For Indian micro, small and medium enterprises, this year is also ending on a mixed note as the industry is still facing massive delayed payments and debt issues. In 2023, with several government policies and industry support, the sector is still on the road to recovery after post devastating Covid-19 pandemic and major jolts from the Russia and Ukraine war.
India’s 64 million MSMEs have had a major role to play in supporting domestic demand growth with a steady supply of goods and services to various major industries. Despite the challenges, it continues to remain one of the biggest sources of employment and it contributes about 29 per cent to the gross domestic product (GDP).
Indian MSMEs are a major contributor to the forex reserves and in FY23, they contributed 44 per cent of India’s exports, at USD 200 billion. The data from the first half of FY24 shows that the share of MSMEs in exports has risen to 46 per cent. While this is still not as much as the pre-pandemic levels of 50 per cent, experts said that there are other encouraging signs.
Now let’s look at major trends that shaped India’s vulnerable MSME sector in 2023
Union Budget, Government Schemes
Union Finance Minister Nirmala Sitharaman in February revamped the credit guarantee scheme with Rs 9,000 crore in the corpus for MSMEs. While presenting the Union Budget 2023-2024 in Parliament, she said, “I am happy to announce that the revamped scheme will take effect from 1 April 2023 through the infusion of Rs 9,000 crore in the corpus.”
During that time, experts welcomed the decision but also argued that the credit disbursed to MSMEs in India through this scheme is only a meagre seven to eight per cent, compared to that in the United States, which is a whopping 30 per cent.
Talking about another government scheme, about 32,298 MSMEs have cancelled their Udyam registration due to the shutdown of their businesses till 8 December 2023. A total of 12,611 units cancelled their registration amid business shutdown in the current fiscal, said minister of state in the MSME Ministry Bhanu Pratap Singh Verma in a written reply to a question in Lok Sabha.
While the reasons behind the withdrawal or cancellation were the shutdown of businesses, change of owner and a few others, Vinod Kumar, President, India SME Forum earlier (while talking to BW Businessworld) blamed the big corporations for this and added that they are crushing and pushing small enterprises to the brink.
“The bread and butter of an enterprise lower in the hierarchy depend on the enterprise higher in the hierarchy. This dependence results in arm-twisting of the micro and small enterprises at the hands of the medium & large enterprises to the extent that micro and small enterprises are forced to deregister themselves from the UDYAM portal so that they are not considered as MSMEs and the punitive provisions of the MSMED Act can’t be enforced against the large enterprises,” Kumar said earlier.
Thereby defeating the law as well as delayed payment solution providers like TReDS which only extend their remedies when you have a UDYAM Registration, Kumar added
Interestingly, the share of women among MSMEs registered on the government Udyam portal has now reached 37 per cent in 2023. The data shared by the MoS Verma revealed that the number of women-owned MSMEs registered on the portal stood at 1.17 crore which is 37.13 per cent of the total 3.16 crore MSMEs registered as of 4 December. “In the upcoming year, it is hoped that the government does more to meet the needs of this sector and create an environment where MSMEs can thrive,” said Kamalika Bhattacharya, Chief Executive Officer (CEO) and Co-founder, QuoDeck.
“The GST system has also been evolving, and going forward, it is expected that GST filings will be simplified further to increase formalisation among MSMEs. The government has been focused on bolstering ease of doing business for the MSME sector, and this initiative is also likely to keep going strong, with further policy support and schemes to strengthen this sector so often referred to as the backbone of the economy,” said Hardika Shah, Founder and CEO, Kinara Capital.
Debt And Delayed Payments
A report by GAME with Dun & Bradstreet (D&B) and Omidyar Network India highlighted that payment delays to Micro, Small and Medium Enterprise (MSME) suppliers have remained endemic and an intractable problem in India for more than 15 years.
Notably, an estimated 5.9 per cent of the gross value added (GVA) in the Indian economy— Rs 10.7 lakh crore is locked up in delayed payments from buyers to MSME suppliers. While talking about the causes of payment delays, the report stated that fundamentally, payments are delayed because of a power asymmetry between smaller suppliers and large buyers.
