beyond 45 days, MSEs suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all States/UTs.

Under Section 16 of the MSMED Act, delayed payment to supplier units, attracts compound interest with monthly interests at three times of the bank rate notified by the Reserve Bank. Vide Gazette notification S.O. 5622(E) dated 02.11.2018, it was directed that all companies who get supplies of goods or services from MSEs and whose payments to MSE suppliers exceed 45 days from the date of acceptance of goods or services shall submit a half yearly return to the Ministry of Corporate Affairs.

However, in reality the MSEs continue to experience inordinate delays in receiving the payment from suppliers including the government entities. Two-and-a-half years after the government launched delayed payment monitoring portal MSME Samadhaan, to fast track settlement of MSME dues by central ministries, departments, central public sector enterprises and governments, the number of cases settled remains low at 24 per cent.

The portal, launched in October 2017 has facilitated the disposal of 3,145 cases so far out of 13,091 cases filed in the past around 30 months in the MSE Facilitation Council . The amount payable in the number of cases filed stood at Rs 4,112 crore while Rs 598 crore has been settled through the disposed of cases.

Vide Gazette notification S.O. 5621(E) dated 02.11.2018, it was instructed that all Companies with a turnover of more than Rs. 500 crore and all CPSEs shall be required to get on boarded on the Trade Receivables Discounting System Platform (TReDs). As on 31.3.2019, Total 62 CPSEs and 849 MSMEs of CPSEs have been on boarded on the TReDS Platform. TReDS is an electronic platform for facilitating the financing/ discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers.

These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs). The transactions processed under TReDS are “without recourse” to the MSMEs.

Export realisation period extended from 9 months to 15 months

Presently, value of the goods or software exports made by the exporters is required to be realized fully and repatriated to the country within a period of 9 months from the date of exports. In view of the disruption caused by the COVID-19 pandemic, the time period for realization and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export by RBI.

Credit Guarantee Fund Scheme and micro and small enterprises

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

The Trust covers credit facilities (Fund based and/or Non fund based) extended by lending institution(s) to a single eligible borrower in the Micro and Small Enterprises sector for credit  facility

(i) not exceeding ₹50 lakh (Regional Rural Banks/Financial Institutions);

(ii) not exceeding  ₹200 lakh (Scheduled Commercial Banks, select Financial Institutions and Non-Banking Financial Companies (NBFCs);

(iii) not exceeding ₹50 lakh for Small Finance Banks (SFBs)byway of term loan and/or working capital facilities, without any collateral security and/or third party guarantees.

Under Hybrid Security model Lending Institutions can cover the unsecured part of the collateral security under CGTMSE upto to the extent of ₹ 200 lakh. As of 31st March, 2019 the amount of cumulative guarantees approved under CGTMSE stand at Rs.1,75,961 Crores.

Post COVID-19

Government’s announcement of total lockdown on 24th March, 2020 to save the lives of the people from the pandemic has totally paralysed the economic activities affecting all the sectors. MSME sector is facing a severe liquidity crisis and many units are facing existential crisis. In order to overcome this crisis the author submits the following recommendations.

1. Bharat’s total foreign exchange (Forex) reserves stand at around US$474.660 billion on 3rd April 2020, the highest ever. The government and RBI may think of divesting US $ 100 billion which will fetch around Rs. 7,50,000 lakh crores. This amount may be utilised as under.

2. Rs. 1.50 lakh crore as refinance from MUDRA Corporation to the banks and eligible MFIs to boost the lending to micro enterprises.

3. Rs. 5 lakh crore as refinance from SIDBI to the banks and FIs to boost the lending to small and medium enterprises for Rs. 2 lakh crore and Rs.3 lakh crore respectively.

4. Rs. 1 lakh crore as refinance from SIDBI to the TReDS platform to encourage more and more MSMEs to avail post sale finance without recourse to the MSMEs and encourage the banks and FIs to expand this post-sale finance portfolio.

5. All eligible loans (Post COVID-19) to Micro and Small enterprises given by regional rural banks and FIs up to Rs. 50 lakhs and up to Rs. 2 crores by Scheduled Commercial Banks, NBFCs and FIs respectively to be covered under CGTMSE. The likely liability of CGTMSE towards this guarantee to be borne by the government will be at an average of 10% of the total guarantee amount based on the historical data of NPAs for Micro Enterprises (8.5%) and Small and Medium Enterprises (11.3%).

6. Government of India and RBI to frame policy guidelines to enable the banks, NBFCs and FIs to convert the existing working capital credit facilities given to MSMEs into Working Capital Demand Loan (WCDL) that is repayable within a tenor of 3 years.

7. Government of India and RBI to frame policy guidelines to enable the banks, NBFCs and FIs to give additional working capital credit facilities to MSMEs equivalent to their extant eligibility (i.e., before COVID19).

8. The entire Rs. 7.50 lakh crore mentioned above as refinance to be charged at 6% by the respective refinancing institutions (i.e., MUDRA Corporation and SIDBI) and the banks, FIs and NBFCs in turn to charge the MSME borrowers at 8%.

9. The above suggested post COVID-19 special financial package to MSMEs to be initially given for a period of 3 years and depending on the situation may be extended for a couple of years.

Hope the government and regulators will consider the above recommendations and take appropriate policy decisions at an early date so that the MSME sector will get the much needed support and bounce back to normalcy in the near future.

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Dr. B.N.V. Parthasarathi
Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 16 years of teaching, research and consulting. 200 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 38 short stories 50 articles and 2 novels published in Telugu. Email id: [email protected]


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