The MSME sector is central to India’s growth and job creation and will be key to the pace of India’s economic recovery? Enumerate reforms needed to strengthen MSME sector in India?

Status of MSME Sector In  India :

•  MSME sector – the backbone of India’s economy – contributing to 30 percent of India’s GDP and 40 percent of exports, under severe stress. 
• The sector, which employs about 150-180 million people, is today burdened with cancelled orders, loss of customers and supply chain disruptions – causing a sharp fall in revenues. 
• This cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector

• Unlocking liquidity

India’s financial system benefited from early and decisive measures taken by the RBI and the Government of India (GOI) to infuse liquidity into the market. Give current uncertainties, lenders remain concerned about borrowers’ ability to repay – resulting in limited flow of credit even to the viable enterprises in the sector. This program will support government’s efforts to channel that liquidity to the MSME sector by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs through a range of instruments, including credit guarantees.  

• Strengthening NBFCs and SFBs

Improving the funding capacity of key market-oriented channels of credit, such as the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs. This will include supporting government’s refinance facility for NBFCs. In parallel, the IFC is also providing direct support to SFBs through loans and equity.

 

• Enabling financial innovations

Today, only about 8 percent of the MSMEs are served by formal credit channels. The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments. Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost, especially small enterprises who currently may not have access to the formal channels.

Actions Taken by government  and RBIto strengthen MSME sector In India :(JusT  Rember Sub headings )

9.1 Definition of Micro, Small and Medium Enterprises (MSMEs)

i. The MSMED Act, 2006 may be reimagined as a comprehensive and holistic MSME Code having a provision for sunset on plethora of complex laws scattered all over the legislative framework. Under this new law, the territorial jurisdiction based and arbitrary inspection system may be substituted with a policy based and transparent inspection system. This may also include sunset clauses on inspections.

[Action: Ministry of MSME, Para: 4.1.3]

ii. The Committee deliberated upon the proposed turnover based definition of MSMEs with various Ministries, Associations and other Stakeholders. The Committee also debated the merits of an employment-based definition and recognized while this was an additional feature preferred in some countries, this definition would pose challenges in implementation. The proposed definition has been considered progressive and suitable because of introduction of Goods and Services Tax (GST). Under the new tax regime, turnover details of enterprises are being captured by Goods and Services Tax Network (GSTN) and turnover declared by GST registered MSME units can be easily verified through GSTN. Hence, turnover based definition would be transparent, progressive and easier to implement. It would also help in removing the bias towards manufacturing enterprises in the existing definition and improve the ease of doing business. The Committee also felt that in view of the need to adjust the definition criteria from time to time in the context of changing economic scenario, the Parliament may consider delegating the power of classifying MSMEs to the Executive.

[Action: Ministry of MSME, Para: 4.2.3]

9.2 Role of Small Industries Development Bank of India (SIDBI)

i. The Committee recommends a more focused engagement of SIDBI with State Governments for MSME development and promotion. This could take various forms as indicated below:

1. Use of Priority Sector Shortfall (PSS) funds to create a low cost lending window for State Governments for infrastructure projects in clusters, civil works for rehabilitation of existing industrial estates and setting up of new industrial estates. This would require RBI approval and could be structured on the lines of the Rural Infrastructure Development Fund (RIDF).

2. Helping State Governments in designing or operating schemes for equity support, interest subvention, resolution of stressed MSMEs, learning events for MSME entrepreneurs including field visits to well performing clusters, etc.

3. Collaborating with State Governments to get MSME units from the State onto digital platforms such as PSBLoansIn59Minutes, Stock Exchange listing, e-commerce platforms, etc.

ii. SIDBI should help deepen credit markets for MSMEs in underserved districts and regions by handholding private lenders such as NBFCs and MFIs for increasing their presence and reach, working with local level bankers, differential pricing for refinance, awareness programmes, etc. The other areas where SIDBI can contribute viz., developing and deploying additional instruments for debt and equity which help crystallize new sources of funding for MSMEs and MSME lenders such as first loss guarantees, Pass Through Certificates (PTCs), etc. For this it needs partnership arrangements and may, if required, raise funds directly from the market based on its AAA rating.

iii. SIDBI should gradually take on a role of a market maker for SME debt on select platforms.

iv. SIDBI should review investments in SFCs, TCOs and other such subsidiaries/ associate companies where the responsibility of incubation is over.

v. SIDBI should continue to roll out of knowledge products, including in vernacular languages.

[Action: SIDBI, RBI, Para: 4.13.4]

9.3 PSBLoansIn59Minutes

The PSBLoansIn59Minutes portal currently caters primarily to existing entrepreneur on account of its reliance on GST, income tax data, etc. Facility for new entrepreneurs presently under development needs to be expeditiously deployed. Limit of the loans should be enhanced to ₹5 crore. Further, Loans sanctioned under Standup India and MUDRA should be included in portal. Banks need to ensure that all applications accorded in principal approval are disposed of within a period of 7-10 days. Algorithms leading to initial in-principle sanction but final rejections by the banks’ need to be reviewed in a time bound manner. CGTMSE guarantee fee for those not offering any collateral may be made part of in-principle sanction. Portal could be linked with land record, CERSAI, CGTMSE.

[Action: SIDBI, Para 7.4.3]

9.4 Equity and Venture Capital Funding for MSMEs

i. SIDBI, as a nodal agency, should ideally play role of a facilitator to create platform wherein various Venture Capital Funds can participate and in turn create multiplier effect for providing Equity Support to MSMEs. For this it has to help popularize/ spread awareness of new ways of investing (modified term sheets for instance).

