MSMEs And NBFCs Lending To Them Need Government Boost To Stay On Recovery Path

While the task at hand is a sizeable one, there are some things the government can do to accelerate the process

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By Aiswarya Ravi


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COVID-19 has left the economy ravaged in its wake. We are facing the worst recession since 1952. The real challenge facing the government right now is to mobilize sectors and businesses, and bring them back to the pre-COVID levels. While the task at hand is a sizeable one, there are some things the government can do to accelerate the process. Here are five things that we hope Budget 2021 will deliver, which can take us further on the path to recovery.

Ease the liquidity crunch

One major challenge faced by NBFCs, especially those serving the MSME sector, is the lack of liquidity. While the credit gap has always existed, the pandemic has exacerbated the problem to a great extent. While the Reserve Bank of India's (RBI) targeted long-term repo operations mandate to banks was aimed at boosting liquidity across the board, the eligibility criteria for most of the government's schemes automatically excludes many last-mile NBFCs that do fit the size parameters. Certain categories of NBFCs, like those serving the MSME sector, can never match up to the giants in the industry. Therefore, there needs to be a shift in the way the rating is conducted. A differentiated rating system which considers peer benchmarking rating based on size and market as well as the asset quality, profitability and growth to have a well-rounded assessment.

Cut GST rates

While overall GST compliance can also be an issue for many small business owners, what really impacts them is the GST rates. In the wake of the pandemic, as small businesses and getting back on the recovery path, one huge relief the government can offer is the relaxing of GST rates. While there have been several rounds of revisions in the rates, lowering them across the board, at least for the time being, can help ease supply chain woes for many MSMEs, which really need the boost right now. The MSME sector is one of the pillars of the Indian economy, and in this troubled time, cutting it some slack in terms of taxation can have a positive multiplier effect on the recovery of the economy at large.

Extend credit guarantee to INR 5 crore

One existing policy that is worth revisiting is SEBI's credit guarantee scheme: the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE). The scheme provides credit guarantee to financial institutions, which in this case, are usually NBFCs, to provide collateral-free loans to small businesses. The loan disbursal limit currently stands at INR 2 crore, which can end up excluding many small businesses as they grow, as well as suppliers and other supporting businesses that facilitate their functioning. Extending this limit to INR 5 crore will help mobilize more funds and give the MSME sector a much-needed boost, helping it along on the path to recovery.

Iron out implementation issues

There were many positive announcements for MSMEs and last-mile NBFCs made in last year's budget, which have been slow to implement. The first of these is the trade receivables discounting system (TReDS). The scheme, which is aimed at facilitating the financing of trade receivables of MSMEs included the setting up of an unified platform for sellers, buyers and financiers. However, there isn't a mechanism in place to get MSME sellers on to the platform, resulting in many being excluded. The Government e-Marketplace (GeM) also suffers from similar issues. The fund of funds that had been announced for the MSME sector by the finance minister also seems to be held up in the works. There has been no word on how the funds will be disbursed. The government needs to address these roadblocks and ensure that these tools and policies deliver on what they have promised.

Grant priority sector lending status

RBI announced in August 2019 that banks lending to NBFCs engaged in on-lending will be considered as priority sector lending (PSL) as long as the loans were disbursed to MSMEs or the agriculture and housing sectors. PSL status means that it is mandatory for banks to offer loans to the sector or sub-sector in question. This move was aimed at easing credit flow to small business owners and borrowers who need it the most. This status was granted for the financial year and was renewed by the RBI in March 2020, after undertaking a review, for financial year 2020-21. However, this conditional renewal means the status can expire and not be extended. At this stage, PSL status for NBFCs engaged in on-lending, especially to MSMEs, should be a given. In my opinion, Budget 2021 should grant this status to registered NBFCs on-lending to important sectors like MSMEs, since these form the backbone of the economy.

Following the pandemic, the lending sector, and specifically last-mile NBFCs, need the government's support to recover to pre-COVID levels and continue to disburse essential loans so that small businesses and local economies can thrive, which in turn will feed into the recovery of the country's economy as a whole.

Our expectations from Budget 2021 revolve around smoothening this process through policy support and a more robust implementation mechanism. This will help us make the most of the tools made available by the government and RBI, as well as the relief measures undertaken by them.

Aiswarya Ravi

Chief finance officer, Kinara Capital

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