Slogans like “ MSMEs are the backbones of our economy” and many such slogans praising and highlighting the importance of the role that MSMEs in the economic development are well known to all of us particularly because we have been hearing that almost since several decades.
Though I admit that beside dishing out slogans, a lot of efforts have been placed by the Government and the Banks to encourage and help the MSME sector so as to enable them to successfully survive in the fiercely competitive world and withstand the competition from the larger units despite facing funds and infrastructural challenges.
The government has also enacted MSME Act so as to provide a strong legal entitlements and reliefs. Various amendments and additions have been made in the Income Tax and Companies Act with the intention of easing and ensuring some comforts to the MSME sector.
But still, a lot more needs to be done .There is a huge distance between the cup and the Lips.
Some of the glaring issues that remain unresolved so far are highlighted below;
- 1. FINANCIAL SUPPORT :
As far as providing easier finances are concerned, it has been consistently observed that the bankers, who by themselves are in highly competitive environments, find it less attractive to finance an MSME unit as compared to the larger units. They rightly feel that efforts involved in financing and monitoring an MSME unit are much more than the margins that they earn as against financing a larger unit. Despite constant instructions etc from RBI and Government, it has remained a challenge to motivate larger banks to finance MSME sector, particularly the Small and Micro units.
One possible solution is to encourage specialized Banks or Cooperative Banks who cater only to this sector. I saw a good hope in channelizing the Cooperative Banks towards financing the Micro and Small scale sector. Unfortunately, after successfully gaining experience in the banking business even cooperative banks also turn their attention towards the larger units.
The NBFCs too are trying to fill up this gap but it has been noticed that they take advantage of the vulnerability of the borrower and extract higher interest and levy additional fees etc.
In short, as far as financing of significant amount is concerned, the MSME sector remains sidelined in reality. They have to resort to extremely exploitative and costly sources of finance when it comes to substantial and critical need.
There is ,no doubt that there are numerous schemes offred by Banks and Governments. But each bank and diffrerent Governments have their varied schemes and it is a time consuming and complex situation even to know how many schemes exist and which scheme is good for an MSME unit .
What pains the most is that such is a situation when there is a constant tomtoming about encouraging and supporting the MSME sector.
Somehow one sees a situation where one is reminded of the story of a crow who was thirsty and was offered water in a jug where the water was in the lower half of the jug and his beak could not reach.
- LEGAL SUPPORT :
The government with a good intention has constantly been trying to introduce / amend the existing Acts so as to make them “MSME friendly”. But as the proverb goes, “help from an ill informed person is more harmful than the harm from a well informed person.”
Let me tell you how this is true. Section-16 of the MSME Act presents a draconian help and i.e. that if any payment to an MSME unit is delayed beyond 45 days then the MSME unit is empowered and enabled to collect interest at the rate which is three times more than the bank rate with a monthly rest. Converting this into simple equation it amounts to more than 24% per annum rate of interest ( three times a bankrate ) and since it is on a monthly rest it would amount to nearly effective 27% per annum with annual rest.
At the same time the Income Tax Act,1961 {Section 43B(h)} is now amended to ensure that expenses incurred by paying to, MSME would be allowed as an expense only when they are actually paid.
As if this is not enough the Companies Act is also amended to ensure that any over due to MSME and the purchases from MSME are clearly and separately reported in a company’s annual account.
The above appears to be favorable steps. But the reality is exactly the opposite. The large units are now trying to avoid doing any business with MSME units because of the rigid legal approach and consequences. They feel that they are inviting potential heavy liability and exploitation from the MSME sector. This is likely to effect the business potential of the MSME sector.
- 3. General :
If one tries to collect an exhaustive list of the benefits and preferences which are offered to MSME sector by Central Government, State Government, Local Bodies, Banks and Financial Institutions one will find that one is lost in a jungle. This reminds me again of a proverb which says that, “Unscheduled, erratic and excessive rain is more harmful than a drought.”
One will find varying definitions of M(Micro).S(Small and).M(Medium).E( Enterprise) not only that the definitions in reality varies from bank to bank, from state to state, from scheme to scheme and they themselves are again subjected to frequent amendments.
One of the standard practice of denying an entitlement is to make the preconditions so difficult that the claimant either gives up his claim or is denied the help and only the lucky few MSME units land up getting the intended help.
The Exit Decision
Besides what is stated above, one thing that strikes while thinking about MSME sector is their reliance and endurance capacity . Somehow, this is noticed in case of many Non MSME units also . An entrepreneur is a good entrepreneur not only when he sets up or runs his enterprise well and successfully . To my mind, he is equally good entrepreneur when he decides to quit at the right time and right way.Many a times emotional and Ego issues prevent many entrepreneurs from quitting at the right time .
At the same time we have to also look at the issue that does our existing legal and banking framework makes the task of quitting easy?
The answer is an emphatic No The current labour laws are so much in favour of labourer s that the cost of closing a unit and the formalities attached thereto will discourage many entrepreneurs from closing the units which are unviable . This leads to distressed sales and unfavourable mergers . The bankers also tend to pressurize regularization of accounts for a long period in order to keep their balance sheets and performance stable
The Way Ahead
A basic question is, does any sector need a lot of support to be successful , profitable and sustainable ? In an open market economy, a sector will survive against many odds if the basic profitability and strength is present in its business model. All that is required is to allow a peaceful, disturbance and obstacle free atmosphere for them to operate. Whether the unit is MSME or not, it does not matter. All units deserve and need obstacle free , peaceful and disturbance free environment to operate. I feel what we have achieved in case of MSMEs is a “ concentrated bundle of confusion” as far as incentives and supports are concerned. Let’s have a look at our own experience in the past . Look at the rapid development of the Information technology sector which took place during the ninetees and thereon and carefully note that the unparalled growth of the sector took place during the period when the Government machinery was blissfully in the dark as far as nitty gritty of the sector was concerned . There were no Special Packages offered to them . The market forces and the entrepreneurial attitude of our businessmen drove the momentum .
In other words, encourage all the sectors and please don’t try to give special treatment in a complicated, half hearted manner
All that is needed to foster the growth of MSME sector is a decent , easy and fair atmosphere for all sectors which helps to set up , survive and also provides ease in closing down the operation if it is so required.
In brief, keep the environment of doing business cooperative , predictable,transparent and simple . without any exra special pumping.
