The Covid-19 pandemic has made the MSME units in the country cry for attention as they are completely stressed out on liquidity for payment of wages and accumulated interests and other committed expenditures. Barring a few high net worth enterprises, most of the Micro units are almost on the verge of closure. It has been amply clear that the present financial avenues available within the banking system/ NBFCs and alternate Funds mechanisms will not be adequate to handle the huge liquidity and other financial stress of this highly productive sector. It requires an independent and innovative credit mobilization mechanism which doesn't depend on the precious government's financial resources. I have attempted a radical and out of the box approach which may defy logics but certainly worth pondering about.

 

Economists and business experts are debating whether India can afford to go for a long haul lockdown of the Industries, especially when the MSMEs are considered to be backbone of Indian economy and second largest employment provider. According to Barclays the estimated cost of Covid19 lock down is about $5.7 Billion per day for India which will work out around 228 Billion US $ for the first 40 days which will increase on an exponential manner eventually. The commercial Banks are saddled with huge sum of Money which rarely reaches  the deserving MSMEs due to the mismatch factors like collateral and creditworthiness issues between the lender and borrower.

The lender, especially the banker, is extra cautious when he wants to lend to the MSMEs particularly for startups for want of collaterals and asset backups. Despite the government's push on development of startups, the ecosystem is yet to pick up to meet the aspirations of the huge no of aspiring educated masses, throwing them back into the job market.

Create multiple credit guarantee trusts

Currently, there are only two credit guarantees trust mechanisms available in the country hardly sufficient to provide the genuine credit requirements of the MSMEs without collaterals under the normal circumstances. But the liquidity crisis which has hit Indian MSMEs post Covid cannot be easily rescued by the existing credit guarantee outfits or Government. Schemes like Moratorium, interest reduction or writing off loans etc. will cripple the banking industry at the present rate of lending.

As  in a bid to comforting the languishing industry, RBI has already cut the Repo rate from 5.15 % to 4.4 % and reverse repo rate from 4.9 % to 4 % making the loans cheaper. Similarly CRR ratio is reduced from 4 % to 3% resulting in additional cash availability from bankers. Besides many small time measures like no charge on ATM withdrawals,  moratorium on the WC loans upto May 31 ,2020, increase in the WC loan by 10% ,Over draft , cash credit facilities etc have given little breather .SIDBI has come out with an attractive working capital loan upto Rs 50 lakhs @ 5% interest with 5 years  repayment tenure.

Besides a few more smoothers like GST payment relaxations, ESI's proposal to pump in about Rs 1.7 lakh crore for payment of labors in the payroll were partly welcomed by the MSME sector. But the liquidity stress is ballooning as the lockdown gets extended and the disruption in the supply chain continues to be reaching an alarming level with wage payment becoming a major commitment.

Hence, it is suggested to have as many credit guarantee trusts/unions with the corpus of Rs. 20000 Crore to Rs.1 lakh crore by raising contributions from MNCs/FDIs/Portfolio investors, Public Sectors/Private Corporates / Pension Funds/ State Governments etc. These trusts can be created based on sectors, products, activities, state govts.  etc. and also based on the nature of credit requirement (capital / working capital / or for wage payments, GST etc.) .

 Hence, it is suggested to create as many credit guarantee trust / unions with the corpus of Rs. 20000 Crore to Rs.1 lakh crore by raising contributions from MNCs/FDIs/Portfolio investors, Public Sectors, Private Corporate, Pension Funds, State Governments, RIDF funds, and other unspent budgets. This trusts  can be created based on sectors, products, activity, state govts etc. and also based on the nature of credit requirement ( capital / working capital / or for wage payments, GST etc.) The credit guarantee trusts will provide the guarantee support to the Banks and NBFCs for extending the credit and the lending institutions will work out the lending procedures in a detailed manner based on the comfort of the Credit guarantee trusts. Stake holding by FDIs, MNCs, Corporate, PSUs will form the corpus and this can be further leveraged by portfolio investments, borrowings  and listings thro Stock exchanges. It is to be noted that most of the developed countries are getting ready to exit China and shift to Far East and India depending upon the red carpet treatment by these countries and faster decision making.

