Micro Small & Medium Enterprises

Introduction to MSME Finance

MSME : Work is Worship - Without Labour Nothing Prospers 

• MSME is a platform to salute human labour. Labour alone brings prosperity
• From a single person enterprise to a Rs.250 cr turnover Unit, MSME captures aspirations of toiling Indians working tirelessly for the nation's productivity.
• MSME in India is the backbone of the country's economic structure and without which, the country cannot progress. 
• With over 63 million MSMEs, the sector covers 80% of the industries in the country.
• MSME accounts for 31% of GDP.
• MSME does 48% of exports. 
• MSME is the second-largest employer, providing jobs to over 120 million people. 

MSME - Before the Reward, There Must Be Labour

• According to the MSME Ministry's report, the MSME sector is dominated by micro-enterprises. India has 6.33 crore MSMEs out of which 6.30 crore -- 99.4 per cent are micro-enterprises.
• MSME Ministry data, as of May 16, 2021, shows Udyam Registration portal registered 30,00,822 MSMEs, which replaced the former process of filing for Udyog Aadhaar Memorandum (UAM).
• With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India's manufacturing output.

MSME :   A Pivot to Nation Building - Importance of MSME 

• MSME is the boon for the fresh talent in India. Provides Economic stability in terms of Growth ,Contributes to manufacturing, exports, and employment. 
• Agriculture is the backbone of the Indian economy, as 75% of the population of India depends on agriculture. MSME Units are the feet of the Indian economy. MSME makes India move worldwide through its innovations and cost competitiveness due to cheap labour costs.
• India is considered a mixed economy: the private and public sectors co-exist. MSME forms a significant part of the private economy that propels India’s growth.
• MSMEs improve the lives of employees and artisans. They assist them by providing jobs, loans, and other services. MSMEs provide banks with credit and  financing opportunities. They encourage the growth of entrepreneurship as well as the upgrading of skills by funding as much as 40% of total credit .

MSME  : A Fulcrum to Economic Growth - Value of MSME 

• MSMEs contribute 45% of the manufacturing output, benefiting all segments of industry.
• They help reduce poverty by creating jobs for the country's growing labor force. They stimulate economic development in rural and far-flung areas. They serve as valuable partners to large enterprises as suppliers and providers of support services.
• MSME in India has the potential to increase the share of contribution to GDP which can augment  its contribution to employment to over 50 per cent over the next decade.

MSME : Biggest  Employer - Contribution of MSME 

• A million people are getting added to the list of job-seekers every month. The Government or the public sector cannot be the source of employment for all these job aspirants.
• We have to essentially depend on the inherent entrepreneurial spirit of our people to create jobs for themselves and create conditions that will help them set up units.
• There can be no better solution than the spawning of MSME units on a large scale, in mission mode, for achieving this objective. 
• There are examples from the developed world that could offer us good lessons on how to make this possible.
• MSME is the second-largest employer, providing jobs to over 120 million people. One in ten manufacturing jobs in India, depends on exports. 

MSME : Ultimate Supply Chain Builder - Indispensability of MSME 

• The MSMEs have become a part of global value chains (GVCs) and find new opportunities to integrate themselves with the GVC as suppliers to large exporting firms. 
• The government’s stress on Atma Nirbhar Bharat, is reflective of a focus on boosting MSME Units substituting foreign goods as part of the supply chain of Indian production cycles. 
• Cost competitive goods manufactured by MSME as part of the value chain make our exports lucrative. 

MSME : Foreign Exchange Spinner

MSME : Enhancing Foreign Reserves

A stronger participation of Indian MSMEs in the global markets will lead to more opportunities in scaling up, and modernising MSME Units . Exports will speed up innovation and enhance productivity

For the FY ended 31.03.2021, India exported goods and services worth $493.19 billion and imported worth $506 billion. 

India exports 7500 commodities to 190 countries and imports 6000 commodities from 140 countries.
MSMEs participating in exports are rewarded in duty credit scrips. 

Small size companies are exporting more than ever before. More than 200,000 MSMEs exported to at least one international market in FY ended 2020.

eCommerce platforms have  removed the fears of exporters where advance payments can be received before actual exports. 

A World Bank report, Global Economic Prospects ,states that trade in goods and services is likely to grow 300% by 2030 providing MSMEs a great future ahead. 

Remission of Duties and Taxes on Exported Products (RoDTEP) has been introduced in  India for promoting exports.The existing MEIS scheme was covering 7,900 products, but the RoDTEP shall cover 8,555 lines plus three chapters under the RoSCTL of textiles. 

MSME : Stepping Stone to Corporate World

MSME: Scalable Future 

• A focus on exports by MSMEs will  lead to use of the production capacity to the maximum level.
• Such MSMEs will help the business defend the domestic market better.
• MSMEs in international trade will increase the product’s competitiveness in all markets, and increase the overall value of the business. 
• Such progression will scale up MSMEs into future Indian Corporates competing at World stage. 

