The 21-day lockdown in the wake of the Covid-19 pandemic will be in force till April 14. But cash-starved micro, small and medium enterprises (MSMEs) remain uncertain about their future and survival for months beyond this period. The 63 million MSMEs are the lifeline of India's economy as well as big employers, providing livelihood to 110 million people, around 40 per cent of the total workforce. They account for 48 per cent of exports and contribute 30 per cent to the nation's GDP.
Finance Ministry and the Reserve Bank of India (RBI) have announced a host of measures to bring relief to MSMEs but that hasn't calmed their nerves yet.
The RBI has allowed banks and other financial institutions to provide a moratorium of three months to all term loan borrowers for all loans due for payment between March 1 and May 31. It also allowed banks to defer interest on working capital by three months, besides easing compliance in GST.
Earlier, in a major relief, RBI permitted one-time recast of loans by GST-registered MSMEs to prevent them from turning NPAs. All accounts in default but standard as on January 1, 2019, qualified for the relaxation. The scheme has now been extended to accounts that were standard but in default as on January 1, 2020. Last month, the central bank also announced that incremental loans to MSMEs, along with retail loans for auto and residential housing, will be exempted from the cash reserve ratio between January 31 and July 31, 2020. "A whole lot of things have been announced and quite a number of things are going to be announced. The government is aware of the need," says A.K. Panda, Secretary, Ministry of Micro, Small and medium Enterprises (MSMEs), indicating that more relief measures could be in the offing.
Yet, fearing that the war against the deadly virus could be a long-drawn one, MSMEs have started bracing for tough times. Since the bulk of MSMEs rely mostly on manual work, a large number of them have decided to downsize manpower and reduce expenses. This will mean lakhs of job losses, particularly, since the sector is still to recover from the two back-to-back shocks of demonetisation and GST.
Banks Drag Feet
The RBI has announced several steps to give relief to MSMEs. But the question is, will banks implement them in letter and spirit? K.R. Sekar, Partner, Deloitte, says RBI announcements will help MSMEs through lowering the rate of interest and deferment of loan payments. But that's not how it's playing out on the ground.
After the RBI's three-month instalment deferment announcement, Bharat Garg, Managing Director, JK Metal Industries, contacted his bank, State Bank of India. "I asked if they are going to pass on the benefits. The official was non-committal and said their expenses had gone up and so they would think about it (later). If they don't pass on the benefits to us, what is the use of these measures?" he asks. JK Metal makes aluminum utensils at its factory in Yamuna Nagar, Haryana, and employs nearly 200 people. It has an annual turnover of about Rs 40 crore. There are dozens of similar firms in the area whose situation is not different.
V.K. Aggarwal, Managing Director, Shashi Cables, says MSMEs may not be the recipients of any largesse because of historical risk averseness of bankers. "MSMEs need cash to meet their daily needs even though their plants are closed. For this, banks will have to be liberal. The Ministry of Finance needs to issue a strong advisory to banks that all relaxations permitted by the RBI must be extended mandatorily to the borrowers," he says.
Aggarwal, however, noted that several RBI steps have the potential to inject huge liquidity in the system, saying changes in the reverse repo rate will dissuade banks from parking money with the RBI and thus nudge them to lend. "Corporates can greatly benefit by getting funds against their bonds and commercial papers," says the owner of a small factory in Lucknow. "However, the bigger challenge will be rise in cost and liquidity crunch once the business starts operating again. MSMEs are looking for government subsidy or grant or deferment of GST collections. While the RBI's announcements are welcome, we need to wait for the government's announcements on improving cash flow," says Sekar. Responding to the RBI decision to slash the repo rate, SBI has passed on the entire 75 bps cut to borrowers availing loans linked to external benchmark-linked lending rate as well as repo-linked lending rate. Many other banks like Bank of India, Central Bank of India and Bank of Baroda have announced moratorium on all term loans across the board and deferment of interest on working capital limits for three months. Small businesses hailed the move but said there should be an institutional mechanism to ensure that these benefits reach all.
