ET, in the backdrop of soon-to-be-released interim budget 2019 by the current PM Modi-led government, spoke to Anil Bhardwaj, Secretary General of Federation of Indian Micro Small & Medium Enterprises (FISME), an industry-wide umbrella organisation representing a wide section of the Micro and Small & Medium Enterprises (MSMEs). Excerpts:
ET: Access to finance is a serious impediment to MSMEs’ growth. What is FISME’s wishlist for Finance Minister Arun Jaitley this budget?
Anil Bhardwaj (AB): As part of FISME’s regular yearly exercise, a number of pro-MSME sector suggestions have been presented to the FM this time. To actively support ‘Medium’ enterprise, we pitch for specific support measures for units/accounts having exposure greater than Rs 5 crore. Further, fresh guidelines needed to be issued on aspects such as dilution and eventual freedom from collateral, performance guarantees (PG) and the treatment of non-fund differently from fund-based limits. MSMEs should be considered at par with financial creditors and their dues should be secured in IBC and guidelines to be issued for Credit Rating Agencies for BLR rating. Also, since BLR-external credit ratings are becoming a drag and tool for blackmailing, Credit Rating Parameters (CRP) need to be defined by RBI to bring transparency to the entire process.
Trade credit is one of the most important forms of financing. It is greater in volume than short-term bank credit in nearly all developing and industrialised countries. However, in India trade credit is steadily declining due to a host of reasons the prominent being the loss of trust on cheque as a negotiable instrument. The trade credit has almost dried up since demonetisation and GST. As a solution, I would suggest, requisite rules need to be made to ensure that a complaint under section 138 of Negotiable Instrument Act can be resolved in a week’s time. Many sellers would be ready to supply goods on credit due to the remedy that will be available in the shape of a post-dated cheque. Naturally, this will give a big boost to the culture of trade credit.
ET: In recent times, FISME has advocated for enhancing the Trade Receivable Discounting System (TReDS) Exchange. Why do you think this is important?
AB: TReDS platform is an important initiative for the flow of funds to MSMEs. It has, however hardly taken off because large corporate buyers are not ready to accept supply bills or even issue NOA to the sellers. Invoices as such cannot be converted into a financial instrument for trade on the platform. I believe, a legislative measure is essential for the scheme to succeed – mandatorily treating supply bills as “accepted” after a lapse of a certain prescribed period. (it is worth noting, as per World Bank, a regulation covers similar procedure in China and is said to be working satisfactorily.)
ET: While some of the teething and compliance related woes seem to have eased now, do you have any GST-related suggestions to the FM?
AB: While complimenting the Government for carrying out one of the biggest indirect tax reforms by implementing GST, we would like to flag a couple of important issues. We believe, GST is a game-changer and all stakeholders have been on a learning curve. The MSMEs, who had to adopt and implement GST on their own, learnt by trial and error. Obviously, there would be mistakes initially during the learning phase. Hence, we believe government need not act in panic and take unduly harsh measures when dealing with compliance lapses during this phase.
Another relevant point worth highlighting is that there are items outside still outside the ambit of GST. For example, electricity is outside GST and this breaks the chain, which in turn leads to leakages. Further, there are still cases of pending refunds due to drawback issue in Integrated Goods and Service Tax (IGST) that need to be resolved soon.
ET: NPAs in MSMEs is a growing concern. Do you see any flaw in the Govt’s process of identifying such cases?
AB: Increasingly NPAs are becoming a threat to MSMEs. In our recent meet with RBI Governor Shaktikanta Das, we have asked for setting up of a separate track for dealing with non-wilful defaulters, classification of accounts into viable and non-viable categories and creation of a viable, revival scheme for stressed MSMEs.
Further, regarding non-wilful MSME defaulters, I believe, the present system and what is practiced on the ground are poles apart and need to be thoroughly investigated, reviewed and overhauled to serve the purpose of the system, which is noticing of incipient (developing) sickness and addressing those in a given time. The biggest curse for bonafide borrowers is the dithering on part of the bank managers and the higher officials in taking decisions, though the manager cannot generally be faulted. Currently, the situation is that the manager and the debtor both try to hide an irregularity in the account as long as possible.
The laudable objective of the banks and the regulator to identify sickness in the earliest phase is not being achieved in the current dispensation, with the existing policy, systems-instructions in place and absence of mandatory timelines. As the time in decision-making extends, the borrower entity gets into deeper difficulties, making its rehabilitation more expensive. The underlying reason is misalignment between systems & procedures and the action plan to achieve the intended purpose. The relevant department must involve borrower representatives and all stakeholders to go to the root cause and suggest a way out of the abyss. We hope the FM, in his budget speech, announces certain measures to change the status quo.
ET: Any suggestion to help turn the Insolvency and Bankruptcy Code (2016) pro-MSMEs? Corporate Insolvency Resolution Process (CIRP)/ Liquidation procedure has helped the sector, hasn’t?
AB: The Insolvency and Bankruptcy Code (2016) is a giant step in re-deploying stressed assets in the economy. But, during the Corporate Insolvency Resolution Process (CIRP)/Liquidation procedure MSME are categorised as “Operational Creditors” meaning have negligible participation in the entire process under IBC. There is no statutory protection of their payments which was guaranteed to the MSME under MSMED Act under the resolution plan and/or liquidation.
The unfortunate fall out of this anomaly is that corporate NPAs will spill over to MSME NPAs. Hence, a suggestion is that the Ministry of Corporate Affairs in consultation with Ministry of Law and Justice should pass appropriate clarifications/changes to ensure the creation of a separate sub-category of MSME within the Operational Creditors and accord the MSMEs with special rights of recovering full payments due against the companies facing CIRP or Liquidation under MSMED Act. Further, the government should accord MSME the status of Financial Creditors under IBC (2016) and accord the MSME with special rights of recovering full payments due against the companies facing CIRP or Liquidation under MSMED Act.