[Action: SIDBI]

ii. A Government sponsored Fund of Funds (FoF) of ₹10,000 crore to support VC/PE firms investing in the MSME sector that will support crowd funding from venture capital and private equity firms, which focus on investing in the MSME segment on modified term sheets developed by SIDBI. This would encourage innovation in term-sheets and product structures.

[Action: Ministry of MSME, SIDBI]

iii. A Distressed Asset Fund of ₹5000 crore, be structured to assist units in clusters where a change in the external environment e.g., a ban on plastics or ‘dumping’ has led to a large number of MSMEs becoming NPA. This fund could then operate on the lines of the Textile Upgradation Fund Scheme (TUFS) which has been in existence over many years. This would be of significant size which makes equity investments that help unlock debt or help revive sick units. It is a variation of VCF, meant for equity investment of ₹1 lakh to ₹10 lakh in proprietary or partnership MSMEs which will not or cannot list on stock exchanges. Covenants such as formalization and digitization of cash flows can be built in. The structure would recognize that exits will not be big bang but through a percentage of revenues or profits over a period of say 3-5 years. Such a Fund could work in tandem with RBI mandated restructuring schemes or bank led NPA revival solutions for MSMEs. The onus of creating this fund would lie with the Government.

[Action: DFS]

iv. Introduce voluntary certification for MSMEs that comply with prescribed internal governance standards

[Action: SIDBI & Credit Rating Agencies]

[Para 7.19.5]

9.5 Issues of Delayed Payments

i. An amendment may be made to the MSMED Act, 2006 requiring all MSMEs to mandatorily upload all their invoices above an amount to be specified by Government, from time to time on Information Utilities (IU) set up under IBC. To begin with, this could be for invoices above ₹1 crore.

ii. To take care of the situation where the MSME is unable or unwilling to complain, a designated authority under the DC MSME may be identified. This authority will be able to request/ obtain information on unpaid bills, of say, all corporates including PSUs above ₹1000 crore turnover to begin with, on the first working day of each month. For the IU to respond to this request, the Authority set up under the DC MSME will have to be notified under IBBI IU Regulation No. 23. With access to this information, the Designated Authority will write to/ email each of the corporates concerned, bringing to their notice, MSME supplier bills which have remained unpaid beyond the due date.

iii. It is likely that on receipt of this communication, the corporate will take steps to clear dues. If it does not do so before the first working day of the next month, when the next statement will be generated, then the Authority may send a communication to both the buyer and the seller that payment has not happened as evidenced by the IU in spite of a communication been sent to the corporate buyer. This communication could then be disclosed on the Authority’s website for information of lenders, rating agency and other MSMEs as a means of naming and shaming. The MSME will now also have a stronger basis to initiate action, should it choose to finally do so.

[Action: Ministry of MSME, IBBI Para 4.3.7]

9.6 Micro and Small Enterprises Facilitation Council (MSEFC)

i. The scope of Facilitation Council is limited to redress cases of MSEs. Presently, Medium enterprises supplying to large corporates are deprived of redressal forum. Hence, the ambit of facilitation council may be extended to Medium enterprises also.

ii. As per Section 80 of Arbitration and Conciliation Act 1996 unless otherwise agreed by the parties, the Conciliator shall not act as an arbitrator in any arbitral proceedings in respect of a dispute that is subject of the conciliation proceedings”. However, sub-section 18(4) of MSMED Act, 2006 states that Council can act as an arbitrator or conciliator in a standing dispute where supplier located within its jurisdiction and a buyer located anywhere in India. As MSMED Act, 2006 is silent on this aspect, specific provision is required by a suitable amendment to the aforesaid Act.

iii. There has to be specific mention in MSMED Act, 2006 for cases already taken up by NCLT. Suitable amendment needs to be done in MSMED Act as NCLT came into effect in the year 2016 much later than MSMED Act, 2006. Although section 14(1) of IBC 2016 clearly states that “subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. There is no clarity about process to be adopted after moratorium period is over.

iv. Some supplier units filed cases before High Court about matter not decided within 90 days as stipulated in the sub-Section 18(5) of the MSMED Act, 2006. Completing the proceedings (Conciliation & Arbitration) within 90 days is difficult. Hence, MSMED Act 2006 may be amendment by way of inserting “shall be decided ‘preferably’ within 90 days” or within 180 days instead of “shall be decided within 90 days.

v. During meetings with State Government officials and MSME Associations, the Committee was informed that MSE borrowers lack awareness about Samadhaan Portal. Therefore, there is a need to publicize the portal amongst the MSME entrepreneurs.

vi. Further, it is observed that majority of the States have only one Facilitation Council which is not adequate to cater to delayed payment cases arising in the entire State. Hence, there is a need to increase the number of MSEFCs particularly in larger States such as Madhya Pradesh, Uttar Pradesh, etc., and in areas of large concentration and volume, so as to meet the time specified for resolving cases.

[Action: Ministry of MSME Para 4.3.3]

9.7 Public Procurement Policy

The Committee was informed that certain Government Departments have been placing orders for supply of equipment and materials which are well in excess of their anticipated or available annual budget. Execution of such orders is made in good faith and thereafter payments are delayed, at times, for months on end. The Committee recommends that the General Financial Rules (GFR) and Departmental Procurement Codes/ Manuals, as the case may be, be amended to prohibit placing of purchase orders in excess of the annual budget approved by the Legislature/ Government.

[Action: Department of Expenditure, Para 4.4.4]

9.8 Government e-Marketplace

i. More MSEs need to be encouraged to register on the portal. For this a focused campaign for enrolment of MSEs should be initiated involving MSME support institutions, States’ Directorate of Industries and DICs.

