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Liquidity to MSME Sector – Intent and Implementation

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Article by Mr. P Udayakumar, Director-Planning & Marketing, NSIC

The COVID 19 has brought New Normal in all walks of life including the much-debated MSME Sector. The optimists and pessimists have rolled out different scenarios for the MSME sector highlighting the vital factors like Liquidity, Migrant Worker issues, Fresh orders, uncertain exports, EMI payments, unfriendly banking support etc.,

A comprehensive survey published by AIMO dissects the pros and cons of the MSME sector and self-employed. The findings are very gloomy setting an alarming bell for a quick revisit of some of the structural fault lines in the banking sector in the country which is the life support system for the revival of the strategic MSME sector which the backbone of Indian Economy.

According to the survey, 35 %  of the MSMEs and 37 % of the self-employed see no scope of survival of the MSME sector which employs about 150 million people and about another 130 million are self-employed. It appears that only around 45 Lakhs MSMEs are likely to get the sanction of the EGCLS loan as compared to the  6 Crore official MSME data raising question mark on the future of these balance Units when there is no alternate Financing mechanism available in the country.

The AtmaNirbhar Financial stimulus package which is considered to be one of the largest ever support in India is yet to reach out to all the struggling  MSME units as the beneficiary units for the Rs 3 lakh crore collateral-free credit have been mapped by the banks based on the asset quality and track record. According to the AIMO survey “ Only accounts up to SMA1 are given additional Finance needs whereas the crying MSMEs are those with SMA2 a/cs who may be temporarily irregular as the sector started failing due to various reasons and global recession since 2019-20”. Banks, as usual, follow the rules strictly as they are driven by the procedure to safeguard the interest of the banks. Off course, the one-year moratorium, 4-year repayment and 100 % credit guarantee cover are no sweeteners for the SMA2 accounts.

According to media reports,  Banks have cumulatively disbursed close to Rs 1.15 lakh crore to 24.70 lakh MSME accounts under the Rs 3-lakh crore targeted emergency credit line guarantee (ECLGS) scheme announced by the government in June to help small businesses survive the pandemic shocks, according to a CARE Rating report. The cumulative sanctions touched 54 per cent or Rs 1.61 lakh crore of the target of Rs 3 lakh crore as of September 3, as per data collated by the agency. Though the Finance Ministry is monitoring the progress, the huge difference between sanctioned and disbursements under this ECLGS is a matter of concern and this underlines the mismatch between the bankers and borrowers.

As the demand creation for the sector and reengagement of the migrant labour are the priorities of the Government, we now need to adopt a new normal in the lending domain also to safeguard the lender and borrower. With this intent, a radical shift in the lending activity for the MSME Sector is suggested which can evolve after addressing the teething troubles.

After all, if there is a will there is a  way in the new normal scenario !!!


Hence it is suggested to have as many credit guarantee trust/unions which need to be created with the corpus of Rs20000 Crore to Rs.1 lakh crore(it can be of smaller size also for managing Micro Fin agencies) by raising contributions from MNCs / FDIs/ Portfolio investors, Public Sectors / Private Corporates / Pension Funds/ State Governments RIDF funds, and other unspent budgets etc. This trusts can be created based on sectors, products, Activity, state govt etc. and also based on the nature of credit requirement (capital/working capital / or for wage payments, GST etc.). The credit guarantee trusts will provide the guarantee support to the Banks and NBFCs for extending the credit and the lending institutions will work out the lending procedures in a detailed manner based on the comfort of the Credit guarantee trusts. Stake holding by  FDIs, MNCs, Corporates, PSUs will form the corpus and this can be further leveraged by portfolio investments, borrowings and listings through Stock exchanges. It is to be noted that most of the developed countries are getting ready to exit China and shift to the Far East and India depending upon the red carpet treatment by these countries and faster decision making.

FDI inflows to India during the year 2014-15, 2015-16, 2016-17 and 2017-18 were  US$ 45.15 billion, US$ 55.56 billion, US$ 60.22 billion and US$ 60.97 respectively. This indicates the preference of foreign companies to invest in India in the immediate past. Hence, it is suggested that all FDIs/ portfolio investors should be mandated to participate in this credit guarantee trust to the extent of 5% -10% of their investment as stakes in the trust as per their sectoral or products or state preference. This can have an exit clause after a minimum lock-in period so that they can opt-out when want to quit or disinvest from the venture.

Similarly, all other stakeholders will also participate in the trust besides the MSMEs with nominal stakeholding like a Cooperative institution (without any veto power). The Credit Guarantee trust will act as a back-up for any failure/default of the MSMEs when borrowing funds from the banks after closely monitoring the performance. The credit guarantee trust will be run by professional CEOs with the stake-holders as trust members.  Besides, the trust will have professional executives who will also be having a say in the management control or monitor the performance of the MSMEs availing credit from banks.  The credit guarantee trust will also source funds from banks, foreign line of credit and through commercial papers etc. The beneficiary MSME units will have the option of migrating from one trust to another trust depending upon the service and fees. This can bring in efficiency and price competitiveness among the credit trusts.

Post COVID-19 it is clear that most of the developed countries like Japan, Europe, USA etc. are keenly looking for exiting China and mostly they would like to have a shift to India and hence this FDI opportunity will create a huge corpus for the credit’  guarantee trusts by adopting the above pattern. As the smaller countries in Far East Asia are likely to provide the much-needed comfort to the countries like Japan, South Korea etc for investments, India needs to create such alternate funding strategies to facilitate collateral-free funding to the MSMEs (both existing and new ones). Besides, the huge stashed black money in the offshore can also be tapped in this trusts by offering good long term returns and immunity provisions as a one time measure.