Classification of MSME - Identity as per Capital Investment & Turnover 

• MICRO UNITS 
• Investment in Plant and Machinery or Equipment,Not more than Rs.1 crore and Annual Turnover ; not more than Rs. 5 crore
• SMALL UNITS 
• Investment in Plant and Machinery or Equipment,Not more than Rs.10 crore and Annual Turnover ; not more than Rs. 50 crore
• MEDIUM UNITS 
• Investment in Plant and Machinery or Equipment,Not more than Rs.50 crore and Annual Turnover ; not more than Rs. 250 crore

MSME  Act  2006 - National Board for MSME 

• Under the MSME Act 2006 , amended in 2020, a Board known as the National Board for Micro, Small and Medium Enterprises has been established.
• Board examines the factors affecting the promotion and development of MSME and reviews the policies and programmes of the Central Government in regard to facilitating the promotion and development and enhancing the competitiveness of such enterprises.
• Makes recommendations on matters  expedient for facilitating the promotion and development and enhancing the competitiveness of MSME Units,
• Advises the Central Government on the use of the Fund or Funds constituted by Government.
• The Board ensures that the policies and practices in respect of credit to MSME enterprises shall be progressive and in accordance with instructions of RBI to ensure timely and smooth flow of credit.
• Board policies minimise the incidence of sickness among such enterprises.

Challenges Faced in Raising Bank Finance - Quick Mortality 

• 33% of MSME units in India close their shops before 5th Birthday.
• One of the biggest challenges that MSMEs face in India is the lack of finance. One of the significant reasons behind financial challenges is the lack of financial literacy. The majority of MSME owners are from education-deprived and poverty-hit regions.
• Biggest challenge is : inadequate collateral to secure loans; 
• Information opaqueness; 
• Low level technical and management skills; 
• Lack of professionalism; 
• Competition; 
• Inability to afford long term financing

 Overview of Government Initiatives - ECLGS & CGTMSE 

• Some of the benefits from the Central Government include easy sanction of bank loans (Priority sector lending), lower rates of interest, excise exemption scheme, the exemption under Direct Tax Laws and statutory support such as reservation and the Interest on Delayed Payments Act.
• Emergency Credit Guarantee Scheme (ECLGS) has been  the flagship credit scheme of the government to help MSMEs particularly for post-Covid recovery.
• On the other hand, for the past 20 years, the Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE) has been among the major schemes rolled out to cater to the funding requirement for MSMEs. 
• In between, a number of credit schemes launched by the government for setting up new businesses, job creation, exports, manufacturing, women entrepreneurship & stressed units.

Credit Schemes for MSMEs - Pradhan Mantri Mudra Yojna (PMMY)

• The  scheme focuses on non–corporate small and micro enterprises that include lakhs of proprietorship or partnership firms such as small manufacturing units, service sector units, shopkeepers, fruits and vegetable vendors, truck operators, food-service units, repair shops, machine operators, small industries, artisans & food processors, The scheme was launched to cater to these businesses as over 90 per cent of such enterprises lack access to formal sources of credit.
• The scheme is segregated into Shishu, Kishor, and Tarun indicating the stages of growth of a business and corresponding credit needs. For instance, Shishu loans are up to Rs 50,000, while Kishor loans are above Rs 50,000 and up to Rs 5 lakh. Tarun loans are over Rs 5 lakh till Rs 10 lakh. Loans can be secured via banks, NBFCs, micro-finance institutions, regional rural banks, and foreign banks. Application forms can be downloaded from the Mudra website. 
• RBI has put a cap on the interest rate at the Base rate/ MCLR for lending micro units by banks. Likewise, regional rural banks were given an interest cap of 3.50 per cent over and above the Mudra refinance rate. In the case of NBFCs, RBI had stipulated an interest cap of 6 per cent over and above Mudra refinance. As of October 8, 2021, out of Rs 1.13 lakh crore involved in 2.03 crore loans sanctioned, Rs 1.07 lakh crore loans were disbursed since April 1 in the current financial year.