[Action: Ministry of MSME]

ii. The Committee recommends that for the purpose of scaling up portal, the Government may make it mandatory for PSUs / Government Departments to meet their MSME procurement targets through GeM portal only.

[Action: Ministry of MSME]

iii. Government may consider making GeM as a full-fledged market place also and permit MSME sellers on-boarded on the portal to procure raw-material as well.

[Action: GeM]

iv. GeM is now collaborating with TReDS platforms for enabling discounting of bills for orders accepted through GeM. PSEs are required to settle invoices for goods supplied within 10 days of issue of certificate of acceptance. As PSEs do not maintain a pool account with GeM, there were instances of PSEs being unable to pay within 10 days. The Committee has been informed that GeM and TReDS platforms have worked out an arrangement whereby such invoices, which already have a certificate of acceptance, will be put up for discounting on that TReDS platform where the PSE and MSME supplier are both registered. This enables the bill to be discounted. The PSE gets time to make the payment and the supplier gets the money. Final IT integration for seamless transition is currently underway between GeM and the three TReDS platforms. The integration of GeM and TReDS needs to be completed within a time bound manner.

[Action: GeM]

[Para 4.4.4]

9.9 Delivery mechanism and MSME eco-system

i. The Committee recommends setting up of a Non-profit SPV to support crowd sourcing of investments by various agencies particularly CSR and non-profits to pave the way for conducive business ecosystem for MSMEs. The SPV will also coordinate with NSDC, NSIC and other financial/promotional institutions apart from facilitating impact/angel funds and management support to Government in terms of mobilizing investments form multi-lateral institutions.

ii. The Committee recommends policy convergence at the national level that also goes down the federal structure. In order to facilitate coherent policy outlook and unity of monitoring, it is recommended that at the apex level a National Council for MSMEs should be set up under the Chairmanship of the Prime Minister with the Ministers for MSME, Commerce & Industry, Textiles, Food Processing, Agriculture, Rural Development, Railways and Surface Transport being members. The states should have a similar State Council for MSMEs.

[Action: Ministry of MSME Para 5.7.5]

9.10 National Board for MSMEs

National Board may continue to function as the body for reviewing and steering the overall implementation of various policies / schemes of MSMEs impacting all aspects of the MSME ecosystem, involving all stakeholders, particularly in terms of bringing MSMEs out of informal category, improving infrastructure, skill and capacity building, technical and financial know-how, etc. The functioning and scope of the Board may be reviewed to strengthen its role.

[Action: Ministry of MSME, Para 4.9.3]

9.11 Khadi and Village Industries Commission (KVIC)

The Committee recommends KVIC should be corporatized with focus on promotional work. The marketing function may be hived off and also corporatized to enable private participation and enabling use of Khadi in the private sector.

[Action: Ministry of MSME, Para 4.12.1]

9.12 State Financial Corporation (SFC)

The Committee recommends that State Governments should re-examine the role of SFCs. Financial resources will need to be programmed accordingly, within the context of the State. For instance, should funds be used to support the SFC or should they be used to incentivize private sector to move to areas where more competition amongst lenders is needed. The Committee also recommends a review of the SFC Act for enhancing the role of States so that more operational freedom is given to SFCs.

[Action: State Governments, DFS Para 4.11.4]

9.13 District Industries Centers (DICs)

i. A new Central Scheme to be initiated for supporting setting up of Enterprise Development Centres (EDCs) in DICs. These EDCs while being principally funded by GoI must have the operational flexibility to partner with the private sector, particularly in the areas of skilling and technology development. Contribution of companies to capacity building via EDCs must be eligible for Corporate Social Responsibility (CSR) spending.

ii. Planning for Training Programs - The need of training for entrepreneurs in various fields may be assessed and included in the action plans of DICs. The training should be based on contemporary requirements and should be relevant to the needs of the entrepreneurs. As much as possible, training must be imparted by corporates engaged in the relevant field and practitioner rather than be limited to staff of DIC only.

iii. Empowering DICs - DICs should be given more powers for providing tangible services such as arranging terms, and other inputs including technologies for the development of industries and artisans.

iv. Data Collection and Statistical Analysis - The data banks created by the DICs should be strengthened and trained persons to be deployed to keep the data up-to-date. Proper collection of statistics on the requirements of entrepreneurs should be undertaken by DICs.

v. EDCs should have a specific focus on rural enterprises and capacity-building. Setting up of EDCs within DICs supported through a Central Sector Scheme with one of their specific mandates being handholding rural enterprises as well as enterprises set up by SHGs or their members.

vi. EDCs should be equipped to assist enterprises in respect of GST, IT, MSME Portal registration, PAN application, loan document preparation, etc. Partnership with Common Service Centre (CSC) – Village Level Entrepreneur (VLE) for the purpose may be explored.

vii. DICs and EDCs should have a dedicated effort to on-board rural MSMEs on large e-commerce platforms that can create better visibility and access to markets for these sellers.

viii. DICs need to be professionalized and corporatized into not for profit entities. This would enable DICs to engage in partnerships with private sector for delivering extension services to MSMEs

[Action: DC MSME, Para 4.9.3, 7.15.2]

9.14 Cluster Development 2.0

The Committee recommends following to strengthen cluster development programme in India:

i. Cluster prioritization and selection criteria.

ii. Widening the definition of cluster constituents and optimal size of a cluster for holistic cluster development.

iii. Synergy and coordination within large number of support schemes.

