MSMEs sceptical about credit flow despite promise of collateral-free loans

Satyajit Kundu and Mohmmad Zia Nafis like many other entrepreneurs are taking the relief announced by finance minister Nirmala Sitharaman for the MSME sector on Wednesday with a pinch of salt even as they wait for the fine print of the package.

Their scepticism stemmed from past experience of government announcements not percolating to the ground, they said.

“We at the lower-level did not get any benefit of schemes announced by the government time-to-time to rejuvenate Micro, Small and Medium Enterprises (MSME), reeling under crisis since demonetisation of all ₹500 and ₹1,000 banknotes by the government in November, 2016,” said Kundu, owner of a foundry unit in West Bengal’s Howrah.

The factory has now been shut for over 50 days due to the lockdown imposed to contain the spread of the COVID-19 infection, severely shrinking his working capital.

Stating that the Howrah Foundry Association is planning to resume functioning maintaining social distance from Monday, Kundu said they would have to wait and watch to see the impact of the package as the earlier initiatives by the government to increase the credit flow to the small and medium businesses did not achieve the desired results.

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“The package is not yet very clear to us. We are waiting for further details and then, more importantly, we have to see how good it is when implemented. Ultimately everything will depend on the implementation,” said Kundu, whose Lakshmi Foundry Works Private Limited churns out water pumps, pinion gears, pipes, manhole covers, and other iron casting products.

Nafis, who runs a leather factory at Calcutta Leather Complex, Bantala also is short of working capital to procure raw materials and money to pay to employees to resume business in full swing. But he too is not very sure about getting easier access to credit even after the FM assured 100 per cent government guarantee on ₹3 lakh crore collateral-free loans to the MSME for a four-year term.

“There is a slip between the cup and the lip,” the young entrepreneur pointed out.

“The government on paper has been saying that the cash credit limit for the MSMEs has been increased to 30 per cent of the turnover. But last month when I went to my bank (Bank of India) to avail the facility for my unit, I was told it could extend only 10 per cent credit limit.”

Nafis is also the joint secretary of the CLC Tanners Association and said the credit flow to the MSMEs did not increase despite the Prime Minister’s Task Force on the sector repeatedly pushing banks to achieve a 20 per cent year-on-year growth in credit to micro and small businesses.

The credit flow to the sector presently is just 2.6 per cent.

The progress is tardy because of the loan defaults in this sector are high, a banker said on condition of anonymity, adding the government is making them scapegoats.

“The government insisted us to enlarge our credit net under the Micro Units Developments and Refinance Agency (MUDRA). But now that defaults in MUDRA loans are increasing, we are being pressured to recover them,” said a branch manager of a commercial bank.

“The NPA under the MUDRA scheme is over ₹7000 crore,” the bank official said.

This is precisely why entrepreneurs like Nafis do not see the possibility of an overnight change in the credit flow to the MSME sector even after the FM’s announcement. He said neither banks have hitherto shown any keen interest in disbursing loans to MSMEs despite government pressure, nor the entrepreneurs are eager to take an additional loan liability at this juncture.

Ishantor Sobhapandit, regional director of the Indian Chamber of Commerce, too believes that providing subsidies on electricity, transportation of raw materials, etc. would have yielded better results to spur the sector.

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He, however, added that doing away of global tenders for government procurement up to ₹200 crore and the redefinition of the MSME will help the sector as it will create domestic demands for the MSME products while ensuring that the MSMEs don’t have to worry about outgrowing the threshold limits.

The Associated Chambers of Commerce and Industry of India, in a statement sent to The Federal, however, praised the package.

It had earlier demanded, among others, waiver of fixed charges on utility bills and bank interest on term loans, overdraft, cash credit limits on the closing balance outstanding before lockdown till the time lockdown is lifted as no sales are taking place.