Budget 2019: SME Financing Industry Seeks Solution to the Liquidity Crisis Modi will be facing pressure to ramp up credit availability

It is that time the year wherein almost everyone is glued onto the desktop to understand if the country's finance minister is dropping any hint related to the upcoming union budget.

But what is interesting about the upcoming budget is this isn't the usual annual budget but an interim budget.

As the country will soon witness the Lok Sabha Elections, the present government will not have the time and bandwidth to exercise the full budget. Hence, till the new government comes to power, the interim budget will be followed the country.

Nonetheless, the last few years, starting from the demonization followed by the GST implementation has been an only about disruption of the MSMEs sector. And just when the ripples started to settle down, the liquidity crisis hit the nation.

Solution to the Liquidity Problem

Owing to the fact the interim budget is just around the corner, SME financing industry hopes that Finance Minister Arun Jaitley provides a solution to the above problem.

Shantanu Agarwal, Chief Innovation Officer, PAISALO Digital notes that the Reserve Bank of India (RBI) has been at the centre of a political warfare, the main point of this warfare was initiated by an out of the blue liquidity crunch that severely affected the NBFC sector, an important and key driver of credit growth.

"In the midst of fears of a hit to the economy during its drive for re-election, Prime Minister Narendra Modi will be facing pressure to ramp up credit availability as well as for stronger action from the Central Bank, but will it implicitly vain from giving direct orders so as to sway away from sparking fears for the fragile independence of the institution," he added.

Credit Flow

Earlier this month, in the 32nd meeting of GST council, the finance ministry reduced the tax and compliance burden on MSMEs by doubling the threshold limit below which companies are exempted from GST to INR 40 lakh.

"The budget is also expected to further ease out compliance burden and facilitate ease of business for the MSME sector, which is identified as a backbone to the Indian economy", Piyush Khaitan, Founder & MD, NeoGrowth.

In the medium-to-long term, Khaitan expects that GST will have a positive impact on organised MSME industry, given benefits such as availability of input tax credit, efficiency in logistics and capturing market share from unorganised players.

"However, easy access to credit for MSMEs is still a challenge and we expect some further measures and digital initiatives to boost lending in this segment," he pointed out.

Other Expectations

Nonetheless, in addition to the GST compliance, the government also has taken multiple routes to fuel SMEs growth. In the last union budget, allowed Trade Receivables Discounting System (TReDS) platforms to access GST stack in order to streamline invoice financing.

Even though, Kalyan Basu, M.D. & C.E.O. A.TREDS LTD. (Invoicemart) thinks the support and outreach Initiative for MSME sector has improved the financial sustainability among MSMEs, he feels the government should continue to ease out the credit flow to for the MSMEs while supporting the formalization.

"Policymakers should introduce credit insurance in the favour of the financiers on the TReDS platforms. Credit insurance will allow TReDS to become a real enabler for the MSMEs as a source of working capital finance and can be accessed by the MSMEs independently without dependence on the buyer," he suggested.

Apart from the solving the liquidity fiasco, Sanjay Phadke, EVP – Platform and FI Business Head of Vayana Network incentivize export financing.

"As for exporters under stress, the budget can look at supporting finances through a mechanism which reflects low cost of capital in global markets," he added.