iv. Improving the scheme (design, implementation and monitoring process) so that it meets the priority needs of the sector and are outcome based and impact oriented

v. Enhancing the funding contribution from private sector.

vi. Strengthening the cluster eco system and intensively involve local intermediaries such as business membership organizations in developing linkages with other stakeholders such as training, educational and research institutions.

vii. To ensure continuous flow of data and information on clusters and avoid duplication of efforts by different agencies and institutions

[Action: DC MSME, Para 5.3.6]

9.15 Marketing Support for MSMEs

The Committee recommends the following for improving marketing support to MSMEs:

i. Facilitate the marketing side of innovation and assist MSMEs to on-board ‘B2B’ and ‘B2C’ e-commerce market places.

ii. Utilize existing Technology Centers (TCs) across the country for providing access to information on Indian and external markets for innovative products and on how MSMEs can benefit from new technological inputs.

iii. Incentivizing large enterprises for providing assistance and guidance to MSMEs, particularly in terms of using the latest technology and bringing them up the value chain

iv. Strengthening of schemes like ‘Consortia Formation’, ‘Brand Building’, ‘E-marketing through specialized MSME portals’, and holding of more domestic and international exhibitions in order to provide increased marketing support to MSMEs

v. Strengthening up of MSME export promotion council

[Action: DC MSME, Para 5.4.6]

9.16 Access to Technology

The Committee recommends following for encouraging Technology adoption for the MSME Sector:

i. Technology Mission: Technology Missions related to water, literacy, immunization, oil seeds, telecom, jute, cotton and dairy had been set up by the Government. A Technology Mission should be launched by the Ministry of MSME, for converging the efforts of various stakeholders for the technology upgradation of the MSMEs across the country.

ii. Need for more Industry specific Technology Centres (TCs): Ministry of MSME has successful model of Technology Centres for providing short term and long term training programmes apart from providing tools, consultancy and common facility support to MSMEs. There is a need to set up more product specific TCs in hitherto unserved fields of Solar, Battery technology, e vehicle, AR/VE/AI, food processing, basic trades like carpentry, advanced welding, black smithy, etc.

iii. FDI policy must focus on development of local MSME sector to bring up capacity, capability and technology development of the MSMEs. In respect of all large projects involving FDI, ancillary development should be made a condition.

iv. Incubation schemes of Ministry of MSME, Biotechnology, NITI Aayog, DST, other departments, state governments should be strengthened and synergised. Joint Working group on Incubation Schemes should be set up. The amount of assistance should include the cost of nurturing ideas, making prototypes and even marketing the test batch in the markets and then improving the product till it stabilises.

v. The Government should constructively encourage more R&D investment and resources from global corporations and the domestic corporate sector. Government could consider establishing a dedicated public-private development fund for core technologies in infrastructure, energy, biotechnology, advanced genomics and other high-priority fields. Government should incentivize large enterprises in mentoring and guiding to MSMEs, as a part of their CSR activity, particularly in terms of using the latest technology and moving up the value chain.

[Action: DC MSME, Para 5.5.6]

9.17 Financial Literacy

The Committee recognizes the need for the creation of content for the benefit of entrepreneurs, which can be prepared based on OECD/INFE Core Competencies Framework on Financial Literacy for MSMEs after adopting it to Indian Context. For example, NCFE has prepared audio visuals on Certified Credit Counsellor and Udyami Mitra Portal for wider dissemination to the entrepreneurs. For dissemination of the content, various delivery channels such as mass media, RSETIs, FLCs, target group specific meetings conducted by various industrial bodies such as town hall meetings with entrepreneurs and specific MSME clusters can be explored. Finally, it is also important to carry out periodic surveys among the owners/managers of MSMEs across the country to assess the levels of financial literacy and the impact of literacy programs. Availability of credit, infrastructural issues, bank facilities, and many more indicators can also be measured across the regions and targeted polices can be formulated accordingly.

[Action: NCFE, Para 5.8.6]

9.18 Convergence of Government Schemes

i. The Committee recommends that the Ministry of MSME should be the Nodal Ministry for all interventions pertaining to the MSME Sector, rather than multiple schemes being run by different Ministries for promotion of MSMEs in their respective domain.

ii. PMEGP needs to be restructured to better meet aspirations of young India. The scheme may have one component reflecting the present support for new units only which may be, for say, 25% of the funds under the scheme with subsidy of upto 15%. The balance 75% must be used for upscaling services for business counselling, help in developing and drafting business proposals and exposure trips for budding and first generation entrepreneurs.

[Action: Ministry of MSME, Para 6.3.3]

9.19 Registration of Startups

The Committee deliberated on all the aspects relating to Startups in India. The major reason for migration of startups to other countries is because of better enabling environment such as tax concessions, well developed infrastructure, ease of doing business, exit policy, etc. Hence, the Committee is of the view that financial incentives and excellent infrastructure facilities must be deployed to retain successful Indian startups and to lure the best talent from across the world to start businesses in India. Telangana has adopted an innovative model for startup which may be assessed for possible replication in other States.

[Action: DPIIT, Para 4.7.7]

9.20 Exit Policy for MSMEs

i. The IBC provides for a differentiated regime for insolvency/ bankruptcy of firms, proprietary firms and individuals. Delegated legislation/ rules in this regard are currently under discussion. The finalization of these rules can boost lender confidence because lenders will have more certainty and predictability regarding the recovery of defaulted loans. This can increase the amount of credit available to MSME in Indian economy and in turn reduce the credit gap. Having an efficient, expeditious insolvency system in place that helps MSME or swiftly reallocates their productive assets to more efficient activities is paramount.

