Something special for MSMEs – The Economic Times

The GoI would propose a new package in the budget to support MSMEs. Rising commodity prices, problems accessing credit and late payments have accentuated the financial distress of MSMEs who have borne the brunt of the pandemic. Measures such as the Emergency Credit Line Guarantee Scheme (ECLGS) offered by banks to MSMEs to repay loans following the pandemic have helped. MSMEs also need equity support. They only get about 15% of their credit from banks, with the rest coming from shadow banks and informal sources at high interest. So, these companies need an infusion of non-debt (read: equity) capital that they don’t need to serve until they recover.

The GoI fund of funds was supposed to inject over ₹50,000 crore in equity to invest in MSMEs. Apparently, MSMEs are wary of questions being asked (by investors) on their books, especially since most of them are sole proprietorships. The GoI should have a dialogue with the promoters of MSMEs, but the need is to ensure a rapid injection of equity. Equity can be recovered once the operations of these companies have stabilized as the economy recovers. Buying stakes in MSMEs will help formalize the sector and allow these businesses to access credit at much cheaper rates.

All outstanding debts from the public sector to MSMEs must be settled. Although all businesses with a turnover of ₹500 crore are required to register with TReDS (Trade Receivables Discounting System), an online factoring platform that connects buyers, suppliers and financiers, many are unregistered or not don’t use it. The objective of TReDS is to end the use of monopsony power of large buyers vis-à-vis small buyers and help alleviate the working capital shortage of MSMEs. Thus, failure to register or use the platform must be declared as an offence.