Banks Rework Funding Strategies for MSMEs

India’s Micro, Small, and Medium Enterprises (MSMEs) are a large and growing market, employing about 60 million people in approximately 26 million enterprises. MSMEs in India contribute 8 % to the GDP. The whole MSME sector is the nursery for entrepreneurship driven by innovation and creativity. With the governments ‘Make in India’, there has been a significant jump in the FDI flow. Due to this, the MSMEs sector is poised to get bigger in India. In this article, we will discuss Banks Rework Funding Strategies for MSMEs.

If we look at the official estimates, there are a total of about 63 million micro, .33 million small, and about 5,000 medium enterprises in India, with Uttar Pradesh having the highest percentage of MSMEs in the country.

In this article, we’ll be discussing MSME’s under the MSME Development Amendment Bill, 2018, the benefits available to an MSME in India, how do we register MSME in India, the new bank reforms for MSMEs and the evolving needs of MSME in India.

The New definition

Prior to 1991, the industries were divided into mainly two blocks i.e. large and small. For establishing a large industry, one needed a license and for a small scal, industry license was not required.

In 2006, under the MSME Development Act Section 7, a more comprehensive definition was given to MSMEs. The enterprises are now divided into two categories-

1. Manufacture Enterprises- “These enterprises are engaged in the manufacture and the production of goods pertaining to Industries mentioned under the first schedule of Industries (Development and Regulation) Act, 1951 or the employ plant and machinery in the procedure of value added to the final product having distinct name/character/use.”
2. Service Enterprises- “These enterprises are engaged in providing or rendering of services and are defined in terms of investment in equipment.”

Both the categories are further categorized into micro, small and medium enterprises based on the investment in the plant and machinery equipment.

Under the MSME Development (Amendment) Bill, 2018, introduced by MSME Minister Giriraj Singh, any business having a total turnover up to ₹5 crore will be deemed to be a ‘micro enterprise’. The other slabs consist of ₹5-75 crore for ‘small enterprise’ and ₹75-250 crore for ‘medium enterprise.

MSMEs in India are grouped into the following categories-

Nature of activity of the Enterprise	Investment in plant and machinery excluding land and building for enterprises engaged in manufacturing or production, processing or preservation of goods	Investment in equipment excluding land and building for enterprises engaged in providing or rendering of services (loans up to Rs 1 crore)
Micro	Not exceeding 25 Lakhs	Not exceeding 10 Lakhs
Small	More than Rs.25 lakhs but does not exceed Rs.500 lakhs	More than Rs.10 lakhs but does not exceed Rs.200 lakhs
Medium	More than Rs.500 lakhs but does not exceed Rs.1000 lakhs	More than Rs.200 lakhs but does not exceed Rs.500 lakhs

What are the benefits available?

The government has initiated measures for allowing easier access to funds and modernization of the MSME sector. These schemes ensure quality products, technology up gradation, credit linked subsidy and UID linked scheme for getting subsidy easily.

Some of the other benefits available to the MSMEs are listed below:

• Banks can give free collateral loans.
• For patent registration, 50% subsidy is given.
• There is a 1% exemption on the interest rate on an overdraft.
• MSMEs are given concession in the power utility bills.
• They are given industrial promotion subsidy.
• They are protected against delayed payments and provided compensation for the ISO certification charges.

How to register as an MSME in India?

To encourage more and more MSMEs registration, the Ministry Of Micro, Small & Medium Enterprises has notified a simple one-page registration form known as ‘Udyog Aadhaar Memorandum’.

The entrepreneurs in the MSME field can file the form online, and they will get a unique Udyog Aadhar Number (UAN) instantly. The applicant needs to fill in general details like Aadhaar number, industry name, business address, bank account detail, and other basic details. 

The businesses need to be deregistered if-

• The investment threshold increase more than the limit prescribed by the government.
• If the enterprise starts manufacturing a new item requiring an industrial license or any other kind of statutory license.

Restructuring Scheme for stressed MSMEs

The Reserve Bank of India (RBI) has recently released guidelines for a restructuring scheme for the stressed accounts of micro, small and medium-sized enterprises (MSME). Following are the key changes in funding strategies-

• The RBI under the new guideline allows a one-time restructuring of existing debt extending up to Rs. 25 crores for companies who have defaulted in the payment but the loans provided to them continue to be termed as standard assets. This decision will at par help MSMEs in facing the cash crunch due to the dual effect of demonetization and GST implementation.
• The current scheme is only applicable to the accounts having an outstanding value of Rs. 250 million or less. In addition to this, whether it is in default or not, the loans have to be classified as “standard” as of 1^st January 2019 to be eligible for restructuring. If the account has already been downgraded, then this scheme would not be applicable to them. This current scheme will prevent the restructured loan to be classified as a non-performance asset.
• Separately, the RBI announced that the overall non-performing asset ratio, which is a percentage of bad loans to all loans, in the banking sector, has gone down for the first time since 2015 falling to 10.8% in 2018.
• The Banks and NBFCs who are desirous of adopting this scheme have to put aboard-approved policy on the restructuring of MSME advances within a month from the date of circular.

Evolving needs of MSMEs – The New Funding Strategies

• The new banking strategies include launching new products and hand holding the existing MSME borrowing which will improve the cash flow prediction models and GST compliance.
• Currently, the funding to MSME is based solely on pledged immovable properties. These credits are often termed as loan-against property.  The Banks can also assess the movable assets like goods of the manufactures to ascertain the cash flow for giving credits.
• GST has a refund mechanism, wherein the manufacturer has the right to claim an input tax credit for the inputs which it has used in the production of the final goods. This mechanism had a negative impact on the MSMEs as it strained the finances because of delayed refunds, which lead to an increase in demand for working capital.
• The compliance burden on the SMEs will also tend to ease because of the GST councils decision to include enterprises having a turnover of less than Rs. 1.5 crore for filing GST returns on a quarterly basis rather than quarterly basis.
• To help the small businesses in India, the State bank of India has launched a product to provide working capital loans to the MSMEs, based on their input credit claims. The loan provided will be given outside the sanctioned bank finance, which will be either 20% of the existing fund based working capital limit or the 80% of the input tax claim due, whichever is found to be lower.

Demonetization and GST

MSMEs loans were de-growing as a result of demonetization and later on due to the implementation of GST. However, now the condition is stabilizing.  In 2017-2018 revenue of MSMEs surged by 27% and the operating profit increased by 66 %.

SIDBIs MSME pulse report claimed that an estimated 5 lakh new borrowers are likely to enter the formal borrowing channels in 2018. However, there is a need to revive fresh lending by public sector banks to MSMEs.

Once every business is registered under the GST platform, the economy will definitely benefit from better compliance and transparency. With ease to business, the market will attract domestic investments which will impact MSMEs in India.

Conclusion

With the government’s commitment to strengthen MSMEs, we are expecting the current challenges to stabilize the situation and help the ‘make in India’ and ‘Skill India’ schemes prosper. The government has come up with ways to boost the economy, firstly it implemented a scheme to grant loans in 1 hour, and then it came up with the restructuring scheme.

It is very important to strengthen the credit structure to help MSMEs. The MSME sector has to be provided with better facilities as it is facing competition from Chinese imports.

Money can be raised from the debt market to service MSMEs that don’t have access to the debt market directly. Better access to formal credit revives MSMEs and helps the economy grow. The government has to achieve this goal together with RBI. Banks have to ensure more prudence that will help prevent a series of bad loans in the future. To improve finance for MSME we need to have robust debt market.

For more information on MSMEs, you can contact our team of experts at Enterslice.