When seeking export finance, the foremost hurdle encountered by MSMEs is limited access to timely and sufficient credit facilities, poor credit records, high interest rates and stringent conditions.
The ‘financing gap’ which means the ‘capital gap’ for MSMEs to pursue growth strategies, has a major impact on India’s growth since MSMEs contribute to 30 per cent of its GDP along with their contribution to employment and exports.
The intricate procedures followed by commercial banks often lead to delays and complexities, causing MSMEs to miss out on the opportunity to avail of credit facilities promptly. Furthermore, the exorbitant costs associated with trade finance offerings from these banks make it nearly impracticable for these businesses to obtain structured funds.
“A lack of access to sufficient credit is one of the issues plaguing the sector. In advanced countries like the US and China, despite the prevalence of large corporations, MSMEs contribute 55 to 60% of the country’s GDP because there is enough access to credit. Financial inclusion can play a big role in boosting MSMEs, particularly in semi-urban and rural areas,” stated Bhattacharya. Recent data by RBI showed that MSMEs have been receiving 14 per cent of aggregate credit since January 2022, as opposed to 10 to 12 per cent earlier, which is encouraging.
According to a TransUnion CIBIL MSME Report August 2023, unsecured loans now account for approximately 15 per cent of the total MSME loan portfolio. “The robustness of demand growth, both on the global and domestic fronts, for India’s goods and services bodes extremely well for the country’s trajectory and growth momentum. This has, in turn, triggered an upswing in the need for systemic credit, particularly within the MSME sector,” Shah mentioned.
Tech Adoption, Online Integration And Ecommerce
In 2023, technology has played a huge role and has transformed credit assessment, with NBFCs, banks and online lenders using data such as GST records for evaluating creditworthiness. However, despite these efforts, only 15 per cent of MSMEs have credit access and approximately 50 per cent are financially ineligible. The year saw a notable gap in funding and many MSMEs, in need of growth capital, face a mismatch with institutions primarily offering instalment-based loans.
A report by the Indian Council for Research on International Economic Relations (ICRIER) has said that micro, small and medium enterprises (MSMEs) that are not integrated with ecommerce platforms are likely to find it more challenging to access markets at a time when integrated firms are making deeper inroads into markets by leveraging platforms.
The report which talks about leveraging ecommerce for the growth of MSMEs stated that while there are gains to MSMEs by integrating with ecommerce platforms, for firms that are unable to join these platforms, technology may represent a survival threat rather than an opportunity.
“Given that integrated firms are better off on average than non-integrated firms, such differences in market access on account of ecommerce platforms can exacerbate inequities between these firms,” the report added.
The report suggested that policymakers and other stakeholders must be mindful of these potential inequities and seek to bridge the divide between integrated and non-integrated firms. “This requires an understanding of the factors that impede firms from joining platforms,” it mentioned.
Notably, non-integrated firms indicated that in large part their decision to not join platforms is due to a lack of knowledge and information about digital technologies and e-commerce platforms.
However, the decision of a firm to join ecommerce platforms is not simply a function of whether it has knowledge and information about the platform but also the firm’s own internal capabilities which determine whether it stands to benefit from joining ecommerce platforms, it said.
“The emergence of digital lending platforms targeting MSMEs relies on the integration of GST, banking, and income tax data. Large corporations are increasingly focusing on reducing scope 3 emissions, influencing changes in MSMEs’ production and energy consumption. Financial intervention is essential for MSMEs to adopt eco-friendly practices, such as replacing coal-based boilers with electric ones or installing rooftop solar for clean electricity generation,” said Gaurav Garg – Business Head SME, Ecofy.
Garg added that next year will see modern lenders, such as P2P platforms, invoice discounting services, payment gateways, and fintech companies, use transaction information to provide credit. Unlike traditional lenders who emphasize installment loans, these new lenders provide flexible lines of credit
Meanwhile, ecommerce is expected to maintain its growth trajectory in 2024 and MSMEs that are effectively marketing their products online will gain a significant competitive advantage. Sustainability practices will rise as customers seek eco-friendly options, cutting costs for businesses. Financial inclusion efforts will simplify loan processes and promote alternative financing methods, like peer-to-peer lending.