Credit Schemes for MSMEs - Prime Minister Employment Generation Program ( PMEGP)

• PMEGP offers credit-linked subsidies to micro-enterprises launched in the manufacturing and services sectors. According to the scheme the enterprise set-up costing up to Rs 10.00 lakhs under the scheme is free from collateral security while the CGTMSE provides a collateral guarantee for the project beyond Rs 5 lakhs and up to Rs 25 lakhs under PMEGP scheme. Self-help groups, institutions registered with Societies Registration Act,1860, production co-operative societies, and charitable trusts are also supported under the scheme.
• The scheme facilitates financial support up to Rs 25 lakh for micro enterprises to be launched in the manufacturing sector and up to Rs 10 lakh for businesses in the service sector. Individuals above 18 years of age and those who have completed schooling till at least the eighth standard are eligible to apply for the scheme. 
• The existing units that have government subsidies under any other scheme cannot apply for it. Applications can be submitted via Khadi and Village Industries Commission website. The interest rate is 11-12 per cent.
• Banks had sanctioned and disbursed loans to 84,793 micro-units in FY21, thereby enabling employment for around 6,78,344 people against the target of assisting 78,625 entrepreneurs and generating estimated employment for 6,29,000 people during the financial year.

Credit Schemes for MSMEs - Credit Linked Capital Subsidy Scheme (CLCSS) 

• CLCSS is focused on helping micro and small enterprises (MSEs) to upgrade their technologies for better production. The scheme is applicable for businesses operating in the specified 51 sectors under the scheme including ready-made garments, biotech industry, cosmetics, steel furniture, pharma, food processing, leather. The eligible enterprises could be into khadi units, village units, coir industrial units, units led by women entrepreneurs, etc.
• For technology upgradation, the scheme enables capital subsidy of 15 per cent of investment in machinery on institutional finance of up to Rs 1 crore availed by MSEs. 
• The maximum subsidy to be provided is Rs 15 lakh. A Special Credit Linked Capital Subsidy Scheme (SCLCSS) is also launched under the National SC-ST Hub to provide a 25 per cent subsidy to enterprises run by scheduled caste or scheduled tribe entrepreneurs.
• According to the data from the government’s MSME Dashboard, 15,213 units were supported with a subsidy of Rs 1,102 crore in FY21 in comparison to 7,840 units supported with Rs 546 crore subsidy in FY20. In FY22 so far, 1,800 units have already been supported with a subsidy of Rs 106 crore.

Protection Under Delayed Payment Act - MSMED Act 2006,  Samadhan 

• The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. 
• MSEFC of the State after examining the case filed by MSE unit will issue directions to the buyer unit for payment of due amount along with interest as per the provisions under the MSMED Act 2006.
• Any Micro or small enterprise having valid Udyog Aadhar(UAM) can apply.
• The buyer is liable to pay compound interest with the monthly rest to the supplier on the amount at the three times of the bank rate notified by RBI in case he does not make payment to the supplier for his supplies of goods or services within 45 days of the acceptance of the goods/service rendered. 
• State Governments to notify (i) Authority for filing Entrepreneur Memorandum (ii) Rules of MSEFC and (iii) Constitution of MSEFC.
• All States/UTs have notified Authority for Filing Entrepreneurs Memorandum, 33 States/UTs (i.e. except Arunachal Pradesh, Assam and Manipur) have Notified rules of MSEFC and all the 36 States/UTs have constituted MSEFCs, as per provisions laid down under MSMED Act 2006.
• Every reference made to MSEFC shall be decided within a period of ninety days from the date of making such a reference as per provisions laid in the Act.
• If the Appellant (not being the supplier) wants to file an appeal, no application for setting aside any decree or award by the MSEFC shall be entertained by any court unless the appellant (not being supplier) has deposited with it, the 75% of the award amount. (Section 19)
• The Ministry of MSME has taken an initiative for filing an online application by the supplier MSE unit against the buyer of goods/services before the concerned MSEFC of his/her State/UT. These will be viewed by the MSEFC Council for their actions. These will be also visible to Concerned Central Ministries, Departments, CPSEs, State Government, etc for proactive actions.

Stand Up India

• Launched in April 2016 to boost entrepreneurship among women entrepreneurs and scheduled caste/scheduled tribe (SC/ST) entrepreneurs, the scheme aims to facilitate bank loans to at least one SC/ST borrower and women borrower per bank branch for setting up a greenfield enterprise in manufacturing, services, agri-allied, and trading sector. Greenfield ventures are referred to as the first-time ventures of the entrepreneur in the respective sector. In case the venture is not an individual enterprise, the borrower should have at least a 51 per cent controlling stake.
•  Composite loans ranging from Rs 10 lakh to Rs 1 crore can be applied under the scheme for setting up a new venture. The size of the loan would be 85 percent of the project cost. In case, the borrower’s contribution along with the support from any other scheme exceeds 15 percent of the project cost, the scheme would not apply for the borrower. Importantly, banks may seek collateral security besides primary security as per their discretion. The repayment period is seven years with a moratorium period of up to 18 months. The loan can be applied at the partner bank’s branch or through the Stand-Up India website. 
• So far, over 1.40 lakh applications involving Rs 33,359 crore have been received of which 1.22 lakh applications involving Rs 27,535 crore were sanctioned via 367 lenders, as per the data from the standupmitra.in. As of now, the scheme is valid till 2025.

e-Discounting of Trade Receivables - TReDS

• TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers
• Sellers, buyers and financiers are the participants on a TReDS platform.
• TReDS platform enables discounting of invoices/bills of exchange of MSME sellers against large corporates, including Government departments and public sector undertakings, through an auction mechanism to ensure competitive market rates.
• It facilitates the discounting of both invoices as well as bills of exchange.
•  TReDS provides a level-playing field where all the participants work together for facilitating, accepting, discounting, and settling invoices.

