Last week was a ‘red-letter week’ for micro, small and medium enterprises (MSMEs) in India. The government set out plans to amend the existing legal framework for MSMEs to tackle some of the biggest bugbears facing the sector: delayed payments and disputes over them, minor penalties and compliance burdens. The amendments, likely to be introduced in the monsoon session of Parliament due to start on 21 July, are long overdue.
The existing law on disputes arising from delayed claim payments is both cumbersome and time-consuming. MSMEs must first file a complaint with micro and small enterprise facilitation councils based in state capitals. These councils must then verify the complaint and refer the dispute for out-of-court resolution. This entails going through the entire gamut of mediation and conciliation, and if the dispute persists, arbitration. It spells needless delays.
Not to be left behind, the Reserve Bank of India (RBI) also eased on-boarding rules for small businesses on trade receivables discounting system (TReDS) platforms last week. MSMEs often face constraints in obtaining finance, particularly in converting receivables into liquid funds. TReDS platforms let these businesses discount their invoices and get instant working capital from banks and non-banks without collateral.
The final framework, which comes into effect immediately, is aimed at making the system more efficient while easing compliance. So capital requirements for authorized entities have been streamlined with those of other non-bank payment system operators, the on-boarding process for MSME sellers has been simplified and financiers have been permitted to avail credit guarantee cover for exposures on TReDS.
Given the growing role of MSMEs in India’s economy, these changes do not come a moment too soon. Globally, MSMEs make up 90% of businesses and account for about half the world’s employment. In India, however, their share of GDP is a low 31%, though they account for close to 50% of India’s merchandise exports and employ over 320 million people.
Over the years, government schemes, such as Mudra (Micro Units Development and Refinance Agency) and CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises), have helped enhance their access to formal credit. Loans to the MSME sector have grown at a compounded annual rate of 15% in the last five years, higher than the 13.7% overall growth in bank credit over the same period.
Meanwhile, tech-enabled platforms such as the Unified Lending Interface—which lets lenders assess an MSME borrower with the help of digital data like GST filings, bank statements, utility records, land records, etc—grant them a single window based on borrower consent, rather than depend on laborious paperwork and physical verification. In the startup space, which bustles with MSMEs, this could be a game-changer.
Despite their sizeable economic and social contribution, MSMEs continue to face many challenges, including feeble access to finance, weak integration into regional and global value chains and a limited ability to innovate and adopt new technologies. They are also highly vulnerable to economic and external shocks.
In a volatile global environment, marked by uncertainty and rapid technological change, strengthening the resilience and competitiveness of MSMEs is critical to realizing their full potential. Recent efforts by the government and RBI should go a long way towards that.