Markets

MSME & Markets | 09 Mar 1500-1630

Introduction:

Micro, Small, and Medium Enterprises (MSMEs) function as the backbone of the Indian Economy and generate employment at the grassroots level. If speaking from a purely statistical point of view, MSMEs employ around 11 crore Indians and produce around 48% of India’s exports. However, the pandemic led slowdown has impacted the financial health of these MSMEs for the worse. There have been several issues because of dwindling consumer demand, shutdowns and lack of access to formal credit. The biggest challenge for MSMEs is access to sufficient working capital and this is a complex issue because there are visible entry barriers that prevent MSMEs from accessing credit easily. There have been institutional provisions for providing collateral-free loans to MSMEs but the number of units qualifying for these loans is low, Formal credit institutions such as banks are hesitant to lend to businesses that do not have established credit histories and this further limits the options available for MSMEs to acquire working capital.

MSMEs and Working Capital Issues:

It has been established that MSMEs find it difficult to raise their working capital and maintain liquidity for their day-to-day operations. However, the issues are not restricted to the debt component of working capital financing only. MSMEs have been facing problems when it comes to raising money from the financial markets as well. There is no doubt about the fact that specialised platforms such as the BSE SME have opened up new avenues for smaller business units to raise capital. But certain points need to be addressed when talking about MSMEs and their potential to raise funds from the market. According to a report by The Hindu Business Line, trading interest on the firms listed on the MSME exchange remains low because of entry restrictions for retail investors. Similar to Futures & Options markets, each stock has a market lot in this segment. Hence, investors need to shell out at least `1 lakh to actively trade. This is also coupled with low levels of institutional buying in this segment which reduces liquidity and makes it difficult to exit for existing investors. These factors lead to reduced interest in investing in SMEs and feed into the loop of reduced options of generating capital for MSMEs.

MSMEs- Cash Flow Lending Issues:

In December last year, RBI Governor Shaktikanta Das had said that “To improve the credit to gross domestic product ratio, access to credit and cost of credit need to be addressed by lesser reliance on collateral security and greater cash-flow based lending.”
The discussions around increasing cash flow based lending for MSMEs have been doing the rounds for several years now. It is well understood that collateral and balance sheet based lending is not sustainable for MSMEs as most of them fail to qualify for the associated conditionalities or do not possess enough resources to leverage for adequate working capital. However, MSMEs form the manufacturing backbone of this country and deal with some of the largest industrial and corporate houses in the country and produce healthy cash flows. There is a broad scope for interventions to make cash flow lending easier for MSMEs.The cash-flow model allows banks and other lenders to provide credit to borrowers based on real-time cash flow data and can do away with the need of collaterals in the form of property.One of the options can be to implement the Cash Flow Lending (CFL) system as a second window on TReDS as recommended by the UK Sinha Committee Report. This step is still stuck in bureaucratic logjams and it has to be expedited to provide timely help to MSMEs.

MSMEs and Market Monopolies:

It has been established that MSMEs find it difficult to raise their working capital and maintain liquidity for their day-to-day operations.However, the issues are not restricted to the debt component of working capital financing only. MSMEs have been facing problems when it comes to raising money from the financial markets as well.There is no doubt about the fact that specialised platforms such as the BSE SME have opened up new avenues for smaller business units to raise capital. But certain points need to be addressed when talking about MSMEs and their potential to raise funds from the market. According to a report by The Hindu Business Line, trading interest on the firms listed on the MSME exchange remains low because of entry restrictions for retail investors. Similar to Futures & Options markets, each stock has a market lot in this segment. Hence, investors need to shell out at least `1 lakh to actively trade. This is also coupled with low levels of institutional buying in this segment which reduces liquidity and makes it difficult to exit for existing investors. These factors lead to reduced interest in investing in SMEs and feed into the loop of reduced options of generating capital for MSMEs

Possible Discussion Areas:

• There are visible difficulties for the MSMEs to raise working capital, What are the issues with the current approaches and what can be the way forward
• There is not enough liquidity in MSME stocks to enable capital raising for businesses, what are the barriers to increasing liquidity in MSME stocks
• There is low levels of institutional buying in MSME stocks, What can be the measures to ensure that financial institutions invest in these stocks to enhance liquidity and ease capital flow
• Cash-flow-based lending is a very minuscule part of the overall lending that both banks and NBFCs do together, what can be the ways to increase cash flow based lending for MSMEs
• There are emerging challenges such as market monopolies in E-Commerce, How can initiatives like the ONDC help to curb these monopolies.