Despite promised relief, loans for MSMEs hard to come by
The government needs to show serious intent behind the massive relief package announced for MSMEs by encouraging banks to inject more liquidity into the system.
Nearly a month after the announcement of the 20 lakh crore package to revive the economy, much of it focused on the Micro, Small and Medium Enterprises, relief is yet to trickle down to those that need it the most. According to data released by the finance ministry, public sector banks disbursed Rs 14,690.84 crore till June 1 under the Rs three lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector. They have sanctioned loans worth Rs 29,490.81 crore starting June 1.
This is nowhere near enough for a sector that is slowed down by a massive mismatch in demand and supply of credit. During these extraordinary times, when enterprises are operating on low liquidity and their balance sheets have been hit by the pandemic, they were expecting cash handouts from the government. But in the absence of that, banks arenâ€™t even proactive in freely extending emergency forms of credit to help enterprises tide over this period. Instead, they are still stuck in the old credit assessment paradigm, judging creditworthiness too harshly and credit a catch-22 situation for potential borrowers.
A majority of the MSMEs are not eligible to access formal finance and there needs to be an urgent review of lending mechanisms and credit scoring criteria. In the absence of this, MSMEs have traditionally been turning to NBFCs who have better coverage and last-mile connectivity when compared to banks. But even these have been in trouble over the past couple of years and need to be strengthened. The MSMEs are the backbone of Indiaâ€™s economy and contribute 29% of the countryâ€™s GDP and 35% of its manufacturing output. The sector is teetering at the brink affected by zero cash flow and fixed costs, pending payments from both private and public sector, low demand and absence of workforce that has either migrated back home and is too scared to come to work on accounts of the rise in coronavirus infections. These enterprises are traditionally less capable of handling working capital challenges and, due to lack of immediate capital injection, are contemplating lay-offs, scaling down operations or shutting shop altogether.