Important Things to Know About the Indian MSME Sector

To know the present picture of the market, one needs to comprehend revival as well as survival stage the MSME segment has undergone
  • BY Jaspreet Kaur

    Feature Writer, BusinessEx

  • |
  • Jul 03,2020
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  • 18 Mins Read

The Indian MSME sector is going through a jolt during this crisis. A sector that comprises micro, small and medium-sized enterprises is grappling to sustain. It accounts a large share in the economy but holds a large chunk of small emerging companies. The epidemic has badly affected the sector leading closure of many businesses. To safeguard the MSME segment, an array of steps have been taken by the government and private sector. 

To know the present picture of the market, one needs to comprehend revival as well as survival stage the MSME segment has undergone. In essence, revival and survival are two different broad categories under the existing MSME sector. Here is more information about the cited phases. 

Survival 

Various companies under the MSME segment are mainly running short of work capital. Over a period of 50 years, current prices at the existing MSME sector requires roughly INR 70 lakh crore against which banks and non-banking financial corporations (NBFCs) have offered approximately INR 18 lakh crore.  

Thus, leaving INR 52 lakh crore as a gap that is financed by suppliers' credit and informal sectors' finance. It is one of the reasons why the MSMEs are not cost efficient. 

Owing to the Coronavirus and lockdown, MSMEs are facing challenges, which are as follows:

  • Cash losses incurred as payment of fixed cost like wages, rent, and electricity etc have affected the MSME sector in general.
  • Plight of migrant workers has created a shortage of labour and it may take a considerable amount of time to come back, thereby running the plant at optimal level for a few months. Moreover, it will create further cash losses.
  • Supply chain has broken at present and to resume it, suppliers have changed their payment terms from credit to cash, therefore affecting the cash flow problem in already strain finances. 
  • General consumer behaviour has changed and non-essential purchases are postponed. Therefore, decreasing the demand for automobiles, home appliances, and housing etc, in turn, affecting ancillary units as well.

To overcome these problems, the Indian government has rolled out INR 3 lakh crore package which will be helpful to roughly 45 lakh units, whose account is standard on 29th February, 2020. Following a month, nearly INR 40,000 crore was sanctioned under this scheme. The actual disbursement is much lower, indicating reluctance among banks and entrepreneurs. 

The above package has been given as a part of Atmanirbhar Bharat wherein the definition of the MSME has been changed. Under this, INR 20,000 crore subordinate debt for stressed units has been proclaimed that will revive 2 lakh units. Also, INR 50,000 crore Funds of Fund Scheme has been announced that it will infuse in equity of growth companies.

A Piece of Advice for Small Entrepreneurs 

The time has come where business owners are supposed to emphasize on reinforcing the marketing mix by employing digital technology. The enterprises have to adopt technological changes that are necessary to upgrade, automate the processes with a single focus of cutting cost.

After the Coronavirus, entrepreneurs may undergo mental disturbances. To overcome this,  a strong family bonding and social support are required as ups and downs will be constant in the post-pandemic world. 

It is the time when the MSME sector has to look beyond India and in order to achieve this, they have to become competent. They can adopt the best market practices, increase their operational efficiency by measuring 52 ratios from their Balance Sheet and Profit & Loss accounts, which will help them to optimise resource allocation. 

Revival 

In this phase,the unit is not meeting its obligations or interest payment of working capital. Here is the in-depth knowledge about companies not paying off their debts. 

  • The installment of term loan for first 30 days is classified as SMA0 (special mention account)
  • Next 30 days that is, total 60 days is classified as SMA1
  • Next 30 days that is, total 90 days is classified as SMA2
  • Next 30 days that is, total 120 days is classified as NPA

Generally, when an SMA0 situation arises, the bank is responsible to call entrepreneurs and discuss why this situation has aroused and what additional steps are required to correct it. In SMA1 and SMA2, more aggressive discussion and correction or possible solutions have to be found. 

However, in fact, if banks and entrepreneurs play the hide and seek game in the above cited situations, then the banks are supposed to do hand holding. Although, banks act as a money lender and they do not perform hand holding and if they do, then it is done to cover up their own records. 

Suffering MSME Sector 

The MSME segment has a grim future if it has undergone the pandemic. The below-mentioned details state about the sickening condition of the MSMEs

  • As per the MSME pulse, nearly 17 lakh crore is the total finance for MSME by bank. Out of this portion, 1.2 lakh crore is in SMA0, SMA1, SMA2, and NPA
  • According to the estimation, the effect of sickness may risk almost 1 crore jobs

The shared information has made great revelations about the internal state of the MSME sector. The sector is falling out and urges the government, as well as large corporations, to stabilise it.

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