[Action: MoCA]

ii. Due to the lack of sophistication on the part of MSMEs, Insolvency code/ delegated legislation should provision for out-of-court assistance to MSMEs such as mediation, debt counselling, financial education, or the appointment of a trustee.

[Action: DFS]

[Para 4.13.3]

9.21 Credit Guarantee Schemes

i. All Credit Guarantee Schemes should be subject to the regulation and oversight / supervision of RBI. These guidelines could draw upon the well acknowledged principle for design, implementation and evaluation of Public Credit Guarantee Schemes for SMEs which has been evolved by the World Bank Group.

[Action: RBI]

ii. All new Credit Guarantee Funds set up by the Government should be run by NCGTC, where expertise on risk management, fund management and compliance can be built up. Modalities for pooling of under-utilized corpus funds across guarantee schemes should be worked out.

[Action: DFS]

iii. NCGTC has been set up as a Government Company while CGTMSE is predominantly owned by the Government with SIDBI holding a minority share. It is necessary that the top management of both these institutions are professionalised and sourced from a wider pool. It would also be appropriate that SIDBI disengages itself from day to day management and Boards of both NCGTC and CGTMSE.

[Action: DFS]

iv. The Committee has recommended that the limit for collateral free lending should be increased to ₹20 lakh for lending to MSMEs and SHGs. It is accordingly recommended that the portfolio guarantee extended under the CGFMU be extended to ₹20 lakh for borrowers under the PMMY as well as SHGs. The corpus of CGFMU may be augmented accordingly to ₹10,000 crore by 2024.

[Action: DFS]

v. The CGFMU needs to revisit its procedure and guidelines so that these are better linked to Bank systems e.g. using PAN as an identifier, increase cover to the extent of 75% as against 50% at present, etc. It also needs to reduce deductibles and first loss provisioning to make the scheme more attractive for lenders. Subsequent to these changes no other Credit Guarantee Scheme including CGTMSE shall issue individual credit guarantee cover to MSMEs for loans below ₹20 lakh.

[Action: DFS]

vi. The Standup India Guarantee Scheme overlaps with the CGTMSE with similar cover. This Credit Guarantee Scheme needs to be folded up with the corpus being redeployed either in CGTMSE or in the CGFMU. Guarantees for Standup India loans would continue to be extended through CGTMSE.

[Action: DFS]

vii. CGTMSE may consider introducing ex-ante Credit Guarantees for loans above ₹2 crore. This would enable potential borrowers to be initially appraised by CGTMSE and secure a credit guarantee from it. Based on this credit guarantee, the borrower could now approach different banks to get best interest rates as a borrower who is fully secured.

[Action: CGTMSE]

viii. Currently, CGTMSE pricing is set at the level of the MLI with premium is being charged on the basis of NPA percentage and Claim Payout ratio of the Bank as a whole which leads to adverse effects on the Firms/ Companies which are actually performing well. In addition to Bank-level criteria, the Committee recommend that premium must also be sensitive to borrower-level characteristic such as formalisation and credit history. These schemes should reward both good borrowers and good MLIs.

[Action: CGTMSE]

ix. MUDRA and NCGTC must focus on catalyzing the markets – where it may otherwise be risk averse to participate. They must evolve into financial institutions which can provide for the MSME sector, risk management support through participation in a whole suite of structured financial products. These institutions can provide a whole suite of specialised products and investment approaches to boost risk-taking by MLIs in previously underserved regions and sectors. By adopting such a strategy, MUDRA and SIDBI can serve MLIs by catalysing a new base of capital markets investors. These products could include credit enhancements of various types, including investments in junior tranches of securitisation transactions.

[Action: DFS & RBI]:

x. Additionally, there can be different refinance rates and guarantee fees for MLIs (whether banks or NBFCs) serving MSMEs that are in the Aspirational Districts.

[Action: MUDRA, CGTMSE & NCGTC]

xi. The Committee recommends that enterprises that are emerging from various SHG initiatives under SRLM and NRLM programmes be included within the purview of MUDRA’s guarantee programme and the corpus for the same may be accordingly increased.

[Action: DFS]

[Para 7.9.6]

9.22 Trade Receivables Discounting System (TReDS)

i. Create a second TReDS window for reverse factoring so that supplier financing can be provided easily. Specifically, two things need to be done:

1. Issuance of the workflow for new TReDS window for reverse factoring.

2. Instructions to current TReDS licensees to activate the second window in a time-bound fashion.

[Action: RBI]

ii. The scope of Centralised KYC network may be expanded for capturing enterprise level document also. This would reduce the delay in on-boarding of MSMEs and Corporates.

[Action: CERSAI]

iii. Registration of invoice and satisfaction of charge upon it with CERSAI generally takes around 30 days which creates possibility of dual financing. Hence, it is recommended that the time period of 30 days should be reduced.

[Action: CERSAI]

iv. Creation of pooled API of all TReDS platforms would enable the financiers to understand the past repayment history of buyers thus enabling them to take more informed decision. Further, it will also rule out possibility of dual financing. NPCI which acts as settlement entity for TReDS may consider creating such API.

[Action: NPCI]

v. MSMEs also supply to Corporates having lower rating. Such MSMEs find it difficult to discount invoices on the platform. Widening the scope of financiers by permitting NBFCs other than NBFC factors would possibly lead to discounting of such invoices. A minimum rating may be required for these NBFCs.

