In its order on April 26, the state government asked all industries to cover 28 days of salary for Covid-affected workers and to ensure payments for daily-wagers at workshops and stores which are shut at this time.
(This story originally appeared inon Apr 28, 2021)NOIDA: Already battered by the pandemic-induced economic slowdown, micro, small and medium enterprises (MSME) in Gautam Budh Nagar have expressed their inability to adhere to the state government order asking industries to pay 28 days of salary to workers who are affected by Covid and unable to report to work. They accuse the government of transferring its responsibility towards workers to small entrepreneurs.
According to Laghu Udyog Bharti (LUB), MSMEs are already contributing to ESI benefits for workers and have no bandwidth to bear salaries for absentees. “We are yet to recover from the impact of last year’s lockdown and are already bearing various expenses like ESI benefits for our employees. To impose a pay-out of 28 days for Covid-positive workers is unfair,” Manjula Mishra, president of LUB, told TOI.
“We have already told the government that we are not in a position to bear this expense and we feel by this order, the government is outsourcing its responsibilities towards workers to the industry owners,” he said.
In its order on April 26, the state government asked all industries to cover 28 days of salary for Covid-affected workers and to ensure payments for daily-wagers at workshops and stores which are shut at this time. “The MSMEs are key contributors to the economy and they themselves need protection at this time,” Mishra added.
Echoing similar sentiments, Rajiv Bansal, national secretary of the Indian Industries Association (IIA), said, “The pandemic has hit the workflow of MSMEs and many factories are working under capacity, productivity has once again dropped. We are not sure if in such a situation any industry would be able to bear the 28 days of payment for the Covid-affected workers.”
“We, on the contrary, believe that the government should arrange free vaccination for all workers at the earliest at locations close to factories,” he added.
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Fintech solutions to small business credit woes
Innovative models like invoice discounting are helping MSMEs overcome their perennial fund scarcity.
All the things I could do if I had a little money” goes a line from the song “Money, Money, Money” by the Swedish pop group ABBA in the 1970s, a humongous success in its time. It is a sentiment those running micro, small and medium enterprises (MSMEs) would heartily endorse. MSMEs are a vast and diverse category of nearly eight crore units contributing around 35 per cent of GDP, but almost all of them have one feature in common – they find it hard to raise finance. Unable to satisfy the rigorous lending criteria of banks and non banking finance companies (NBFCs), weighed down by buyers’ delay payments and suppliers clamouring for quick settlements, most find themselves struggling for working capital, and can hardly think of capacity expansion, even when their businesses are doing fairly well. The MSME credit gap has been estimated at Rs 16 lakh crore ($215 billion).
Can fintech companies come to their rescue? What are the challenges MSMEs face in going digital and taking advantage of fintech solutions? How can fintech companies reach out to them? To discuss these and related questions The Economic Times and Mastercard convened a virtual discussion of experts on ‘Fintech Solutions to Small Business Credit Woes’, moderated by ET Senior Editor Alokesh Bhattacharya and Senior Assistant Editor Suchetana Ray.
“The credit gap of MSMEs is huge for four reasons,” said Anil Bharadwaj, Secretary General, Federation of Indian Micro, Small and Medium Enterprises (FISME). “Such units have few assets to use as collateral, they have few stable sources of revenue, they have liquidity problems, and for lenders, there is information asymmetry.” It is in correcting the last that fintech companies can play a crucial role, by collating the transactions MSMEs undertake – but only provided the MSMEs digitalise, moving their transactions online. “Financial statements of an MSME do not give the information about why it needs credit, especially working capital,” said Nitish Asthana, President and COO of fintech company Pine Labs. “Fintechs have data on how a business works, and this data can complement that which these enterprises submit to banks.”
The demonetisation of November 2016, and the continuing Covid-19 pandemic, has already weakened the resistance many small businesses initially had to non-cash dealings. “In 2016-17, we had less than three million acceptance locations in India acquired over three decades most of which were in metros,” said Rajeev Kumar, Senior Vice President, Market Development, South Asia, Mastercard. “Today, we have 8.5 million such locations, most of the additions coming from Tier 2 to Tier 8 towns. The growth has been enabled by fintech companies, who work as payment facilitators, partnering with banks and acquiring merchants for them.”
