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Small Business, Big Stress

Small Business, Big Stress

Government relief measures for MSMEs have benefited only a few players. A large number may be unable to survive the pandemic

Illustration by Raj Verma Illustration by Raj Verma

The last 15 months have been a non-stop downhill slide for Ananya Bahl, who runs a small unit manufacturing mobile chargers in Delhi’s Samaypur Badli industrial area. The second-generation entrepreneur’s woes started last March after the nationwide lockdown due to the Covid-19 pandemic. That meant the 27-year-old couldn’t collect his dues from pre-Covid sales. His costs spiralled after the lockdown was lifted. Now, as the second wave ebbs with the possibility of a third looming, Bahl’s business has all but been run into the ground.

“There is no demand, due to which manufacturing units have been impacted. Compared with March 2020, output has plummeted by almost 80-90 per cent,” says the second-generation entrepreneur. “Even if you set aside the generic cost of transport, specific raw materials related to my sector have seen a massive price rise on account of the import ban from China. Prices of raw materials such as charger cabinets, copper wires, and circuits have gone through the roof,” he adds.

On top of that, he is struggling to access capital under a government scheme for small businesses. Bahl says his multiple trips to a public sector bank for a collateral-free loan worth Rs 30 lakh have been futile. He concedes that the fear of a third wave has stifled the prospects of recovery in the unorganised sector and made people wary of making investments.

Bahl’s story will find succour among many of the 6.33-crore micro, small and medium enterprises (MSME) that dot the country. Their combined worth was Rs 60 lakh crore and they accounted for at least 30.27 per cent of India’s GDP in 2018/19, according to the Ministry of Micro Small and Medium Enterprises’ 2020/21 annual report. Not to mention the 11 crore-plus jobs MSMEs have created, according to the 2015/16 National Sample Survey. But all of that is under siege now.

MSMEs are in dire straits as an economic slowdown has added to their litany of woes such as limited access to capital, high raw material cost, supply chain disruptions, labour migration and overdue collections. As a result, several firms haven’t been able to resume operations even after state-specific lockdowns were eased after the second wave. Those that have restarted were able to do so after either curtailing their operations or their workforce.

Roughly two out of every three respondents to a survey — conducted jointly by the Federation of Indian Chamber of Commerce and Industries (Ficci) and Dhruva Advisors in June — say the MSME sector has faced the brunt of the second wave of the pandemic and needs immediate relief.

Existential Crisis

Sanjay Aggarwal, President of the PHD Chamber of Commerce and Industry (PHDCCI), an industry body that has a large representation from MSMEs, explains the hurdles the sector faces. “Firstly, the MSME supply chain is completely disrupted and they do not have the capacity to handle it. Secondly, a spike in commodity prices translates into higher working capital requirements. With depressed demand, margins come under stress. Thirdly, there is a huge pendency in both government as well as PSU payments to MSMEs,” he says. His conclusion is dire. “All these factors combine to give a death blow to small industries.”

And this is for the firms that made it as far as this March. About 70 per cent of small businesses were disrupted from March to August last year, and 40 per cent until February this year, according to a survey by US commercial data firm Dun and Bradstreet. There is a very real fear that a large number of MSME entities may permanently shut shop after the debilitating effects of the second wave of the pandemic.

That fear is palpable in the industrial hotspots in the country, from Bawana in outer Delhi to Chandrapur MIDC in Maharashtra, and from Kovai in Tamil Nadu to South Delhi’s small industry cluster of Okhla.

The 14,500 MSMEs in the Bawana industrial area include food, steel, paint, electrical, wiring and fan-making units, among others. At least 20 per cent of them haven’t resumed operation since the easing of regulations after the second wave, according to the Bawana Manufacturers’ Welfare Association. The association’s President, Rajiv Goel, primarily blames rising fuel and raw materials prices coupled with a complete disruption of the supply chain.

The numbers are mirrored in other regions. About 12 per cent of the 4,000 units in Delhi’s Narela industrial area, which houses food processing, footwear, cable and plastic units, have not yet resumed operations, while at least 80 per cent have downsized. About 15 per cent of the roughly 15,000 units in the Okhla industrial area and at least 15 per cent of the 1,738 units in Mayapuri are estimated to have succumbed.

“Small units running in rented outfits will not be able to open up again,” says Neeraj Sehgal of the Mayapuri Industrial Area, home to Asia’s biggest scrap yard and many auto parts, engineering and paint units. These micro-units have no other choice, says Arun Popli from the Okhla Chamber, as it’s impossible for them to pay rent during lockdowns and bear overhead costs such as electric bills.

A survey conducted by the Consortium of Indian Associations in June this year paints a bleak picture of the pain and prospects of MSMEs. Seventy three per cent of respondents reported losses in FY21, while 13 per cent managed to break even and only 14 per cent made a profit. About 22 per cent of the respondents said they had laid off workers, while 42 per cent were on the fence. And though 36 per cent were not in favour of downsizing, they may not have that option for very long going by the overall verdict on the government’s stimulus efforts in the last 15 months.

Eighty eight per cent of the respondents felt that either the government’s stimulus packages did not reach them or they were not considered for support, while only 12 per cent were lucky enough to access funds. About 80 per cent of the participating MSMEs said they were unsatisfied with the efforts of the Central and state governments, while only 8 per cent appreciated the government support and 12 per cent did not bother answering the question.

Capital Conundrum

Ever since the pandemic struck, both the government and the Reserve Bank of India have launched multiple schemes to support MSMEs. Among the most prominent had been the Rs 3-lakh-crore Emergency Credit Line Guarantee Scheme (ECLGS) unveiled as a part of the Rs 20-lakh-crore Covid stimulus package announced in May last year. The scheme, which offered collateral-free loans to Covid-hit small businesses requiring working capital, has now been extended by another Rs 1.5 lakh crore.