[Action: DFS]

vi. Presently, Factoring Act, 2011 permits only financiers to register charge with CERSAI. If TReDS entities are permitted to act as an agent for Financiers for filing of Registration of Charge with CERSAI and its satisfaction this will lead to operational efficiency. Therefore, Factoring Act, 2011 may be amended to permit TReDS entities to register charge with CERSAI.

[Action: DFS]

vii. Credit Guarantee Fund Scheme for Factoring of NCGTC may be extended to invoices to be discounted on TReDS platform through second window as such guarantee may result in even bills drawn on smaller /lower rated buyers being accepted for discounting by factors and banks initially, and once transaction histories are built, they may dispense with guarantee subsequently. This would also in a way lead to better price discovery of the risks for the sellers.

[Action: DFS (NCGTC)]

[Para 7.6.2, 8.3.1]

9.23 Collateral free limit

i. Increase the limit for non-collateralised loans to ₹20 lakh, this would address a significant proportion of MSEs needs.

[Action: RBI]

ii. Revision in loan limit sanctioned under MUDRA to ₹20 lakh from ₹10 lakh.

[Action: DFS]

iii. Portfolio guarantee through NCGTC for all such collateral free MSME loans may be increased i.e. proportion of guarantee coverage should be increased to 66.6-75% from 50 %. A commensurate enhancement in corpus may also be done.

[Action: DFS]

iv. CGTSME would no longer provide individual covers upto ₹20 lakh, except for such units which are at say ₹20 lakh exposure and are now looking at further growth and therefore a transition to an individual guarantee.

[Action: DFS]

[Para 7.12.1]

9.24 Lending to MSMEs under PSL

i. The Committee recommends that the APSL mechanism be tried out starting with MSMEs in Phase 1 and evaluating the results of the same. As a default, all banks must continue to achieve 40% of NBC as PSL lending in the case of Universal Banks and 75% in the case of Small Finance Banks. For banks that wish to specialize in MSME lending, the requirements to do agricultural lending under PSL can be waived provided they achieve 50% of NBC as SME-PSL lending in the case of Universal Banks and 80% in the case of Small Finance Banks. Additionally, weightages may be constructed for MSME lending in the Aspirational Districts to incentivise flow of credit to these underserved districts. Under such a construct, one rupee of MSME lending in an Aspirational District would count more (say ₹ 1.25) towards PSL achievement than one rupee of lending in another district.

[Action: RBI]

ii. Current PSL guidelines state that investments by banks in securitised assets, representing loans to various categories of priority sector, are eligible for classification under respective categories of priority sector depending on the underlying assets provided - the all-inclusive interest charged to the ultimate borrower by the originating entity does not exceed the Base Rate of the investing bank plus 8% per annum. Such price caps are not applicable to banks when they originate directly through branches. In order to encourage smaller NBFCs to extend MSME lending to underserved areas and micro-segments where the cost of intermediation are higher and to encourage partnerships between Banks and NBFCs, the Committee recommends modifying this cap to the Base Rate of the investing bank plus 12% per annum for now and periodically reviewing the need for such a cap.

[Action: RBI]

[Para 7.7.5]

9.25 Credit Appraisal

i. Uniformity in and simplification of various loan application formats and assessment process in line with learnings from supply chain financing, escrowing of cash flows is needed for quicker decision making and reducing turnaround time. Further, there is need to develop new MSME products as per prevailing market dynamics. Creating Centralised Centres of Excellence with specialized staff can help expedite processing of loan proposals. A working group involving SIDBI and IBA may work on this with SIDBI taking the lead. As there is considerable expertise on the subject available with RBI on the subject, RBI may provide specialised technical assistance and expertise to this group.

[Action: RBI, SIDBI, IBA]

ii. The working group of SIDBI and IBA may also consider ways to reduce Turn Around Time (TAT) especially in the pre LOS (Loan Origination System) or centralised sanction stage.

iii. Banks should use surrogates like personal guarantee, bank statement, GST data, standardized score cards to evaluate credit worthiness of MSME borrowers. For PSBs, these can be part of Enhanced Access and Service Excellence (EASE) programme of Ministry of Finance so that progress is monitored.

[Action: Scheduled Commercial Banks, DFS]

iv. Government should specifically encourage MSMEs to obtain Zero Defect Zero Effect (ZED) Certification from QCI, and the banks could pass on some benefit due to lower risks for such units by way of interest/processing fee concessions.

[Action: Ministry of MSME & Scheduled Commercial Banks]

v. Presently, banks assess working capital and term loan requirement of MSME units based on various methods viz., Cash Budget Method, Nayak Committee or minimum 20% of Turnover Method, Traditional or Operating Cycle Method. Out of these methods, assessment based on projected turnover based method prescribed by Nayak Committee, is generally used by banks. The movement from Balance Sheet or turnover based Working Capital financing to cash flow based, or supply chain/ cluster based financing needs to be accelerated to reduce TAT. This is within the remit of individual banks and requires no regulatory intervention.

[Action: Scheduled Commercial Banks]

[Para 7.4.3]

9.26 Cash Flow-based Lending

i. Banks should develop customised products to assess the financing requirements based on expected cash flows moving away from traditional forms of assessment.

ii. Banks need to build their ability to capture cash flows of MSME borrowers on a regular basis, for which tie-ups with Industry Majors / Aggregators / Online platforms will have to be done by the Banks. When Account Aggregators (AA) get operationalized, lenders will have access to more information on borrowers’ transactions at a single point which would further facilitate cash flow based lending.

iii. Banks should monitor on ongoing basis data input from partners for early warning indicators, for instance, in case of e-commerce sellers, any change in seller rating, velocity of sales, etc. should be notified to lender.

