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Importance of Robust Institutional Support for MSMEs and Small Businesses

The Finance Minister recently revealed a relief package for multiple sectors that suffered during the second wave of the pandemic. The package also included a liquidity component that helps revive a broken supply chain for small businesses. An emergency credit line guarantee scheme created to provide relief to businesses expanded from Rs 4.5 trillion to Rs 3 trillion last year.  

A new credit guarantee scheme via micro-financiers would allow 2.5 million small borrowers to extend loans. The National Credit Guarantee Trustee Company will back the bank loans provided to micro-lenders with the lending of up to Rs 1.25 lakh per borrower.  

Shortfalls in Support 

Small businesses have been granted a time till March 2022 to opt for financial assistance towards the PF (provident fund) for the contribution of workers hired during the pandemic. The Aatmanirbhar Bharat Rozgar Yojana funding full or partial contributions of people hired under the scheme were bound to expire this June. 

Center had announced the government about guaranteed loans of $40 billion for businesses to get back on track in July 2020. Instead of accepting the offer and staying under another debt, businesses demanded reduced GST or even waived off interest on their loans. Bankers refused to lend, as the businesses were floundering and having a rough patch.

Small businesses that survived the first wave of the pandemic started to get back on track after the lockdown was relaxed in September 2020. Still, the second wave had a rather devastating impact on their business.

A survey by LocalCircles indicated that 59% of startups and MSMEs across 171 districts in India are prone to downsize, shut shop, or sell their business by late 2021 due to extended regional lockdowns.

Other data included 22% of MSMEs have a runaway for more than 3 months, while 41% remained out of funds for operation. By July, 49% decided to reduce employee benefits and compensation costs.

From the survey, it became evident that Indian MSMEs had struggled since the beginning of lockdown in March 2020. While businesses continued to struggle after the lockdown was re-imposed, liquidity remained a major challenge as lenders remained wary in extending credit for businesses affected by the pandemic. 

Practical Solutions 

One possible way to tackle the challenge is by using CSR funds for supporting small businesses and startups running with a social impact. MSMEs should be handheld as they contribute to 29% of India's GDP and 48% of exports and help employ more than 110 million people via 63 million enterprises.

A recent announcement by RBI claimed that NBFCs (non-banking finance companies) are eligible to avail bank funding for promoting increment lending and offer credit lifelines to struggling MSMEs under TLTRO (Targeted Long-term Repo Operations.)

Regardless, MSMEs continue to suffer challenges like complex licensing and regulatory mechanisms and much more, including GST. Due to heavy documentation, lack of adequate collateral, and non-existent credit history, MSMEs cannot capitalize on loan offerings.

Robust and well-charted policies will help MSMEs procure loans and run operations with benefits like reducing GST, easing stringent eligibility, incentivizing the adoption of digital, and more. Even the United Nations Conference on Trade and Development (UNCTAD) believes in offering MSMEs short-term support measures to reduce their tax burden. 

The smaller size of MSMEs helps them become more flexible and adaptive to the new normal after the pandemic. MSMEs are the nation's interest in driving greater employment generation and ensuring faster revival as they are considered the Indian economy's backbone.

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