Encouraging competitiveness

 FDI inflows during the year 2014-15, 2015-16, 2016-17 and 2017-18 were US$ 45.15 billion, US$ 55.56 billion, US$ 60.22 billion and US$ 60.97 respectively. This indicates the preference of foreign companies to invest in India in the immediate past. Hence, it is suggested that all FDIs/ portfolio investors should be mandated to participate in this credit guarantee trust to the extent of 5% -10% of their investment as stakes in the trust as per their sectoral or products or state preference. This can have an exit clause after a minimum lock-in period so that they can opt out when wants to quit or disinvest from the venture.

Similarly, all other stake-holders will also participate in the trust besides the MSMEs with nominal stake holding like a Cooperative institution (without any veto power). The Credit Guarantee trust will act as a back-up  for  any failure / default of the MSMEs when borrow funds from the banks after closely monitoring the performance. The credit guarantee trust will be run by professional CEOs with the stake-holders as trust members.  Besides the trust will have professional executives who will also be having a say in the management  controlor monitor the performance  of the MSMEs availing credit from banks.  The credit guarantee trust will also source funds from banks, foreign line of credit and througth commercial papers etc. The beneficiary MSME units will have the option of migrating from one trust to another trust depending upon the service and fees. This can bring in efficiency and price competitiveness among the credit trusts.

Post COVID-19 it is clear that most of the developed countries like Japan, Europe, USA etc. are keenly looking for exiting China and mostly they  would  like to have a shift to India and  hence this FDI opportunity will create huge corpus for the credit' guarantee trusts by adopting the above pattern. As the smaller countries in the Far East Asia are likely to provide the much needed comfort to the countries like Japan , South Korea etc for investments , India needs to create such alternate funding strategies to facilitate collateral free funding to the MSMEs (both existing and new ones). Besides, the huge stashed black money in the off shore can also be tapped in this trustsby offering good long term returns and   immunity provisions as anone time measure.

It is also presumed there may be a revisit of some of the huge capital budget in the non critical development projects during the current year (Govt of Maharashtra also has announced)  so that the much needed financial relief measures thro all possible means reaches the  MSMEs for meeting working capital requirement and  for wages for the labours. The ESI can also further step in for providing a credit to the independent credit trusts which can be created exclusively for the labor wages and relief packages which can be repaid in a staggered manner with nominal interest from specialized created bank credits.

Unified Task Force

The MSME sector and Ministry of Commerce and DIPP may form a task force for following up with the potential countries for attracting the FDIs and multilateral agencies for setting up anchor industries and MSME ancillary units with Tier 1, Tier 2  and Tier 3  layers with credit guarantee trust support  for the ancillary units.The state government may provide further incentives to attract the FDIs.

The Ministry of MSMEd has already proposed 1 Lakh crore to CGTMSE to rescue MSMEs from the pandemic impact. Besides the fund of funds proposal  of Rs 10000 Crore under creation as per UK Sinha Committee  can also leveraged  for nurturing the Start up culture with simplified procedures and safeguards.

Monitoring performance

Similarly, credit guarantee trust concept can be considered for export guarantee mechanisms  also by creating more no for boosting up the much needed exports. This guarantee trust executives will be closely monitoring the MSMEs for their efficiency and performance on a real time basis and in case of any potential defaults or low performance, the trust will reserve the right to takeover and auction the same to any buyer including to foreign entities depending upon FDI cap limits. The Union Govt may stand as Sovereign guarantee for the CGTs after thorough scrutiny of the constituents and the structure of the CGT. The finer working of the Multiple CGT unions and its compliances for meeting the statutory and RBI guidelines need to be worked out by experts.

Fixing a cap on the Bank credit

It is often noticed that any sunrise sector and new products with high demand attract multiplication of MSMEs due to limited entry barriers seeking banking credits and creating  excess capacities leading to under cutting of prices and dilution of quality.