The scheme, initially valid until November with a one-year repayment moratorium and a four-year repayment period, has been extended twice. These extensions have added stressed sectors, such as hospitality and tourism, and the scheme now has a six-year tenure with a two-year moratorium and could be availed of until June. But all that is on paper; what is the ground reality?

As of January 8, according to finance ministry data, banks and financial institutions had sanctioned Rs 2.14 lakh crore in loans to 90.6 lakh borrowers. Of that, Rs 1.66 lakh crore was disbursed to 42.5 lakh borrowers. While no fresh data has been released since then, industry estimates point at a marginal increase in the disbursal amounts. “Banks have sanctioned loans worth Rs 2.46 lakh crore under the ECLGS scheme for the MSME sector,” estimates Mohit Jain, Chairman, MSME Committee, PHDCCI. Crisil, meanwhile, says disbursements have already touched Rs 2.69 lakh crore. That is 90 per cent of the total corpus of Rs 3 lakh crore.

But there is a catch: Inequitable distribution. About 80 per cent of borrowers accounted for only 30 per cent of the total loan amount disbursed, according to the National Institute of Bank Management (NIBM), which studied the implementation of the ECLGS six months after it was rolled out. On top of that, the NIBM reported lower-than-average utilisation rates by smaller borrowers and manufacturing firms accounted for a minuscule slice of the distribution pie. Of course, there were many, like Bahl’s mobile charger-manufacturing business, that were left empty handed.

“There is no doubt that the scheme is well intentioned and broad-based. With the second wave of the pandemic, an element of deeper uncertainty has been added. Difference between the outlay and disbursals has to be seen in the context of actual need for funds, economic sentiment, commercial considerations and disbursal concerns amid the likely third wave, and also the fact that ECLGS is finally a credit and not a grant. It needs to be paid back,” Arvind Sharma, Partner, Shardul Amarchand Mangaldas, told Business Today.

Aggarwal of PHDCCI adds that aggressive spending by the government in the infrastructure sector would help revive MSMEs. “Even if the government front-loads the expenditure on the Rs 100-lakh-crore National Infrastructure Pipeline, it will come as a huge stimulus to MSMEs,” he adds.

Non-deposit taking NBFCs (non-banking financial companies) have stepped in to fill the loan void. “We have seen business owners of groceries, pharmacies, restaurants, mobile shops looking for fresh loans. MSMEs are increasingly reaching out to digital lenders and NBFCs for faster turnarounds and fulfilment of working capital requirements,” says Arun Nayyar, CEO of NeoGrowth Credit Pvt Ltd, a digital lender that focuses on MSMEs.

The MSME industry, however, feels that the government’s credit guarantee schemes aren’t enough to assuage the pains inflicted upon small units by the pandemic. The NIBM report said while the ECLGS scheme focused on short-term liquidity issues, it failed to address the longer-term viability of MSMEs.

Overdue Dues

“The need of the hour for small and medium businesses is a moratorium for a period of six months for all loans and clearance of MSME dues and relaxation of eligibility criteria under the ECLGS,” says K.E. Raghunath, Convenor, Consortium of Indian Associations. He warns that urgent intervention is needed to save over 60 per cent MSMEs from “death”.

Pending dues, which industry estimates peg at Rs 5 lakh crore, from the Central and state governments, public sector enterprises and other entities is also one of the key hurdles for small and medium scale businesses.

According to data from the MSME ministry’s Samadhan portal, out of a total 81,332 applications filed with the Micro and Small Enterprises Facilitation Council (MSEFC) for release of dues, only less than a tenth (7,671) have been cleared, with a total payable of Rs 22,030 crore. And of that amount, just approximately Rs 1,402 crore, or a little over 6 per cent, has been paid.

A closer look at the data reveals central ministries have disposed of a mere Rs 20.6 crore out of dues worth Rs 353.33 crore cleared by the MSEFC, while central departments have disposed of Rs 70 crore out of Rs 553 crore and central public sector enterprises have cleared only Rs 229 crore out of Rs 3,161.41 crore. The railway zones and divisions have cleared a shade under 10 per cent of a total of Rs 287 crore. State governments and PSUs have been just as tardy, disposing only of Rs 200 crore out of the Rs 5,653 crore payable.

And while revealing the pains of collecting receivables, industry experts point out that this data on the Samadhan portal reflect only those cases where a small business even opted for a reconciliation. The reality is that a minuscule number of MSMEs approach the MSEFC as it is akin to taking a customer to court and eventually losing that business.

Little wonder then that the country’s central bank itself has raised red flags on these slippages. In its July Financial Stability Report, the RBI said that despite the restructuring schemes launched in 2019 and 2020, the “stress in the MSME portfolio of the public sector banks remains high.”

The report says while non-performing assets (NPAs) in the MSME portfolio at PSBs have dropped to 15.9 per cent this March from 18.2 per cent last March, the cases in the ‘Special Mention Account’ (SMA) category have risen. While the SMA-0 (payments overdue by up to 30 days) category have grown to 10.6 in March 2021 from 6.9 per cent a year back, those in the SMA-1 (31 to 60 days overdue) category have jumped to 9.2 per cent from 5.7 per cent.

“Given the elevated level of debt of the stressed cohort, the implications of business disruptions following the resurgence of the pandemic could be significant,” the RBI report said.

Or, in the simpler words of PHDCCI’s Aggarwal, “a death blow to small industries.” Like Bahl’s mobile charger-manufacturing business.