Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

Key Phrases: Credit Guarantee Schemes, third-party credit risk mitigation, enterprises and lenders, Deeper engagement, ‘A Test and Learn’ Framework, Member Lending Institutions, Special Credit Linked Capital Subsidy Scheme, TReDS.

Why in News?

• Mere infusion of funds into credit guarantee schemes is not enough. New delivery initiatives need to be experimented.

Background:

• Despite the best attempts, MSMEs couldn’t get bank funding because Most MSMEs didn’t have any collaterals. A loan from an NBFC is not an option due to the high interest rate.
• Many stories abound of deserving small and medium enterprises (SMEs) whose growth and ability to generate employment are impaired for want of credit. While MSMEs are critical for employment generation, the credit flow to the segment remains abysmally low. An estimated 15 per cent of MSME debt demand is funded by the formal financial sector and only 32 per cent of MSMEs are served by financial institutions.
• Credit Guarantee Schemes (CGSs) offer government intervention to unlock finances for SMEs. A CGS provides third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses on the loans made to an enterprise in case of default, typically in return for a fee.
• In 2000, the government put in place the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), promoted by the Ministry of MSMEs and SIDBI. Till March 2021, CGTMSE cumulatively accorded guarantee approvals for ₹2.6-lakh crore to nearly 66 lakh accounts, under guarantee schemes, which indeed is significant.

• But despite this achievement the reach is poor, driven by factors such as poor unit economics for bigger lenders, low levels of formalisation of enterprises, a high level of information asymmetry between enterprises and lenders, and an incentive system that favours risk aversion of the lending officers. Though CGS itself may not be a panacea, it could be leveraged more effectively to speed up the credit flow to unserved segments.
• The Budget has indicated that the CGTMSE, set up to catalyse the flow of institutional credit to SMEs, will be revamped with necessary funds. While this is a welcome move, more funds alone may not be the solution.

This fund could benefit from the following factors:

• A sharper focus on learning the credit profiles to create lending solutions with agility, and aim to amplify successful solutions in the ecosystem;
• A comprehensive measurement tool to assess the strength and weakness of the key links of the value chain;
• Deeper engagement from private sector and MSMEs in the programme for learning and quicker adoption of successful outcomes.

Correspondingly, the following considerations may be pertinent:

• ‘A Test and Learn’ Framework: Given the general apprehension that SME loans are risky, bankers seek collaterals. Several Fintechs /NBFCs have solutions that provide for other viable models. Based on their success they can be scaled.
• As much as 3-5 per cent of the overall trust fund can be set aside for a ‘test and learn’ initiative, wherein a set of ‘sand boxes’ can be designed with promising partners to expand lending.
• A mechanism may be framed to allow people/consortia to come forward with specific proposals to avail this. Unlike the rest of the fund, this pool may have expanded risk appetite to test new-age solutions. The mechanism could be operationalised through a set of Member Lending Institutions (MLIs) and branches across the country to cover a statistically significant population to measure the impact.
• It is imperative for this framework to have a robust assessment and measurement tool and a mechanism to share the key learnings from these ‘sand boxes’ with the broader ecosystem. This could enable wider participation from the private sector.
• Tracking and Measurement Mechanism: Currently, the prerogative of extension of credit guarantee to a MSME borrower remains with the branch functionaries and lacks transparency for oversight/review by the MLI’s higher authorities. Also, there is no mechanism to assess the demand for credit guarantee in the sector. CGTMSE could evolve a suitable tracking system to help MLIs review cases that are denied CGMSTE cover by its branches and also capture the data regarding the need for CGTMSEbacked assistance in the sector.
• Such an initiative, will sharpen the understanding of the prospects and geographies, and enable focus on the weak links in the lending process for targeted interventions.

Government policies for the growth of MSMEs:

The Government of India has designed various policies for the growth of MSMEs in the country.

• In November 2021, the Indian government launched the Special Credit Linked Capital Subsidy Scheme (SCLCSS) for the services sector. This scheme will help enterprises in the services sector meet various technology requirements.
• In Union Budget 2021, the government announced funds worth US$ 1.36 billion for ‘Guarantee Emergency Credit Line’ (GECL) facility to eligible MSME borrowers, giving a major boost to the sector.
• The Emergency Credit Line Guarantee Scheme (ECLGS) was announced as part of the Aatma Nirbhar Bharat Package with the objective to help MSMEs and business enterprises to meet their operational liabilities and resume businesses in view of the distress caused by the COVID-19 crisis.
• The psbloansin59minutes Portal was launched in 2018 to facilitate in-principle approval of loans of up to Rs 1 crore (enhanced subsequently to Rs. 5 crore) to MSMEs without human intervention.
• RBI operationalized TReDS in 2017 to solve the problem of delayed payments to MSMEs. TReDS is an electronic platform where receivables of MSMEs drawn against buyers (large corporates, PSUs, Government Departments, etc.) are financed through multiple financiers at competitive rates through an auction mechanism.
• Pradhan Mantri Mudra Yojana (PMMY) scheme was launched in 2015 to provide access to institutional finance to unfunded Micro/Small business units with collateral free loans up to Rs 10 lakh for manufacturing, processing, trading, services and activities allied to agriculture.

Way Forward:

• In spite of plethora of policy and schemes from the Government and RBI this sector is struggling to get timely and adequate finance. This problem persists from the side of both entrepreneurs and bankers. In the era of Digital India and Atmanirbhar Bharat, India is witnessing many small but innovative start-ups in the service sector which need assistance in the form risk capital and timely credit.
• MSMEs are also making partnership with larger firms and bringing out competitive products in market. In spite of the fact that large number of enterprises are becoming sick, we cannot deny that the rate of NPA is less than the large enterprises and the Banks should consider this fact.
• There is also a need to ensure access of banking facilities in the remote unbanked/under-banked areas. Banks have an important role to play in addressing several problems faced by MSMEs in India. Banks have to view themselves not mere as a credit provider but as partners in the growth of these enterprises, through a process of hand holding support of first generation entrepreneurs and startups, while they find their feet in the business.
• Banks should therefore, provide financial consultancy/financial management services to their MSE borrowers to give them holistic guidance and support and nurturing them. Banks could set up special industrial and management consultancy departments to address functional inadequacies and market gaps
• There might be a higher failure rate for start-up MSMEs, but despite the risk, the financing of these enterprises is a must for ensuring inclusive growth and here Credit Guarantee Scheme can play a major role. Credit guarantee is not the sole criterion for facilitating MSME credit but we cannot deny the fact that lack of collateral is the major cause of rejection of good projects by Banks. Financial Institutions are also safe while granting loans under Credit Guarantee Scheme. Therefore, this scheme should be popularized among bankers and entrepreneurs.

Source: The Hindu BL

Mains Question:

Q. Discuss the bottlenecks in Financing MSMEs in India. What should be the step to tackle challenges related to financing of MSMEs? Critically Examine.