When it comes to funding, traditionally the sector has depended on debt financing and despite several directives, the banks and financial institutions and the non-banking finance companies have remained very cautious and selective in providing the sector with funds. Taking this into account, the Government of India, as part of its fiscal relief measures, had announced a “Fund of Funds” scheme that aimed to infuse Rs 10,000 crore and support the 2.5 million MSMEs across the country. With this financial year’s union budget, the allocation to this initiative was also hiked for the year.The objective of the scheme is to provide MSMEs access to funds which will help them tide over the crisis. Available to all Triple-A rated MSMEs, the “Fund of Funds” will focus on MSMEs who do not have or are not eligible to procure funds from any other sources.
Will it help the MSMEs?
The Fund of Funds is indeed a step in the right direction. Intended to help MSME who are in their nascent stages, this fund proposes to buy up to 15% equity. It also aims to help MSMEs list on the stock markets, which will not only bring many such enterprises into the mainstream, but, with appropriate credit ratings, make them eligible to access finance from formal channels.
Additionally, a credit guarantee scheme, announced by the Government, will help MSMEs secure loans during the crisis. Traditionally the MSMEs have found it difficult to secure loans because of the higher credit risk associated with the sector. However, this guarantee augers well for the MSMEs as well as the financial institution which is extending the loan.
However, this Fund of Funds, because it is available to only Triple-A rated MSMEs, will not suffice for a majority of MSMEs in the country. This essentially means that for small traders, who have always found it difficult to access formal financial channels, the problem remains. The Performance and Credit Rating Scheme for Micro & Small Enterprises by the Ministry of MSMEs, Govt. of India, might be a long-term solution but it brings no succour for the smaller MSMEs in the current existential crisis which could sound their death knell.
The need for Regional Exchanges
If you look at the MSME landscape in the country, you will be left wondering at their skewed distribution across regions and states. The South, with approx. 7.7 million MSMEs employing over 19 million workers, accounts for the most MSMEs followed by North, West, East and North East.
Hence there is a need for Regional Exchanges to take the lead in funding MSMEs to help in putting money in the hands of small entrepreneurs based on their business size and requirement. Apart from Exchanges, there could be the possibility of opening the sector to Retail Investors through special schemes which makes them eligible for Income Tax benefits over and above the existing benefits and exemptions.
Regional Exchanges are important as they will not only help retail investors, from non-metros and mini-metros, get investment opportunities, but will also be in a position to better understand businesses specific to their respective regions. This will help them in better valuations; a more granular understanding of the issues and challenges faced by the local MSMEs; better understanding of cash flows, which could be seasonal; and, a better understanding of the current and future potential of businesses which could have an impact on their credit-worthiness and their ability to sustain the business. These Exchanges could also play a more effective role in not only providing the local businesses access to formal channels, but also provide them with financial guidance.
Why do we need to build an alternate ecosystem for MSMEs
Often quoted as the place where all great entrepreneurs started their journey, the MSMEs form the “bottom of the pyramid” of the Indian economy. They play a pivotal role in bolstering the economy and, therefore, need to be carefully nurtured with policies and regulations which will help and sustain them.
With a booming startup ecosystem and news of record-high fundraising activity along with a surge in the number of accelerators/programs by well-known VC funds, startups often steal the spotlight from MSMEs. However, it is here that the Government and private players need to provide resources –both monetary and human—to MSMEs to support the rise of the entrepreneurial ecosystem in India. Feeding MSMEs that often interact with value-chains at the grassroot level not only acts as a substantial jumpstart to this grassroot economy but also fosters a culture of risk-taking, innovation, and entrepreneurship – a step further in the direction of bettering India’s edge in global markets.
(The writer is Venture Lead, SOLV)