Once small and medium businesses have a record of their transactions, there are many innovative solutions fintech companies have devised to make them more eligible for credit. Foremost among them is invoice discounting, in which the pending invoices (receivables) of the business are used as collateral. “Invoice discounting is a big boon for small businesses, enabling them to get at least working capital loans,” said Kalpana Balasubramanian, CEO and Chief Thinker, Grant Thornton dGTL.
In 2014, the Reserve Bank of India introduced the concept of a Trade Receivables Discounting System (TReDS), which could provide MSMEs an institutional mechanism to facilitate the financing of their invoices (receivables) through multiple financiers on a secure electronic platform. Three such platforms were subsequently granted approval for such transactions, one of them being M1Xchange. Sundeep Mohindru, M1Xchange’s CEO, noted how rapidly the concept had gained ground among both lenders and MSMEs. “In 2017-18, when we began going to banks to suggest digital invoice discounting, they said it would never work,” he said. “But today there are 35 banks vying for business with us. Invoices get vetted within minutes, the best bid is selected and the credit gets transferred without any paperwork or physical meeting.”
MSMEs have been equally enthused, especially after the pandemic multiplied their cash flow problems manifold. “Before the lockdowns began, we had MSMEs from around 350 towns across the country participating,” said Mohindru. “Now it is 612 towns. Even small companies in Tier 3-4 towns are putting their invoices on their phones and getting discounting.” But he regretted that public sector units – and a few leading corporate houses – were not permitting their MSME suppliers to put up pending invoices online to raise credit.
“A change of culture is required,” he said. “Once invoices are displayed online, everything becomes visible and there is pressure on these companies to pay on time,” said Bharadwaj of FISME. “They can’t get away with squeezing their suppliers. But the power equation between large corporate buyers – be they public sector or private – and their MSME suppliers is such that the latter dare not go against them.”
Not only does invoice discounting get MSMEs the credit they struggle to raise otherwise, it does so at a reasonable price. “By shifting the credit risk through invoice discounting from the MSME to its purchasers, the risk is lowered, since the purchasers are often established corporate houses,” said Subhash Chandra Garg, Former Economic Affairs Secretary and Finance Secretary, GoI. “Everyone gains.” The coming years are likely to see fintechs facilitating MSME functioning even further. “We already launched the ‘tap on phone’ solution in India last year which enables merchants to accept card-based payments using their smartphones alone, they no longer need POS machine hardware,” said Rajeev Kumar of Mastercard. “We are now overlaying it with a solution from our fintech partner Zoho, which will enable MSMEs to manage GST compliance and other back office operations using only smartphones.”
It was noted, however, that only MSMEs of a certain size were being able to take advantage of the support fintech intervention offered. Most of the micro enterprises, around six crore of the total of eight crore MSMEs – many of them one-person businesses, unregistered, often operating from home – still remained outside the formal banking system. “They need small amounts of money for short durations, but because they have no documentation, banks do not entertain them, and they have to borrow at usurious rates,” said Bharadwaj of FISME.
Ex-finance secretary Garg noted that while the government’s Emergency Credit Line Guarantee Scheme, announced in March 2020, immediately after the first pandemic-related lockdown began, had indeed helped the bigger MSMEs recover, it had nothing for the really small ones. The scheme provided an additional 20 per cent credit to MSMEs, but with the bulk of MSMEs having no links with banks at all, only around 45 lakh among them were able to take advantage of it. “About 60-70 pe rcent of the micro units were very badly hit, their businesses shattered, but because the government had no data on them, no interventions could be made to support them,” he said. But he added that even such units could be helped if they digitalised and opened their accounts up to fintech solutions. “They will embrace digital once they realise that having a record of receivable and payables helps raise money at lower rates,” he said.