The fatal blow of a Chinese virus on the MSME sector
COVID-19, the world’s most dangerous virus that has shamed cancer and destroyed both lives and businesses, has damaged something irreparably. The MSME sector.
Worse, the pandemic has halted the government’s ability to help the industry in India. In developed countries, governments have provided wage subsidies and loans directly to struggling businesses. Governments could do it because they had an advantage, they could identify small businesses.
In India, most MSMEs are not registered. Why? No one has an answer.
There is a precipitous rise in unemployment that continues to shake the workforce in this pandemic. A major challenge for our policymakers and leaders is the method by which they can be brought back to work. In addition, the impact on the value chain had a cascading effect. They are currently facing an acute cash flow crisis due to operational challenges with a small staff. The risk of default also exists for financiers offering unsecured loans to MSMEs, which usually rely on valuation of estimated cash flows.
If the current business climate is to continue, it would take nearly two months, if not more, for businesses to experience significant negative impacts, such as temporary layoffs or temporary or permanent closures. The impact of the pandemic will also lead MSMEs to face difficulties in paying bank loans and leasing payments and difficulties in paying rent and utility bills.
So what is the alternative. Let’s assess some of the points: TREDS (Trade Receivable Discounting System) should be made mandatory for all MSME related transactions as it can improve MSME working capital flow at very competitive interest rates and reducing completion cycles loans, allowing MSMEs to obtain loans from various banks.
Also, why not unlock funds under the Employment State Insurance Corporation (ESIC) as medical insurance coverage and provide training in labor, health and safety to MSME manufacturers.
There is also an increased need for financial incentives. The Reserve Bank of India (RBI) is to issue guidelines for higher provisioning revisions to banks otherwise the injection of liquidity into the system is delayed. Raising the minimum threshold from Rs. 1 lakh to Rs. 1 crore to initiate a company’s insolvency under the Insolvency and Bankruptcy Code (IBC) can help MSMEs in financial difficulty.
Force majeure is an extraordinary situation beyond human control, such as calamities, and is described as an “act of God”. A Force majeure clause releases both parties from contractual obligations. Due to the pandemic, several MSMEs were unable to meet their contractual obligations for which they were held legally responsible. So why not ask for an amendment to section 56 of the Indian contract to include a state-imposed foreclosure under Force majeure.
The change in the definition of MSMEs is a significant change as it has brought several small businesses within the scope of the MSME law. And then, the digitization of MSMEs at an accelerated pace will be a crucial element in accelerating the revival of manufacturing MSMEs.
Consider this one. The Emergency Line of Credit Guarantee Program (ECLGS) has greatly assisted MSMEs that were inactive and helped them resume operations by clearing payments to suppliers and paying employee salaries. And banks need to lend more under this scheme to support small businesses.
So why not work towards a flat-rate exemption for raw materials, electricity, etc. in order to alleviate the expense burden.
In India in particular, these are painful times for MSMEs who gloomily look at an uncertain future. It is sad, and also unfortunate, on the surface because time and time again MSMEs have been hailed as the backbone of the Indian economy which contributes almost 29% of the GDP.
However, these companies will find it very difficult to survive if a recall or even for that matter even small regular steps are not taken as an urgent priority to get them out of the current gloomy conditions.
It’s time for the government to sit down and smell the coffee.