The MSME sector and Ministry of Commerce and DIPP may form a task force for following up with the potential countries for attracting the FDIs and multilateral agencies for setting up anchor industries and MSME ancillary units with Tier 1, Tier 2  and Tier3  layers with credit guarantee trust support for the ancillary units.   The state government may provide further incentives to attract FDIs.

Besides the fund of funds proposal of Rs 10000 Crore under creation as per Mr UK Sinha committee can also be leveraged for nurturing the  Startup culture with simplified procedures and safeguards..

Monitoring of the performance of the  MSMEs borrowing funds under credit guarantee trusts:

This guarantee trust executive will be closely monitoring the MSMEs for their efficiency and performance on a real-time basis and in case of any potential defaults or low performance, the trust will reserve the right to take over and auction the same to any buyer including to foreign entities depending upon FDI cap limits. The Union Govt may stand as Sovereign guarantee for the CGTs after a thorough scrutiny of the constituents and the structure of the CGT.

The finer working of the Multiple CGT unions and its compliances for meeting the statutory and RBI guidelines need to be worked out by experts. A model can be evolved by which the underperforming MSME can be taken over or disposed of off by the Credit Guarantee union if the performance does not improve after two alerts. Then the unit should be kept under intensive monitoring for a turn around before sale of the stakeholding. Successful units can be handheld for about three years and after that, they should be asked to mandatorily list in the MSME exchange so that the proceeds will go to the stakeholders and the funding agency(Banks or NBFCs or HNIs).

Similarly, credit guarantee trust concept can be considered for export guarantee mechanisms also by creating more no for boosting up the much-needed exports.

Monitoring and fixing a cap on the Bank credit on products and services of MSMEs  to maintain the optimum competitiveness   and volume of production :

It is often noticed that any sunrise sector and new products with high demand attract multiplication of MSMEs due to limited-entry barriers seeking Banking credits and creating excess capacities leading to undercutting of prices and dilution of quality.

In order to avoid creating excess capacities and undercutting a national level, MSME Investment Bureau should be set up which will have a real-time database of the sector/product wise Bank credits given already and the  Demand supply statistics of the product & service so that the Startups and MSME units will prosper with decent returns atheist for a period of 5 years. Some of the products and services should be reserved only for the Micro sector by appropriately revisiting the  MSME criteria.

Besides the anchor Industries should be developed across states depending upon the raw material availability, port facilities consumption pattern etc so that the MSME ancillaries boom in this area offering self-employment opportunities.


The Migrant labours who mainly belong to SCST and minorities need to be mapped for their skill sets and village level industrial clusters can be created by the State agencies for converting their skill sets gainfully, in areas like Textile, Agri /Food products, etc which can be a major economic livelihood activity locally. Besides a workers data bank also can be created for an organised engagement of this invisible force of the modern economy.

Creation of cluster Mapping:

It is also suggested that Indian clusters and industrial estates can be connected to successful clusters in abroad like European nations, USA, S. Korea and Japan for creating and shifting major manufacturing industries to India on a mission mode. It is also expected that most of the industrial clusters and entrepreneurs in the USA, Europe, far-East will be diluting or quitting entrepreneurship who hold a lot of brand image, goodwill capital and market access. These entrepreneurs can be engaged through the Cluster Matching strategies to provide design, technology and also capital to the clusters in Indian cities and villages in the chosen states cum cities so that “ Make in India”   becomes a booming activity and become active exporters. This can also create Indian Global Brands in the future. The Chinese loss should be India’s gain. Dedicated industrial parks and export zones also can be created under the cluster matching concept. States can also compete in attracting the cluster partners. MSME Ministry can identify the various clusters available world over through the various bilateral agreements signed and provide the connection to the domestic and potential clusters in technology sharing and investments. Parallelly, world-class infrastructure like highways, logistics, port facilities etc. may also be created on a fast track basis so that this can attract the cluster partners to shift their export hub to India. This can also create an active E-commerce ecosystem in India along with physical infrastructures.  India can easily emerge as a major player in digital, electronics goods, food processing, solar and consumer products etc.

Land and resource allotment- Key component in attracting FDIs:

Land allotment and Environmental clearance for larger projects continue to be a concern for both for domestic corporates and MNCs, especially in progressive states due to multiple reasons. As we are currently passing through ‘ challenging times during the lifetime, the political differences among the states and political parties should not become a hindrance for potential investments. After all, the anchor industries are going to be the fulcrum of ancillary growth and hence a single-window Landbank authority with the cooperation state govt is desirable with industrial estates for MSMEs side by side.

A Centralized National Land Bank Authority may be created with the support of State governments for facilitating the MSMEs and Foreign cluster partners for the spot allotment of land through digital/ online format.

*Views expressed in the above article are personal and does not reflect any institutional viewpoint. 

About the Author

Mr P Udayakumar is currently Director (Planning and Marketing ) and in the Board of NSIC, New Delhi. He is an Engineer and Aluminus of IIM Bangalore. He is in the Board of NSIC for about 10 years and well-acknowledged in the MSME circle who is known for radical and futuristic approach on the MSME issues.

He has been involved in several key assignments in spearheading the growth models for NSIC. He is widely travelled and a regular speaker in MSME forums and leading institutions.

Faiz Askari

Faiz is a mediapreneur specialised in Small Business and Technology domain.

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