[Action: Scheduled Commercial Banks, Para 7.5.1]

9.27 Co-origination of Loans

i. The applicability of the Co-origination guidelines may be expanded to include Non-Systemically Important ND-NBFCs with a minimum credit rating. This will also encourage participation by new generation lenders that use alternative data for underwriting.

[Action: RBI]

ii. RBI to align IRAC norms for Banks and NBFCs.

[Action: RBI]

iii. NBFCs are not permitted to enforce action under the SARFAESI Act for loans below ₹1 crore. Since NBFCs will be servicing the loans on behalf of banks, they may be permitted to initiate all recovery measures including SARFAESI for the total loan amount for loans below ₹1 crore.

[Action: DFS]

[Para 7.8.2]

9.28 Portability of MSME loans

In order to provide loan portability in a seamless manner to MSMEs, the Committee recommends that RBI should come out with measures on portability of MSME loans with a lock in period of one year.

[Action: RBI, Para 7.10.3]

9.29 Regulatory Retail

The limit of ₹5 crore was introduced along with the adoption of Basel II in India. Basel II allows for regulatory retail (or SME exposure) upto Euro 1 million. In today’s terms, Euro 1 million easily translates to ₹7.5 crore, if not more. The Committee recommends RBI to revise the limit of regulatory retail to ₹7.5 crore.

[Action: RBI, Para 7.11.1]

9.30 Restructuring of NPA accounts

An MSME account could be considered for upgrade to “standard” after six months of satisfactory operation, instead of one year at present. In addition to stable performance for six months, the MSME must also have demonstrable additional equity in the business and/or new sources of cash-flow.

[Action: RBI, Para 7.13.3]

9.31 Role of MUDRA

In order to play a more catalytic role, MUDRA would require enhancement of in-house (or outsourced) capabilities, including underwriting, risk management, fund raising based on its own AAA rating and sharper focus on emerging trends in the market. A reimagining of MUDRA is necessary including assessing the rationale for continuing it as a subsidiary of SIDBI.

[Action: DFS, Para 7.14.2]

9.32 Access to digital payments and commerce platforms for rural MSMEs

i. The Committee recommends an urgent focus to implement broadband connectivity in all parts of the country which will disproportionately benefit rural MSMEs.

[Action: Department of Telecommunication]

ii. Access to digital payments requires more demand-side incentives. As has been suggested by the High Level Committee on Deepening Digital Payments (Chairman: Nandan Nilekani), the acceptance network in rural areas need significant improvement. This Committee supports the recommendation to set up an Acceptance Development Fund to support merchants in rural areas.

[Para 7.16.1]

9.33 Issues related to SHGs

i. Loans to SHGs may be made collateral free upto ₹20 lakh, as against ₹10 lakh at present, in line with the recommendation for micro enterprises.

[Action: RBI]

ii. DFS may act as Settlor for a Credit Guarantee Fund to be operated by NCGTC for extending Credit Guarantees to digitalised SHGs as well as producer collectives or Farmer Producer Organisations (FPOs) which are registered entities, etc. This Credit Guarantee may be configured to provide upto 75% guarantee cover to these SHGs, FPOs, etc. for loans between ₹20 lakh and ₹1 crore on the lines of CGTMSE, Education Loans, Skilling loans, etc. This will mean that loans upto ₹1 crore would be effectively collateral free.

[Action: DFS]

iii. The transition of FPOs to Farmer Producer Companies (FPCs) should be actively focused upon.

[Action: MoRD, Ministry of Agriculture]

iv. The Committee recommends for upgrading Self-Help Group (SHG) access to credit by grandfathering SHG member history into the credit system and by introduction of mobile/tablet-based book-keeping, SHGs will see an expansion of cash-flow lending. Many SHGs grow into nano and micro enterprises. By grandfathering SHG member history into the credit system one can improve the odds of new entrepreneurs getting financing.

[Action: MoRD]

[Para 7.17.5, 8.3.1]

9.34 Mitigating Risk and Impact of Calamities

i. Group policies for death and accident cover for MSME entrepreneurs need to be developed with insurance cover significantly higher than the cover currently offered by PMSBY and PMJJBY schemes. As Group policies, these would involve significant reduction in premium payable. Coverage could be offered in slabs so that there are different sub-products for say a Micro entrepreneur vs a Medium entrepreneur. A portion of the sum assured could be assigned towards settling workers’ dues at the unit. The insurance cover would require no subsidy support from the Government and could be configured as an incentive for MSMEs which have been formalised, for instance, through GST enrolment or MSME registration or under the Shops and Establishments Act.

[Action: DFS & DC MSME]

ii. Active efforts, in campaign mode, are needed to extend coverage under PMSBY and PMJJBY to all MSME employees.

[Action: DFS & DC MSME]

iii. Workers at urban and rural formalised MSEs need to be specifically covered under PMJAY- Ayushman Bharat scheme. Thereafter, MSME-DIs and DICs may be involved in an intensive campaign to assist enrolment of workers of MSEs and their families under the PMJAY/ Ayushman Bharat scheme so that health cover of ₹5 lakh becomes available to them. For MSE entrepreneurs, a group health scheme on similar lines based on full contribution by the entrepreneur may be designed in consultation with insurance companies.

