Why Are MSMEs Worst Hit By Covid-19

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As defined in the MSMED Act, 2006
But credible and precise details of investments were not easily available by authorities.

February 2018- “Annual turnover” 34 crore MSMEs in the country- 51% in rural India.
Employment to 11 crore people- But 55% in the urban areas.
On average, less than two people are employed per MSME. It shows how small these really are.

Breakup of all MSMEs into micro, small and medium categories is even more revealing.
5% of all MSMEs fall in the micro category.
In other words, micro enterprises essentially refer to a single man or a woman working on their own from their home.
The medium and small enterprises — the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees.

PROBLEMS FACED BY MSMES?

Most of them are not registered anywhere because they are just too small.
Even GST has its threshold and most micro enterprises do not qualify.
Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms
This brings down their costs.
But in times of crisis, it also constrains a government’s ability to help them.
For instance, in some of developed countries, the government has tried to directly provide wage subsidy and extra credit to smaller firms
But that could happen because even smaller firms were being mapped.
Another biggest hurdle facing the MSMEs – lack of financing.
According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third of the credit MSME credit need that it can potentially fund.

That is why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs have had a limited impact.
A key reason why banks dither from extending loans to MSMEs is-
The high ratio of bad loans.
The data show higher slippage for relatively bigger enterprises.

The other big issue plaguing the sector is the delays in payments to MSMEs —
Be it from their buyers (government also) or things like GST refunds etc.

The total lockdown has raised a question mark on the existence of many primarily because these are not firms that have too much cash to wait out the crisis.
That explains the job losses. According to a recent survey, “small and medium” firms in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.

There is no fixed solution.
The RBI has been trying to pump money into the MSME sector but it had limited impact.
The government can provide- Tax relief (GST and corporate tax),
Give swifter refunds,
Provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products

Loans to MSMEs are mostly given against property (as collateral) —
But in times of crisis, property values fall and that inhibits the extension of new loans.
A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case t he MSME falters.