 

In order to avoid creating excess capacities and under cutting a national level MSME Investment Bureau should be set up which will have real time database of the sector / product wise Bank credits given already and the Demand supply  statistics of the product & service so that the Start ups and MSME units will prosper with decent returns at least for a period of 5 years. Some of the products and services should be reserved only for the Micro sector by appropriately revisiting the MSME criteria. Besides the anchor Industries should be developed across states depending upon the raw material availability, port facilities consumption pattern etc so that the MSME ancillaries boom in this areas offering self employment opportunities. 

Creation of cluster mapping

It is also suggested that Indian clusters and industrial estates  can be connected to successful clusters in abroad like European nations, USA , S. Korea and Japan for creating and shifting major manufacturing industries to India on a mission mode. It is also expected that most of the industrial clusters and entrepreneurs in USA, Europe, far-East will be diluting or quitting entrepreneurship who hold a lot of brand image, goodwill  capital and market access. These entrepreneurs can be engaged thro the Cluster Matching strategies to provide design, technology and also capital to the clusters in Indian cities and villages in the chosen states cum cities so that “ Make in India”  becomes  booming activity and become active exporters. This can also create Indian Global Brands in the future. The Chinese loss should be India's gain.

Dedicated industrial parks and export zones also can be created under the cluster matching concept. States can also compete in attracting the cluster partners. MSME Ministry can identify the various clusters available world over through the various bilateral agreements signed and provide the connection to the domestic and potential clusters in technology sharing and investments. Parallelly, world class infrastructure like highways, logistics, port facilities etc. may also be created on fast track basis  so that this can attract  the cluster partners to shift their export hub to India. This can also create an active E-commerce eco system  in India along with physical infrastructures.  India can easily emerge as a major player in digital, electronics goods, food processing, solar and consumer products etc. 

National Land Bank Authority

As the customer behavior is expected to change drastically and some of the traditional high growth industries are likely to close or scale down, a separate task force with Bankers , State govts and the parent ministry  should be created for a smooth transition of this shift  with specific tasks for protecting the investments and employees.  India needs to capitalize on the post COVID-19 scenario by creating healthy competition amongst the states and manufacturing regions.The clusters and investment regions can have single window  integrated support systems in all fronts offering the best Ease of doing Business in transparent manner and the procedures and progress of the proposals should be made online for the investors and public.   A Centralized National Land Bank Authority may be created with the support of State governments for facilitating the MSMEs and Foreign cluster partners in on the spot allotment thro digital/ online format.

Livelihood and Technology Centers

In order to encourage labour who have reverse migrated from cities to the villages, livelihood Incubators should be started in their respective hometowns / villages to convert them as entrepreneurs who are already blessed with basic skill sets . Already a fair amount assessment has been carried out on the migrant labours during the lock down .States like IP , Bihar ,North east states may come forward in this exercise by starting the incubation prgms or create a worker database Bureau which can facilitate labors to the recipient states in a transparent manner safe guarding all labour laws with proper agreements as the workforce becomes a major focus area post Covid. This program may  be overseen by Labour and MSME Ministry and State Governments by creating a complete database of migrated labourers' skillsets  , qualification, aptitude. This will help the migrated labourers to remain gainfully engaged  in their hometowns or opt for moving to any other state of his choice for employment.

In fact the Investment climate can be restarted by engaging PSUs aggressively who are cash-rich and by unlocking the under-utilized resources available with them. The above are only an attempt to look at the options in a radical and out of the box perspective, but the finer details need to be examined in line with the RBI norms, legislations  and financial discipline.

As it is expected that the business format and world order will be totally different from the past post covid and as there are no proven models available for managing the pandemic situation , the above out of the box ideas  with improvements  may be worth pondering about  for addressing some of the serious issues being faced by the MSME sector.

 -------------------------------------------------------------------------

About P. Udayakumar

P. Udayakumar is currently Director (Planning and Marketing) and is on the Board of National Small Industries Corporation, Govt. of India (NSIC), New Delhi. He is an Engineer and Aluminus of IIM Bangalore. He is an acknowledged opinion maker and is well known for his radical views and futuristic approach on the MSME issues.

He has been involved in several key assignments in spearheading the growth models for NSIC. He is widely travelled and regular speaker in MSME forums and leading institutions.

 (The views expressed in the article are purely in his personal capacity and do not, in any way, reflect the NSIC's viewpoint).