Credit and Finance for MSMEs: The most important support that can be offered to MSMEs is the security of their jobs and payment. Addressing this issue of payment will bring about some relief to the sector on its own.
- By Ram Iyer
Credit and Finance for MSMEs: During this challenging period of lockdown, small business needs the most support and stimulus since it is the backbone of India’s economy. The most important support that can be offered to MSMEs is the security of their jobs and payment. Addressing this issue of payment will bring about some relief to the sector on its own. Businesses have to strive hard to keep the MSMEs surviving and offer them support in every way possible right from clearing their payment as soon as possible, extending credit period, paying advances to their suppliers, referring them to lenders to get access to finance or even offering liquidity options so that they can survive. Businesses should also offer any other non-financial support such as health benefits, constant communication and family support to ease the situation a little for them.
A major relief for the MSME sector will be a stimulus from the government at this point in time which will ensure an impetus for the sector during this tough period. Supply chains need to be re-started, migrant labourers need to come back to work in a safe and organized manner and consumer demand needs to be triggered. Another initiative that can be taken at this time is to incentivise MSMEs to produce medical supplies with a buy-back arrangement from the government.
- A stimulus package of Rs 10 trillion (Rs 10 lakh crore) would prove to be a big push to the MSME sector and there won’t be a debate around the survival of the sector anymore. This package can be released in a calibrated manner and slowly release into the economy rather than all at once. This will ensure optimum and economic use of the available resources.
- Such a package along with tax concessions would ensure greater liquidity for small businesses and cash in the hands of the poor, helping drive demand for goods and services. Taking inspiration from other nations, paying part of the worker wages, savings in rent and utility bills, or providing low-interest loans and loan guarantees can be an effective way to extend minimum support at the moment. The government can consider covering the salary cost of the workers.
- Policy measures that include longer loan repayment moratorium for small businesses and suspension of the Insolvency and Bankruptcy Code for companies for at least six months.
- In case of any large insolvency, arising out of cash and liquidity crunch faced by firms whose demand has declined, the government should intervene and avoid the same by way of providing a quick relief package. Several economists have endorsed the government scaling up its spending to help revitalize the economy, including by monetizing a portion of its debt.
- Other than the relief package from the government, banks should also be considerate by giving the MSME sector more time. Since there may be a delay in interest and instalment payments to the banks, they should be more patient and not declare their account NPAs. Banks should give them more time to pay interest and instalment without paying charges, treat them as regular accounts and allow them some grace period to fulfil the payment. Additionally, banks and NBFCs should provide not only moratorium but extremely low interest rates. Sustainable low interest rates is the need of the hour.
- The government must address the high collateral security leading to a denial of credit for the MSME sector. It is also the same case with the limit on margin money being extremely high. These combined factors ensure a lack of access to available credit for MSMEs.
One of the biggest help the Government can provide to MSMEs and other businesses is around taxation. The Goods and Services Tax is still a relatively new regime. Given the circumstances, some of the GST issues the MSMEs would face on account of Covid-19 are:
- Impacts on Accounts Receivable – GST invoiced is due and must be paid regardless if you have received payment from customers.
- Treatment of bad debts
- Cancellations or reduction of orders – Related tax invoicing and credit notes issues and tax accounting reconciliations etc.
- Cancellation of reservations – Hospitality sector, would need to consider the correct GST treatment.
- Change of time of services (with no change in fees etc.) – The time of supply rules for GST needs to be factored to avoid incorrect reporting.
The Employee’s State Insurance Corporation (ESIC) has given 30 days extended grace period to deposit dues of Feb-March, which is now extended to 45 days. Therefore, the date for ESI contribution for the month of February 2020 and March 2020 was extended up to April 15, 2020, and May 15, 2020, instead of March 15, 2020, and April 15, 2020, respectively. Like EPFO, the GST department can allow an extra grace period to MSMEs to deposit their dues. Due to the sudden disruption in working norms, ex. work from home, there is difficulty in filing any kind of returns on time, so the government should also extend the filing of all statutory returns by at least 60 days.
Relaxations in filing requirements, waiver of penalties, late fees, GST rate reductions, and speedy refunds are some of the indirect tax measures which the government may contemplate to counter the ill effects of this pandemic. With combined efforts from the government, banks, corporates and other stakeholders, there is hope that the MSME sector will emerge successfully from the challenges they are facing currently.
Ram Iyer is the Founder & CEO of Vayana Network. Views expressed are the author’s own.