- A committee formed by the Reserve Bank of India (RBI), headed by former SEBI Chairman U.K. Sinha, has recommended a Rs 10,000-crore government fund.
- The fund will be used to develop micro, small and medium enterprises (MSMEs) has proposed.
About MSME sector
- Micro, Small and Medium Enterprise (MSME) sector has emerged as a very important sector of the Indian economy, contributing significantly to employment generation, innovation, exports, and inclusive growth of the economy.
- It accounts for over 7 per cent of India’s GDP and employs over 117 million people and contributes 45 per cent to the manufacturing sector’s output and 40 per cent to the nation’s exports.
- According to the recent survey conducted by All India Manufacturers’ Organisation, the TMSME segment (Traders, Micro, Small and Medium Enterprises) is in a critical condition with high level of job loss and decreasing profits.
- MSEs face problems of delayed payments and hesitate to enforce the legal provisions available to them under the MSMED Act due to their low bargaining power.
- Of all the problems faced by MSMEs, non-availability of credit at reasonable interest rates is the most severe.
- MSMEs are predominantly informal and vulnerable to structural and cyclical shocks, at times with persistent effects.
- High-risk perception of banks in lending to MSMEs due to which they insist on collaterals that are not easily available with these enterprises.
- To understand the structural bottlenecks and economic forces affecting the performance of the MSMEs, RBI announced the constitution of the Committee headed by U K Sinha in January 2019.
- The RBI expert committee on micro, small and medium enterprises (MSMEs) has recently submitted its report to the RBI.
Key Recommendations of the Committee to boost MSME sector:
- Rs 10,000-crore government fund to support venture capital and private equity funds investing in the MSME sector.
- Rs 5,000-crore distress asset fund to assist in clusters where several small businesses are affected because of external factors, such as a change in environmental laws.
- A comprehensive and holistic MSME code in place of the MSMED Act, 2006, replacing present territorial jurisdiction and arbitrary inspection with policy-based monitoring systems with a sunset clause.
- Change in Criteria for determining MSMEs: Presently the criteria for determining MSMEs is based on employment, which is difficult to implement. The committee has recommended to use turnover as criteria for determining MSMEs.
- Increase the number of Facilitation Councils: Majority of the States have only one MSE Facilitation Council (MSEFC) which is not adequate to cater to delayed payment cases arising in the entire State. Hence, there is a need to increase the number of Facilitation Councils particularly in larger States.
- Mandatory Procurement from GeM Portal: Government has notified the PSUs/ Government Departments to make 25% of their procurement from MSEs. To further strengthen the procurement mechanism, the Government should make it mandatory for PSUs/ Government Department to procure from MSEs up to the mandated target of 25% through the GeM portal only.
- Creation of Information utility: To help small businesses recover their dues from large corporates, creating an information utility to collect details of invoices. Based on this information, the designated authority will write to corporates, asking them to clear bills.
- Central Scheme to Support Enterprise Development Centres (EDCs): These EDCs, while being principally funded by the government of India, must have the operational flexibility to partner with the private sector, particularly in the areas of skilling and technology development.
- Finalisation of bankruptcy law for individuals: The finalisation of these rules can boost lender confidence because lenders will have more certainty and predictability regarding the recovery of defaulted loans. This can increase the amount of credit available to MSME in the Indian economy and, in turn, reduce the credit gap.
- Exempt startup listings from profitability rule: At present, for companies to list on Indian bourses, they need to show a consistent track record of profits for the previous three years. The panel has recommended that there should be no profitability requirement for startups to list in India as they tend to be loss-making to achieve high growth.
- Facilitation of dual-class or differential voting rights (DVR) share structure: The DVR shares allow founders to retain control even when they have less stake in the company after raising external funds from investors. This will be an important step to balance founder control.
- Cash-flow based lending to open new funding channels: The cash-flow based lending on the back of publicly available digital infrastructure will not only open a new form of funding for the sector but will also help in generation of new jobs in the economy.
- Increase the limit for non-collateralised loans: The panel also suggested that the RBI should increase the limit for non-collateralised loans to ₹20 lakh, and this would address a significant proportion of the sector needs.
- Revision in loan limit sanctioned under MUDRA: It also suggested revision in loan limit sanctioned under MUDRA by the Finance Ministry to ₹20 lakh from ₹10 lakh.
- Non-Profit Special Purpose Vehicle (SPV): Setting up of a Non-Profit Special Purpose Vehicle (SPV) to support crowd sourcing of investments by various agencies particularly to pave the way for conducive business ecosystem for MSMEs.
- Expanding the role of SIDBI: SIDBI can contribute in developing and deploying additional instruments for debt and equity, which help crystallise new sources of funding for MSMEs and MSME lenders, such as first-loss guarantees, pass-through certificates (PTCs).
- PSB Loans In 59 Minutes portal: The Committee recommendede using the PSB Loans In 59 Minutes portal to also cater new entrepreneurs, who may not necessarily have such information, including those applying under PMMY loan and Standup India.
- Loan Service Providers (LSPs): To reduce the credit gap, a new intermediary i.e., Loan Service Providers (LSPs) who will be an agent of the borrowers is recommended for consideration by RBI.
- Creation of Digital Public Infrastructure: It will have the potential to reduce loan operating costs significantly and will address information asymmetry that improves credit access and overall quality in the lending space.