The Micro, Small & Medium Enterprises (MSME) sector is the backbone of the country’s economy. The sector contributes 29% of the GDP, 50% of export and employ 11.10 crore people of India. What will be the financial implications of the coronavirus disease (COVID-19) on the vital sector, and how is the MSME-focused Prest Loans placed to help out the players. Financial market specialist and the company’s founder & CEO Ashok Mittal weighs in:
What is the nature of the problem the MSME sector is facing?
The MSME sector was already undergoing stress owing to a slowing economy fuelled by various economic and social reasons. The sector will stare increased threat as the novel coronavirus broke out globally, including India. The business activities of the sector have completely stopped due to the government’s 21-day lockdown. The MSME sector may be the biggest affected sector as it is more people-centric and less automated.
The MSME segments including manufacturing, trading or services have been hit as no business activity is happening and also looking at uncertainty in the near future. Coupled with low demand, the sector will also experience a dearth of manpower as migrant workers returning to their native places. It will take a long time before they return and start working again. While travel & tourism, non-food consumer durables, apparels and automotive segments of MSME are hardest hit, pharmaceuticals, pharmacy, food (FMCG), packaging, etc, will either be not hit or realise the positive impact.
How are government’s fiscal relief package and Reserve Bank of India’s (RBI) extraordinary monetary measures likely to help the sector?
The swift action by the government to support poor people by offering various Direct Benefit Transfer (DBT) is appreciable. The Ministry of Finance and RBI have also announced various fiscal and monetary relief packages which will help the MSME segment to some extent. The relaxation in filing various regulatory data, reports, returns, and reduction of penalty is quite supporting though in my view that is not sufficient. The government should have totally waived off any penal interest on all kind of filing for 3 months. The government should also reduce the GST rates at least 50% for the next 6 months to support the consumers and small businesses.
Another important announcement by RBI is to allow all lenders (Banks and NBFCs) to defer EMIs for 3 months. The deferment not to be considered negative by rating agencies is a welcome step. This will help the lenders to keep their financial position in a manageable position. However, the industry has asked for some more clarifications and support considering the practical ground-level challenges faced by MSMEs. It should be noted by borrowers that this circular is not a waiver of loan EMI; this is an option to lender hence not an automated deferral of EMI, the borrower will have to pay interest for delay or deferral in EMI payment hence they should try and pay as much as they can. The only takeaway here for borrowers is that the delay in payment may not be reported to Credit Information Bureaus (CIBIL); so it will not impact their credit track record.
How should the sector reposition itself to survive the present crisis?
The MSME sector would need to think out of the box and reposition itself once the lockdown period is over to come back to normal very fast. One way of doing that would be to control the costs, they will need to cut down on all kind of unnecessary expenses be it related to marketing, branding, people, rentals, etc. Another way would be to conserve the cash in hand, so most of them should defer expenses whatever can be, for example, payment of rental and service provider can be done with a delay or in parts. They should also clear whatever stock they have to bring cash in the business. The MSME players have been very quick in learning to turn around their business.
How is Prest Loans lending a helping hand to MSMEs?
We have issued various audio and video advisories to our customers (borrowers) educating about all the steps taken by the government as well as RBI circular regarding deferment of loan EMIs. We have advised them to contact us in case they have challenges in repayment of loan EMI and we shall consider their requests. Further, we have also decided to support the existing customers with satisfactory track record by providing them with an additional loan to meet their current working capital requirement immediately after the lockdown period. Prest Loans shall support its customers at this difficult time and wish them a safe life.