[Action: DFS & DC MSME]

iv. Calamities such as earthquakes, cyclones and floods have been occurring ever so often. Disaster relief efforts by Government have tended to focus on rescue, temporary rehabilitation and ex gratia payments. Ex gratia payments cover death and loss of homestead but rarely cover loss of business enterprises. In a relative sense, MSMEs are prone to both business (cycle) risks and natural calamity related risks, the latter being associated more with agriculture. Agriculture failure gets attention and relief, while the same does not happen for MSMEs. Once relief work is discontinued and some shelter has been built, MSME owners struggle with reviving their business. Currently, on declaration of a natural calamity, banks offer a rescheduling of existing loans. This has involved conversion of outstanding limits to Working Capital Term Loans, moratorium on repayments of old loans, some amount as fresh loan, etc. While this provides some immediate succour, the overall leverage increases. In most cases, sooner or later, the old and new debt together becomes difficult to sustain. The leverage does not reduce as net earnings are being used to service the increased debt and no capital accumulation is taking place. This gap can be met in two possible ways. The first would be to make changes in the Relief Manual so that a fixed amount could be given as ex gratia for MSEs in lieu of equity to enable them to restart their enterprise. The other alternative could be to set up a micro equity window, with GoI funding, operated by SIDBI for providing patient capital to formalised, calamity affected MSEs.

[Action: DFS]

v. Blanket bans lead to large scale shut down of units. These bans are not simply cyclical and often result in significant structural changes in the industry segment concerned. Loans taken by such units have to be written off, entrepreneurs are tagged as defaulters and jobs are lost. This needs to be distinguished from business failure at an individual level as this is an exogenous event. Rather than attempting to compensate entrepreneurs for the event, changes to the MSMED Act, 2006 could be envisaged whereby a transition time of, say one year, is provided under the law to affected units for an orderly closure of their unit.

[Action: Ministry of MSME]

vi. Design of insurance products that address the special needs of MSMEs after a catastrophic event should be encouraged. This would include solutions for maintenance of income in case of business interruption, cost of re-education, partner insurance, key man insurance and capital for accessing loans. This insurance solution should be made available at an affordable price.

[Action: IRDA]

vii. TReDS platform mitigates risk arising out of non-payment of receivables of MSMEs who supply to a large buyer or are a part of a formal supply chain. Yet, there are many buyers who are not on TReDS. MSME sellers often take a blind call on the credentials of such buyers and their ability to pay in time. Trade Credit Insurance is an insurance product that secures the payment of such receivables and helps MSMEs sell to new buyers who may often be in distant geographies. There is a need to widely publicise this insurance product to MSMEs.

[Action: IRDA & Industry Associations]

[Para 7.20.4]

New Technological Interventions for MSME Lending

9.35 Financial Architecture for MSME Lending

A. Data for Non-Corporate entity

i. The creation of a unique identifier such as Unique Enterprise ID (UEI), on lines of Corporate data collected by Ministry of Corporate Affairs, wherein all details pertaining to any MSME firm can be integrated. The Committee recommends that the PAN be used as the UEI, and that CBDT may implement the following recommendations.

ii. The UEI should be used for creation of comprehensive reports pulled from different data sources that cover

1. Financial information (Ownership structure, Complete Financials, Auditor Comments)

2. Non- Financial Information (Registration details; Management details; related entity of the proprietor, partners; status of statutory compliance viz., TDS, GST, Export-Import regulation, etc.)

Each of the individual owners of the repositories with this information must be responsible for including the UEI in their database and making available an API for this access. The Department of Revenue (DOR) can be the coordinating agency, for successful completion of this task.

[Para 8.1.2]

B: Rating of MSME

The Committee recommends that RBI facilitate the creation of additional information sources from where a financial institution may download a report which includes a score for the entity based on additional factors including business risk, industry risk, management risk, and financial risk. Additional parameters used in this score could include: Business Vintage, GST compliance, Direct Tax compliance, PF and ESI compliance, Export compliance, Promoter Net Worth. Such reports could also provide additional information including peer comparisons and industry analysis.

[Para 8.1.4]

C: Credit Score of Buyers for MSMEs

The Committee recommends that RBI may enable the MSME to check the credit rating / Credit Monitoring Report (CMR) for their buyers, based on consent, through their primary banker. CMR being a strong indicator of liquidity risk, repayment track, specific behavior pertaining to vintage and regency to credit, the Committee recommends the incorporation of CMR in the credit rating mechanism.

[Para 8.1.6]

D: Disbursement Architecture and KYC Norms

i. It is suggested that online repositories like Ministry of Corporate Affairs website for corporates/LLPs, GST, Shop and Establishment be encouraged to open APIs for verification of documents issued by them. Further, various document issuing Departments of the Central and State Governments should also promote online repositories for this purpose. REs may validate document information real time through API based verification with the respective Government databases maintained by the issuing Department. Such API verification should be treated at par with physical verification of the documents submitted by customers which in turn would also mitigate the risk of fake / forged documents being submitted.

ii. Lenders may use API services (self or through FinTech providers) and maintain appropriate logs to evidence verification of such documents. Currently, for example GSTIN / PAN can be used to fetch the name of entity, registered address, e-mail id, and entity type through an API with GST database. The following APIs are currently available. Entity Proof for KYC -MCA (Fetch Corporate & Director details from MCA database), GST, NSDL (PAN), Service Tax, VAT, TIN, Shops & Establishment, IEC, Professional tax, ICAI, ICWAI, ICSI, FSSAI.

iii. The Committee further recommends that physical verification be replaced with electronic verification wherever possible. This includes:

1. Promotion of digital signatures by partners and directors for acceptance and documentation;

2. Creation of a platform to upload digital documents for online stamping which incorporates compliance with state-wise stamp duty payments;

3. Integration with online mortgage repository for ensuring end to end digital journey in secured cases;

4. Digital KYC which enables digital site visit with geo-location tagging, video KYC for ease & seamless on-boarding

iv. