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Imagine receiving your salary with a lag of six months. Month after month. In time, you will tailor your savings and spending cycle suitably. Now, imagine waking up one day to learn that six months will now become nine months and your employer will pay you only partially. That’s the predicament facing many of the 63.4 million micro, small and medium enterprises (MSMEs) in the non-agricultural space, 99% of which have made a capital investment of less than 25 lakh in the business.

The last time MSMEs saw their average receivable days—the time from raising an invoice to receiving the payment—spike from six months to nine months was during the global credit crisis of 2008-09. That time, the cash taps went off, but business was still on. In this pandemic, business has been shut for a month now. It’s threatening to cripple a segment that, as per government numbers, employs about 111 million (about 30% of India’s labour force), and contributes about 28% to gross domestic product (GDP).

The main reasons that cripple MSMEs in ordinary times were documented in a report filed by a U.K. Sinha-led committee on MSMEs to the Reserve Bank of India (RBI) in June 2019. As part of the initiative, the committee studied a set of 100-odd MSMEs that had defaulted on bank loans. Liquidity issues arising from delayed payments and unsold goods were cited as the biggest reason (41% of cases), followed by loss in business.

Nearly every reason that caused that set of 100-odd MSMEs to default on their loans is in play today. About 71% of MSMEs failed to pay wages, fully or partially, for March, according to the All India Manufacturers Organisation (AIMO), a trade body with a focus on the MSME segment.

They are also waiting on the central government for a relief package. As they wait, they are seeing examples of benevolent states overseas: paying part of worker wages (United Kingdom, Malaysia, and Saudi Arabia), savings in rent and utility bills (South Korea and Singapore), or providing low-interest loans and loan guarantees (most countries that have announced a rescue package).

So far, India hasn’t announced direct measures that address specific problems for businesses, especially MSMEs, in this extraordinary time: how to pay salaries when there are no revenues, how to buy raw material when things resume, how long before payments come in. What it has announced are indirect measures that rely on others to deliver.

In late-March, the Centre allowed MSMEs to delay GST returns for the months of February to April until June, without drawing interest, late fees or penalties. It accelerated settlement of income-tax refunds. Last weekend, the central bank put more money in the hands of banks, urging them to lend onwards to enterprises that need cash. But it’s left to the banks to do so, and they have been tight-fisted.

Large businesses have cash buffers, and can absorb the blow of such a disruption. Take the 30 companies that comprise the BSE Sensex, the bellwether Indian stock index. According to equity research portal Screener.in, the average debtor days—the time it takes to realize a payment—of these 30 companies was 30 days. For MSMEs, this figure was 220 days for 2017-18.

Worse, it had doubled over 2016-17, the year in which the centre took the radical step of demonetisation, making 86% of currency in circulation void overnight. A longer wait for payments lengthens the working capital cycle—the time it takes to convert the total net working capital (current assets less current liabilities) into cash. Businesses try to manage this cycle by selling inventory quickly, collecting revenues from customers quickly, and paying bills slowly.

To plug cash gaps, they would like to borrow. But their access to the formal banking system is weak. In spite of accounting for 28% of Indian’s GDP, the share of MSMEs in total outstanding bank credit in 2017-18 was just 6.3%.


The UK Sinha committee estimated that the overall supply of finance from formal sources to MSMEs at 14.5 trillion, and the credit gap to be 20-25 trillion.

That’s partly because they are not registered as companies—96% are single-person proprietorships, according to a 2017 NSS survey on unincorporated non-agricultural enterprises —and don’t have historical financial information. Yet, they are inextricably woven into the economy, and the fear today is that a collapse of MSMEs could have a cascading effect. Besides supply chains, a ripple effect might also be felt on the banking sector (for example, the MUDRA loans) and livelihoods.

Both in terms of number of units and employment, the MSME sector is divided almost equally across three broad areas: manufacturing, trade, and other services.

They have a nearly equal rural-urban split. They are also spread out across states, though 10 states account for three-fourths of MSMEs by number. The scale and sweep of MSMEs is too much to ignore.

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