59 Minute Loans - PSB 59 Minute Loans

• The scheme to provide in-principle approval to a loan application in 59 minutes is an initiative by the Small Industries Development Bank of India (SIDBI) It enables term loans and working capital loans,for MSMEs to purchase plant and machinery, technology upgrade, product expansion, purchase of raw material, infrastructure development. The disbursement period is generally seven-eight days while the interest rate starts from 8.50 per cent. 
•  Loan ranges from Rs 1 lakh to Rs 5 crore through the 59-minute scheme. Applicants have to register on the PSB loans website, create a profile, provide required financial details of the business and bank details, and then select the desired bank and branch from where they want to get the loan. Importantly, as per the scheme’s details, for receiving the in-principle approval, the borrower will be charged Rs 1,000 excluding GST. The need for collateral is as per the lender’s discretion.
• The number of applications sanctioned via PSB loans in 59 minutes grew from 2,12,091 involving Rs 66,991 crore till August-end last year, to 2,34,905 loans involving Rs 78,409 crores as of September 30, 2021. Similarly, the applications disbursed had increased from 1,96,473 involving Rs 54,545 crores to 2,18,977 applications in August last year involving Rs 64,067 crores.
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Udyam Registration - Empowering the Entrepreneur 

• Government has organised a full system of Facilitation for Registration Process, An enterprise for the purpose of this process will be known as Udyam and its Registration Process will be known as 'Udyam Registration'
• A permanent registration number will be given after registration.After completion of the process of registration, a certificate will be issued online.
• This certificate will have a dynamic QR Code from which the details about the enterprise can be accessed.There will be no need for renewal of Registration.
• Registration Process is totally free. No Costs or Fees are to be paid to anyone.
• Udyam Registration also known as MSME Registration is nothing but a government registration that is provided along with a recognition certificate and a unique number. This is to certify small/medium businesses or enterprises. 
• The owner, director, or proprietor of the entity provides a  12-digit Aadhar Number in this certificate towards authenticity of ownership. 
• Having PAN & GST number is mandatory from 01.04. 2021. Those who have EM-II or UAM registration or any other registration issued by any authority under the Ministry of MSME, will have to re-register themselves. No enterprise shall file more than one Udyam Registration.
• The existing enterprises registered prior to 30th June,2020, shall continue to be valid only for a period up to the 31st day of December, 2021.

MSME in Germany

• Germany, one of the few growth engines of the world today, is a shining example of the difference that a great positive thrust for MSMEs can make.
•  The German Federal Ministry for Economic Affairs and Energy  has accepted the definition of SMEs as businesses with an annual turnover of less than €50 million and with fewer than 500 employees.
• An SME has been defined by the European Commission as being a company with fewer than 250 employees and an annual turnover of less than €50 million (or total assets of less than €43 million).
• Due to their success, German SMEs — known collectively as the German Mittelstand — are market leaders abroad. Classic SMEs account for 99 per cent of German firms providing for 60 percent of all jobs in Germany.
• Dismantling the norm relating to investments in plant and machinery and aligning it with the best practices in other developed markets, especially the shining example of the German Mittelstand, will further the cause of Make in India and more importantly, focus attention where it is needed most for our economy — job creation.

MSME in America & Canada - Realistic Definitions of MSMEs 

• Major countries from the developed world follow the number of employees as the basis for the categorisation of firms as MSMEs. Almost the entire Canada & Americas, including the US, base their categorisation of firms for this sector only on the basis of the number of people employed and their turnover. In fact, the US Trade Commission defines SMEs only on the basis of people employed.
• Probably, the origins of our irrational obsession with investment norms can be traced to the ‘fear’ of capital as a means of control of businesses and the need to ‘ration’ it so that economic agents with undue advantage over this factor of production do not control businesses.
• At the present juncture, when the need to create jobs is the most important task of governance, there is a need to  redefine the norms for categorisation of the MSME sector, by only taking the number of employees into account. This will be transparent and straightforward.
• Insiders know how to manipulate the norms for investment in plants and machinery . For instance, in the case of a hotel, the cost of lifts and escalators, are to be excluded from the investment in plant and machinery and similarly the land and building, leaving the definition vague. 

Written by: Mr Hargovind Sachdev, ex General Manager, State Bank of India