Nirmala Sitharaman waves the MSME wand but industry isn’t impressed

The announcement of a collateral-free fresh loan by Union Finance Minister Nirmala Sitharaman, as part of her relief package, has not impressed Parthiban.

Update: 2020-05-20 00:45 GMT
About 20 MSME associations met in Coimbatore on May 15 and passed a resolution demanding that the government directly pay the lockdown wages to the MSME workers instead of forcing the MSME owners who are nearly broke after two months without work. Photo: iStock

In the first of her five tranches of ‘Atmanirbhar Abhiyan,’ Union Finance Minister Nirmala Sitharaman had announced a slew of measures for micro, small and medium industries (MSMEs). Do they address the problems faced by the MSMEs on the ground? How has it been received by the owners of MSMEs? The Federal spoke to office-bearers of MSME associations in Coimbatore and Bengaluru and some individual owners of MSMEs in Chennai, Hyderabad, and UP. Here is what we learned:

Parthiban owns PAS Garments, a micro enterprise manufacturing leather goods, in Bengaluru. He started the unit on a ₹35-lakh loan on which he is paying a monthly interest of ₹30,000.

After deducting his expenses, which includes salaries for employees, Parthiban was left with an average monthly earnings of ₹45,000. After paying interest, he manages a meagre ₹15,000 per month as profits.

He was getting twice the amount before the lockdown. This did not fall even during the economic slowdown. But now, in the midst of a pandemic, he stares at an uncertain future.

The announcement of a collateral-free fresh loan by Union Finance Minister Nirmala Sitharaman, as part of her relief package, has not impressed Parthiban.

He says it is not of much importance to his enterprise. He would rather prefer reduced interest rates as a relief. Ironically, though the RBI had cut repo rates, the banks have failed to pass on the advantage as lower interest rates to companies.

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Due to the lockdown, there has been no revenue for the last two months and Parthiban says the situation might remain the same for the next two months. Still, he has to pay the interest, nevertheless.

He has been paying a few of his workers wages at half rate without work. Besides, he is shelling out full rent for the factory premises. He says, if the interest rates were brought down by the government, to say 5 per cent at least for the lockdown period, he would have managed to breakeven. But now the losses are mounting.

The MSME scene

On the same day the Finance Minister had said that enterprises with an outstanding loan of up to ₹25 crore and turnover of up to ₹100 crore can avail of 20% of their earlier loan as additional new loan without any new added collateral.

Saravanan in Bengaluru owns a tools-and-dies unit and has been paying ₹3.3 lakh as annual interest on a bank loan of ₹30 lakh. He is now entitled to borrow ₹6 lakh more, that would take his total interest payment to ₹4 lakh per annum. But he is not sure whether he would get enough business or orders to maintain the same level of revenue which he managed during pre-COVID days. Therefore, he is not confident of taking ₹6 lakh as a fresh loan.

His diffidence is being echoed by Ravichandra Alva of Srinidhi Industries, an auto component manufacturer, who is not confident of getting any major new order for the next six months from auto majors. But the new collateral-free loan will have to be availed before October 31, 2020. Further, to take fresh loans he has to show the new order copies to his bankers, which is impossible before this deadline.

Forget new loans, many loan applications almost finalized after due inspection, paper work and other formalities before the lockdown have now been shelved and the banks insist that process has to start all over again for new applications for these collateral-free loans and this is a big hassle for borrowers.

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About 20 MSME associations met in Coimbatore on May 15 and passed a resolution demanding that the government directly pay the lockdown wages to the MSME workers instead of forcing the MSME owners who are nearly broke after two months without work.

They had also demanded 50% interest waiver and reduction of GST to MSMEs at a uniform rate of 10 percent.

As part of the MSME package, Nirmala Sitharaman had said that the government would pay the EPF contribution of workers as well as employers for three months but has attached a caveat to this. This concession would be available only to those units with 100 workers where 90 per cent of them draw salaries below ₹15,000 per month. This excludes many start-ups and tech SMEs where more than 10 per cent of workers would be drawing more than ₹15,000 as salary.

Raveendran Muthuraj, president of Compressor Manufacturers’ Association, who is part of the above grouping, says that they have demanded that this concession should apply even to medium enterprises with 200 workers and the ceiling of ₹15,000 monthly income should be scrapped.

While announcing that the government would pay the EPF contribution of both employers and employees for three months, in the same breath, the government also announced that the EPF rate would be brought down from 12 to 10 per cent for these three months. The government claims that this is a demand-side measure would leave more money in the hands of workers but, in reality, the workers would incur a loss of 2 per cent management contribution for 3 months which would bring down their aggregate accumulated EPF.

Further, if workers do not pay EPF for three months, their taxable income would increase correspondingly as EPF payment falls under standard deduction and hence this would only increase the tax revenue for the government.

The FM has announced ₹30,000 crore special liquidity scheme for non-banking finance companies (NBFC), housing finance companies (HFCs) and mutual funds (MFIs) and ₹45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFCs & MFIs. Credit guarantee to the loans given by government-owned public sector banks is understandable but why should the government offer credit guarantee to the loans of private NBFCs when it doesn’t have much regulatory control on their lending operations? If we go by the NBFC scams of the recent past like the IL&FS scam, this entire money would be lost and taxpayers would have to foot the bill.

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The FM has separately earmarked ₹20,000 crore for reviving stressed MSMEs. Under an earlier restructuring plan of the RBI, 19 PSBs had restructured 4,32,078 MSMEs loans as stressed loans. The rating agency, TransUnion Cibil, has said in May 2020 that loans worth ₹2,32,000 crore of micro, small and medium enterprises are at a higher risk of becoming non-performing assets (NPAs). Nirmala Sitharaman has claimed that her allocation of ₹20,000 crore would benefit 2 lakh MSMEs. One wonders what would happen to the rest.

Nirmala promised ₹50,000 crore equity infusion into MSMEs through a fund of funds. But Varadharajan Venkataraman, who owns New Century Enterprises in Ambattur Industrial Estate, Chennai, says that in Chennai and surrounding areas up to 98 per cent of MSMEs are proprietary firms and not public or private limited companies.

In Chennai, Hyundai Motors has divided much of its operations into 50–60 independent SMEs located in the same SIPCOT industrial estate to attract the tax concessions to SMEs. Similarly, the TVS Group runs 15-20 SMEs. Only among them can you find public limited MSMEs and this ₹50,000 crore earmarked by Nirmala Sitharaman would only be grabbed by such tax avoidance ‘SMEs’ of large corporate firms.

In any case, the BSE launched a BSE-SME platform, a stock exchange exclusively for SMEs as part of the BSE in March 2012. According to BSE CEO Ashish Kumar Chauhan, as on October 16, 2019, at least 312 SMEs had listed in this exchange from all over the country and had raised ₹3200 crore and their total market capitalisation accounted for ₹18,000 crore only. How would the FM infuse ₹50,000 crore equity into these SMEs is a mystery she alone knows! On the whole, her package leaves much to be desired.

(The author has been engaged in labour studies for the last three decades and is currently focused on developing new media communication skills among tech workers.)

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