Federation of Indian Micro and Small & Medium Enterprises (FISME) President Animesh Saxena says the measures so far are insufficient given the scale of the disruption. "Probably, they do not understand the working of MSMEs. MSMEs have an extreme cash flow issue. It is a cycle. You are supplying, you are getting payments and you are buying raw material and paying wages. If your incoming payments dry up for one-and-a-half months, how can you run the business?" he says.
The chief of another leading MSME body says the RBI has issued a lot of advisories but there are no clear instructions to banks. "We expect a little more. We need more concrete terms. The banks need to allow a longer moratorium on term loans. Cash flow has dried and MSMEs dont have huge reserves. They are going to suffer a huge business loss," he says.
Saxena of FISME says the RBI should have asked banks to immediately give additional cash credit limit to MSMEs so that they can pay salaries. S.K. Jain, Managing Director, Solo Components, says anything that eases the pain and gives them time to recoup will be good.
Refunds from centre key
Many MSMEs are facing delay in payments from government agencies and PSUs. Industry representatives have appealed to Commerce Minister Piyush Goyal to bear salary cost for two months. "Many workers are covered under Employees State Insurance (ESI). This a national issue. The government may ask ESI to pay our workers for March and April. And then, for middle and senior staff, the government could partly support the companies in paying salaries. This will help MSMEs pay salaries and retain workers," FISME has suggested to the government.
The industry is looking at cutting staff count. "More people at lower level could be hired on contract based on daily requirement. At middle and senior levels, people could be asked to take a 25 per cent pay cut or offered a higher variable pay with a cut in basic salary," says Shashi Cables Aggarwal.
Different Strokes for Different Folks
The response of companies will vary from sector to sector. Even within a sector, different enterprises will follow different strategies. While some firms in sectors like automobile, food processing and pharmaceutical may not see the need to reduce staff strength, many in sectors like garments and luxury goods will have to resize operations.
Further, most manufacturers and service providers expect that normalcy will take months, in some cases more than a year, to return, as getting workers back will not be easy. The industry has in the past seen that workers take at least a month to return once they go back to their villages. In the current scenario, it may be longer due to the heightened fear of coronavirus.
"We are part of an auto supply chain and do not downsize manpower when every now and then there is a hiccup in the economy. It is difficult to replace these people. Neither does it make business sense as where will you hire when the chips are up?" says S.K. Jain, Managing Director, Solo Components.
However, a large garment maker from Gurgaon, Haryana, says he plans to lay off staff, especially at middle and senior levels. Unlike him, many firms see latent demand once the lockdown is lifted. That is why several companies have directed their HR departments to contact workers and stop them from leaving for their native places. They are even assuring cash relief. These include Gurgaon-based auto parts maker Solo Group and JK Metals.
MSMEs play a key role in economic growth but face numerous challenges. Most score poorly on automation and adoption of technology and hence lag their counterparts in developed countries. They also lack access to cheap credit and risk capital. Then there is the problem of delayed payments from government agencies as well as big corporates.
U.K. Sinha, former Sebi chief who was head of an RBI-appointed panel on MSMEs, says his committee had suggested several steps to help MSMEs but they have not been implemented. "One important thing, for example, is that the ceiling for collateral-free loan be extended from Rs 10 lakh to Rs 20 lakh. We should do something for providing them special line of credit and delayed payments. The government should arrange that all its agencies/PSUs start making payments to MSMEs," says Sinha. He says Covid-19's impact on MSMEs may last longer than what was initially understood.
Post Lockdown Phase
MSMEs expect more relief, especially as the government wants them to play a key role in its target to make India a $5 trillion economy by FY25. The share of MSMEs in GDP is projected to touch 50 per cent in the next few years from 30 per cent at present. Industry too wants the sectoto be in focus after the lockdown. Saxena says hand-holding is the need of the hour. "If they are not supported, the sector will find it difficult to tide over the crisis. The government does a lot of things for marginalised sections of society. We are the marginalised section of the industrial society. If hand-holding does not happen, this sector will see a lot of retrenchments," he says.
"After the lockdown is over and factories open, people will require hand-holding and support. The government is definitely going to come up with (the support)," says Panae. That may be music to the ears of SME promoters. But for now, they have to deal with the grim, grimmer and the grimmest!