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The Indian government has tried to protect its most vulnerable enterprise group—the micro, small and medium enterprises (MSME) sector—from the fallout of covid-19 by redefining what constitutes such enterprises, and providing a relief package under the Aatmanirbhar Bharat Abhiyaan. A big challenge for policymakers, as also other stakeholders such as lenders to these MSMEs, is the lack of adequate signals from ground-level data, both structured and unstructured.

We undertook a deep and extensive research study of the financial impact of the pandemic among micro and small enterprises, which, as per the annual report of the ministry of MSMEs, accounted for 99.92% of all MSMEs in 2018-19. The basic data for this survey was provided by Magma Financial Corp, a non-bank financial company registered with the Reserve Bank of India as an asset finance company, and with a strong presence in rural and semi-rural India. The survey was administered by Magma in the second half of May 2020, when the lockdown had been partially lifted across India. It was carried out across a sample of 14,444 mostly small and micro enterprises to understand the financial impact of the pandemic on these enterprises, and their business outlook after the pandemic. It also sought to study their borrowing habits, especially whether they had availed of a loan moratorium, and whether they would wish to avail of loans.

We sought to analyse the results in terms of the size of businesses, measured by their annual turnover. Micro and small businesses made up close to 75% of all respondent firms. Our findings are interesting both from the perspectives of policy and lending. We examined the results at both the macro level and at a more granular, disaggregated level.

At a macro-level, the impact of the pandemic on the earnings on these enterprises, as they see it, does not seem as bad as once feared. Half the respondents stated the likely impact to be between 20% and 50%, while 83% said that this impact is likely to be less than 50%. However, given that more than half these firms have turnovers of less than 10 crore, the impact on their cash flows is likely to be far greater, as also on aspects of business such as growth potential.

While the business outlook is negative for 37% of respondents, the proportion of those for whom it is neutral, at 36%, is likely to make a difference in the months ahead. Overall, their business outlook could be termed ‘Not Negative’, with 62.67% saying that their business outlook is either neutral or positive. Such optimism may have to do with the commencement of business operations, as was reflected in the survey. Of all respondents, 58% stated that they had already started their business when asked if they had.

Respondents were also asked to rate themselves on a scale of 1 to 5 on their perceived financial health, with 1 being “best" and 5 being “worst". As many as 76% of the MSMEs surveyed rated themselves at 3 and above, yielding a financial health score that is relatively optimistic. Just about half the enterprises said they had a loan requirement, while more than half said they had availed of a debt moratorium, either from Magma or other lenders.

At a granular level, we found that size matters. Among micro and small enterprises, as the turnover of the firms increases, perceptions of a negative impact of the pandemic on earnings is seen to reduce, though just marginally. Smaller firms, unsurprisingly, have a business outlook that is more negative than that of others. But surprisingly, size also seems to have had a role in the resumption of activities after India partially lifted its lockdown, with larger firms resuming operations sooner.

The larger the firm, the better is its perceived financial health, as measured by the financial health score. Thus, for instance, 14% of MSMEs with turnovers up to 1 crore reported a financial health score of 1 and 2, while that proportion for firms with turnovers of 50 crore and above was 17.4%. More than 50% of the sub- 10 crore turnover businesses stated that they would need to take a loan in the coming months. Just over 25% of the respondents that have availed of a moratorium from either Magma or other lenders have less than 10 crore in turnover. About 11% of these businesses availing of a moratorium have turnovers between 10 crore and 50 crore.

Thus, even as the government has announced changes in the classification of MSMEs, based now on a composite criterion involving investment and turnover, policymakers and lenders need to understand the business-size dimensions of the pandemic’s impact on their earnings, outlook and debt behaviour. A greater proportion of enterprises choosing to avail of a moratorium, rather than fresh loans, for example, may indicate that MSMEs are currently in survival rather than investment mode. Also, the greater the financial health score as rated by themselves, the greater their chances of not reneging on repayments.

Policy measures such as debt moratoriums and the government’s underwriting of MSME loans may need to evolve for greater efficacy in the post-covid era, with a combination of structured and unstructured data serving as a basis for decisions.

This article is based on Magma-SPJIMR’s ‘Report on the Financial Impact of Covid on Indian Micro and Small Enterprises and their Outlook Amidst the Pandemic’.

Tulsi Jayakumar & Anshul Verma are, respectively, professor of economics and associate professor of finance at SP Jain Institute of Management and Research.

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