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INDIA'S MICRO FIRMS FACE A CREDIT SQUEEZE
Read more on - Polity | Economy | Schemes | S&T | Environment
- Farms and MSMEs: Farms and farmers are being debated hotly, but a small change by GoI regarding MSMEs went unnotices. The new notifications are about classification of Micro, Small and Medium Enterprises (MSMEs). They largely help the Small and Medium ones, but not the Micro ones at all.
- Nature of Indian economy: Some relevant questions - Small Indian firms usually do not grow big, and their productivity remains constrained. Why so? Also, should GoI's policy regarding micro firms be totally separated from others?
- New classification: Now, MSMEs are defined on dual basis - both investment and turnover. Various privileges and protections have been (will be) available to firms in these segments.
- A firm with an investment of Rs.10 cr in plant/machinery/equipment is now a small enterprise (earlier medium)
- A firm with an investment of upto Rs.50 cr is now a medium enterprise.
- What about micro firms, the largest type of firm in India? Now, any firm with investment upto Rs.1 crore is micro, which earlier was upto Rs.10 lakh to Rs.25 lakh (services and mfg., resp.)
- Policy goal: It seems that the GoI wants to help smaller firms become bigger, without losing privileges (due to size limits). But, many large firms are now being called medium, and hence will get benefited due to protections available. Existing firms with Rs.50 cr investments (already working in markets) can now become medium, and start getting benefits.
- What benefits: Banks give priority sector loans, govt. allows priority procurement for MSME-reserved sectors, etc. So the big now become medium, and will hit the existing small very hard. That's the instant price of formalisation and efficiency.
- Data for India: There is a total of 6.34 crore unincorporated, non-agri enterprises in India. Total employment was 11.127 crore. Mostly these were run by single entrepreneurs (no employees) - the own account enterprises. Total such firms were 5.33 crores, of which 96% were sole proprietorships and 2% partnershps. Others were trusts, etc. These are huge nos., and substantially large livelihood matters.
- Additional norms: GoI's new norms notwithstanding, the RBI has its own norms for credit disbursals.
- A loan of upto Rs.1.25 lakh given by a NBFC-MFI will be "microfinance".
- For Small Finance Banks (SFBs), 50% of portfolio must be made up of account sizes less than Rs.25 lakh. So "small" as per RBI is Rs.25 lakh in an SFB.
- MUDRA definition of micro-units is - upto Rs.50000 loan is Shishu, Rs.5,00,000 is Kishore, and Rs.10 lakh is Tarun.
- Banks must lend 40% of Net Bank Credit to notified listed sectors (MSMEs included), and 7.5% must go to micros (a hard target, with penalties).
- But now, the 26 June 2020 definition of micro is what's being used. And that is Rs.1 crore investment or Rs.5 cr turnover. This is way off the other mentioned above
- Register or die: To get any benefit, one must register with the Udyam portal. But 69% of informal enterprises have no registration of any type. So many enterprises are just not getting any help at all. So basically you formalise or you die down! Govt. is pushing forced formalisation. And to take loans, re-registration with some documents is needed, which most micro informal ones won't even have.
- Informal sector is out: So the RBI is using a GoI notification to define enterprises, thereby excluding entire informal sector. Can pakoda stall owners register on Udyam portals for loans? They cannot, as they lack formal documentation and have no resources for all that.
- Supposing that's done: If they do register somehow, all wholesale and retail traders are excluded! But 1.99 crore of the 6.34 cr enterprises in India (NSS data) are traders. That's the largest chunk. Hence, they can never get formal credit, procurement benefits etc.
- What's the solution: Either the RBI sticks to its own definitions and saves the micro enterprises from perishing, or the govt. introduces a new category of "nano" firms. Give them zero registration benefit upto a limit.
- The basic problem: The present govt. is data-crazed - it wants to collect more and more data, and link it internally, while not sharing anything when asked. So it won't relax such rules. So, credit will flow towards larger firms, and others will wither. The truth that India is an informal economy is not being accepted by the government. Micros will pay the price.
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