Over the past few years, the micro, small and medium enterprises (MSME) sector has been battered by a series of shocks. From demonetisation to the transition to the goods and services tax to the pandemic, MSMEs have borne the brunt of the disruption in economic activities during each of these periods. While there are indications of this segment of the economy picking up, there are also signs that its financial position remains stretched. Data from the RBI’s most recent financial stability report showed that while gross non-performing assets of the MSME sector have dipped recently, they remained uncomfortably high. At the end of March 2022, bad loans in the MSME sector stood at 9.3 per cent. Further, as the report also pointed out, restructured MSME loans, constituting around 2.5 per cent of total advances, remain a source of concern. During these periods of disruption, the larger firms have benefitted at the expense of MSMEs — as per CRISIL, more than a quarter of the country’s MSMEs have lost market share due to the pandemic.
MSMEs also face another peculiar problem, that of delayed payments. As reported in this paper, delayed payments are a critical issue for the sector, especially for the micro and small enterprises. The sheer magnitude of the delayed payments, from both private and public sector customers, complicates their cash flow management, increasing their working capital requirements, and impacting their financial position and business prospects. Among the MSMEs, for the smaller enterprises, delayed payments as a percentage of sales, have seen a sharp rise over the past few years. This problem is more acute in labour intensive segments such as construction, retail trade and transport. The government has been cognisant of this issue and has urged both central and state departments as well as public sector enterprises to clear their dues to MSMEs within 45 days of receipt of goods. Yet, as reported in this paper, the issue remains.
In recent times, there are signs of a turnaround. Bank credit to MSMEs has picked up pace sharply in the quarter ending March 2022. But, considering that the government’s relief measures were largely through the formal banking channels — under the widely used emergency credit line guarantee scheme loans worth Rs 3.32 lakh crore were sanctioned till April 2022 — the formal MSMEs are likely to have recovered faster. Among the informal MSMEs, those who have linkages to the formal parts of the economy would have also recovered quicker — after all, an upsurge in demand would have led to a pick up in ancillary industries and service units. The informal MSMEs who operate mostly among themselves are likely to have suffered the most. Considering that MSMEs employ a sizable part of India’s labour force, and are also suppliers to the larger economy, their financial distress has far reaching consequences. Appropriate steps should be taken to ease their woes.
Reference: https://indianexpress.com/article/opinion/editorials/saving-msmes-rbi-demonitisation-8051187/
