Tuesday, 29 September 2015

MSME Sector | Past, Present and Future

Significance of MSMEs
  • MSMEs contribute nearly 8 per cent of the country’s GDP, 45 per cent of the manufacturing output and 40 per cent of the exports. They provide the largest share of employment after agriculture and are nurseries for entrepreneurship and innovation. 
  • As MSMEs are generally labour-intensive, they have the capability to create more jobs to cater to a young demographic country like India. 
  • Employment: 11 crore people through the operation of 5 crore enterprises producing a heterogeneous basket of about 7,000 different products.
  • Climate Change --> Unemployment in agriculture --> Absorb in MSME.
  • Compensate slowdown in the industrial growth rate, especially manufacturing
  • Gross capital formation has been declining over the years, especially households- MSME can help
  • The performance of the agriculture sector has also been slower than the previous year because of uncertain rains in the last few months.
  • continuing uncertainty in the agriculture sector because of substantial dependence on rain-fed irrigation, an alternative power pack, unutilised, is micro, small and medium enterprises (MSMEs).
  • MSME sector in India employs nearly 11 crore people through the operation of 5 crore enterprises producing a heterogeneous basket of about 7,000 different products.
  • As MSMEs are generally labour-intensive, they have the capability to create more jobs to cater to a young demographic country like India.
  • Further, in view of the continuing implications of climate change, it is necessary that the MSME sector is prepared to absorb millions who may be rendered unemployed in the agriculture sector.
Potential
1. MSMEs contribution to GDP is around 10%. Growth in MSME also supports struggling GDP figures
2. More importantly, MSMEs employ about 10 crore people This contrasts to the big MNCs, where "jobless
growth" takes place
3. MSMEs support women and lower caste population in greater number. Thus, MSMEs can potentially lead to Inclusive Development
4. The small companies of today; the start-ups ; are the future of tomorrow.
5. MSMEs are the leaders in manufacturing as well as in exports. The success of Make in India lies on their shoulders

