*****Targeting stimulus schemes for small businesses – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/targeting-stimulus-schemes-for-small-businesses/article65402076.ece

Access to formal credit is still a huge problem for small businesses

Access to formal credit is still a huge problem for small businesses | Photo Credit: M A Sriram

The Centre must build a digital infra using data science to reach credit to this vulnerable segment of the population 

It’s been more than two years since our economies were hit by pandemic induced lockdowns and unlocks. The debate on the effects of the strictest lockdown in the world has revolved around economic destruction, shape of economic recovery, the effectiveness of fiscal and monetary stimulus announced by the government and the RBI, and now withdrawal of some of these ultra-accommodative measures.

There have also been concerns about an impending inflationary situation caused by geopolitical unrest. We all know that the impact of Covid-19 has been wildly disproportionate, with volatile rates of unemployment, private consumption expenditure, and surprising movements in both stock markets and cryptocurrencies.

What about small businesses? Some anecdotal observations point to the disproportionate effect that Covid-19 had on the urban small business, including the proprietary food business (hotels and small outlets), pushcart vendors, miscellaneous street business, the gig economy, taxi drivers etc.

The informal economy

The informal sector of the Indian economy contributes nearly 50 per cent to the GDP and engages 90 per cent of the economy’s labour force. The uncertainties associated with possible lockdowns, unlocks, and the new virus variants have thrown their businesses out of gear. Under normal circumstances, these informal enterprises face two major challenges, i.e., shrinking demand and non-recovery of financial dues. One could guess what would have happened in the pandemic when demand shrunk and uncertainty of localised lockdowns and unlocks aggravated the demand deficit.

In this context, it is pertinent to examine the implications of stimulus for urban small businesses. Today, the high frequency indicator business has crowded the macro indicator street; but unfortunately, we hardly have any such indicator that represents the true picture of the mass informal sector of the Indian economy. The frequency of surveys of unorganised enterprises and employment is around five years in India.

The uncertainty regarding a possible lockdown, unlock announcements, and the State-wise lockdowns have thrown the business of the urban small business out of gear. It’s now that these businesses are somewhat getting back on track. It is important to understand the actual benefits those Covid measures may have created to kick-start the businesses of the urban unorganised sector. Most of the Covid related benefits announced were for rural areas barring very few for the ones in urban areas.

The only visible national scheme is the PM Street Vendor’s Atma Nirbhar Nidhi (PM SVANidhi) — a Special Micro-Credit Facility for Street Vendors. Launched on June 1, 2020, PM SVANidhi provides affordable working capital loans to street vendors to resume their livelihoods. This scheme targets over 50 lakh street vendors under which the vendors can avail themselves of a working capital loan of up to ₹10,000, repayable in monthly instalments in the tenure of one year.

As on April 21, 2022, the Centre’s data dashboard shows about 31.4 lakh beneficiaries who have been disbursed close to ₹3,302.8 crore under this scheme. Similarly, targeting to build a comprehensive National Database of Unorganized Workers (NDUW) in the country, the eShram portal was launched on August 26, 2021 which may be instrumental in offering last mile delivery of the welfare schemes for crores of unorganised workers countrywide. As on April 21, 2022, a total of 27.29 crore workers have registered in the portal pan India.

Besides these, all other measures are primarily meant for registered and organised businesses having access to institutional credit in some form or the other. According to the study by Institute of Social Studies Trust (ISST 2021), street vendors contribute a turnover of ₹80 crore a day to the domestic economy. As on date, there are roughly four crore hawkers in India and one-third of them are women street vendors.

Credit ‘excluded’

These small businesses may be registered but not ordinarily credit-included in the financial markets. Going by the 6th Economic Census, out of 22.65 million non-agricultural establishments in urban India, only 2.2 per cent borrow from financial institutions whereas 83.7 per cent are self-financed. Alternative sources of funding for those enterprises were private money lenders (0.3 per cent), loans from self-help groups (0.3 per cent), donations/transfers from other agencies (9.2 per cent) and financial assistance from government sources (3.7 per cent), highlighting their limited formal financial credit accessibility. Moreover, as found in a study by ADB (2016) more than half of the surveyed small enterprises in India were unaware of government schemes.

The own account enterprises (OAEs) especially in services like food business, rely on their savings, informal borrowing for both working capital and fixed capital. Some dipstick surveys indicate that some of them have continued to incur fixed costs only with some concession on rentals from landlords in pandemic time. But the loss of revenue has also led to significant depletion of their savings.

They do have an FSSAI licence, GSTIN number, PAN, a bank account to carry out transactions both cash and carry or online via Zomato or Swiggy. But they are not effectively financially included, or they are credit-excluded at the least. Most fiscal and monetary measures have bypassed them, or in other words, they are least benefited.

Here is a four-pronged plan to help small businesses in urban areas:

First, it is time for the government to think of data science-based solutions in providing fungible digital credit integrating GSTIN, PAN, and registration numbers such as FSSAI. Given the substantial progress in digitalisation initiatives, the Centre and the State governments could initiate such a market-based solution to make small businesses resilient to Covid-19 like shocks.

Secondly, though a few Fintechs are operating in Tier II and Tier III cities to serve the financial needs of small enterprises, their penetration is questionable given difficulty in borrower identification and credit profiling. To compensate the cost of sophisticated credit scoring algorithms for customised funding, Fintechs charge excessive fees which discourage small enterprises from accessing credit at exorbitant rates ranging from 24-36 per cent a year.

To break the impasse and make financing available to these small enterprises at affordable prices, the government must engage in building digital infrastructure using data science.

Thirdly, conducting a good number of case studies is very important.

Finally, increasing the frequency of the surveys of unorganised sector to biennial basis may aid timely policy intervention.

Acharya is Professor, School of Economics (University of Hyderabad), and Panda is Economist at State Bank of India. Views expressed are personal.

Published on May 10, 2022

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