Issues
  • Govt and RBI have done supply side efforts through a series of measures to encourage MSMEs, but more needs to be done now on demand side or in other words we need to nurture entrepreneurs from a young age. 
    • If the country has to successfully launch the ‘Make in India’ programme, it needs to train young entrepreneurs, in addition to developing skills at skill development centres.
  • Finance
    • The government and NGOs seek to finance and allocate resources for MSMEs, but these resources often do not reach the targeted audience. 
    • The successful launch of the Jan Dhan Yojana (JDY) could be used to direct financial resources to targeted MSMEs. 
      • Still, access to bank finance may be difficult for some MSMEs, and therefore there is a need to consider various alternative sources of finance. In the case of Japan, the government has imposed a cap on interest rates on loans that a money lender extends to MSMEs. As money lenders continue to play an important role in India, it is worth considering whether money lenders could be brought under regulation now, given technological progress, as achieved in the case of Japan, and an interest cap be imposed for lending to MSMEs.
  • In India, commercial banks are mandated to lend to MSMEs. 
    • In such cases there is also a need to ensure that the public sector does not crowd out the private sector. 
    • Further, MSMEs generally suffer from poor conduct by major banks. In some cases, mis-selling of financial products is a general complaint of entrepreneurs. This can take the shape of higher fee or interest rate, failure to explain exit costs, and sometimes threatening them with refusal to extend regular credit. 
    • Role of financial education is very important for MSMEs in assessing appropriate start-up finance and in empowering them to use financial products and services to manage risks and other business needs.
  • Not all banks can do MSME financing as this is a specialised area and requires specialised skills to assess the institutions that can benefit from bank finance and yield higher production. Therefore, skill development of bankers is also necessary for assessing MSMEs that can be bank-financed. These skills would include standardising simple format for accounting purposes for MSMEs, competent development of human resources, cultivating business ethics and standards, and also imparting training to MSMEs which are being served by the bankers. The initiatives by the RBI in this regard need to be strengthened in instituting similar training programmes in different commercial banks.
  • In addition to financing, there is a need for focussed coordination of activities of different government authorities to encourage MSMEs. This coordinating agency could serve in building a database and repository information on a shareable basis, measuring levels of productivity for different product groups, and identifying products in need of research and development.
  • MSME can correct the mistake of jumping to services than focussing on manufacturing.
  • Lack of institutional credit- MSMEs have to resort to high charging moneylenders
  • Economic theory says that smaller firms are often inefficient as they lack access to more expensive yet efficient technologies
    MSMEs are associated with lack of experience, managerial and specialist skills.
    Lack of skilled manpower
Suggestions
  • Therefore, government needs to prepare a roadmap for the MSME sector in addition to various ad hoc initiatives undertaken regularly. 
  • It needs to delineate proper objectives, vision and a mission, as it did in the case of JDY. 
  • Then, it needs to consider appropriate funding mechanisms for MSMEs. 
  • The government could also consider an appropriate guarantee system to be offered to the MSMEs availing loans under various government schemes. 
  • To inspire confidence, the government needs to strengthen the legal structure and establish a credible redressal mechanism. 
  • To prepare a vision document and an achievable roadmap that can place the Indian MSMEs to compete with those in China, Japan and Germany, there would be a need to engage researchers, industry groups and stakeholders. Therefore, there is much to be accomplished before the MSME sector can take off. India needs to make a start now.
  • The successful launch of the Jan Dhan Yojana (JDY) could be used to direct financial resources to targeted MSMEs.
  • In the case of Japan, the government has imposed a cap on interest rates on loans that a money lender extends to MSMEs. As money lenders continue to play an important role in India, it is worth considering
  • In India, commercial banks are mandated to lend to MSMEs. In such cases there is also a need to ensure that the public sector does not crowd out the private sector.
  • Further, MSMEs generally suffer from poor conduct by major banks. In some cases, mis-selling of financial products is a general complaint of entrepreneurs. This can take the shape of higher fee or interest rate, failure to explain exit costs, and sometimes threatening them with refusal to extend regular credit. Illustratively, weighted average lending rate of commercial banks, as reported in the RBI’s latest AR, is the highest for MSMEs when compared with loans extended to agriculture, large industry and infrastructure.
    1. Therefore, the role of financial education is very important for MSMEs in assessing appropriate start-up finance and in empowering them to use financial products and services to manage risks and other business needs.
  • Not all banks can do MSME financing as this is a specialised area and requires specialised skills to assess the institutions that can benefit from bank finance and yield higher production. Therefore, skill development of bankers is also necessary for assessing MSMEs that can be bank-financed. These skills would include standardising simple format for accounting purposes for MSMEs, competent development of human resources, cultivating business ethics and standards, and also imparting training to MSMEs which are being served by the bankers. The initiatives by the RBI in this regard need to be strengthened in instituting similar training programmes in different commercial banks.
  • In addition to financing, there is a need for focussed coordination of activities of different government authorities to encourage MSMEs. This coordinating agency could serve in building a database and repository information on a shareable basis, measuring levels of productivity for different product groups, and identifying products in need of research and development.
  • government needs to prepare a roadmap for the MSME sector in addition to various ad hoc initiatives undertaken regularly.
  • It needs to delineate proper objectives, vision and a mission, as it did in the case of JDY.
  • Then, it needs to consider appropriate funding mechanisms for MSMEs.
  • The government could also consider an appropriate guarantee system to be offered to the MSMEs availing loans under various government schemes.
  • To inspire confidence, the government needs to strengthen the legal structure and establish a credible redressal mechanism.
  • To prepare a vision document and an achievable roadmap that can place the Indian MSMEs to compete with those in China, Japan and Germany, there would be a need to engage researchers, industry groups and stakeholders.
Banking and MSMEs:
  • Considering that big corporates are over-leveraged, banks need to explore new avenues for profitable lending to spruce up their balance sheets.
  •  Over the last two years, both the government and the central bank have consistently nudged banks to redouble efforts to bring smaller players — individuals and industry — into the fold of the formal banking system. New institutions such as the MUDRA Ltd are likely to propose innovative new ways of channelling flows to small producers. The RBI has revamped priority sector guidelines so as to reemphasise lending to excluded or nationally important sectors in a changing economy. In particular, it set new targets of 8 per cent of adjusted net bank credit to small and marginal farmers and 7.5 per cent for micro enterprises, while allowing medium-sized firms, social infrastructure such as toilets, and renewable energy investments to qualify for priority sector credit.
  • Adding to this diversification effort, the RBI has focussed on the MSME sector, which has the potential to foster strong growth by creating local demand and driving consumption. Currently, 
  •  To specifically address the issue of delayed payments to the MSME sector, Trade Receivables Discounting System (TReDS) has been conceptualised as an authorised electronic platform to facilitate discounting of invoices and bills of exchange of MSMEs.

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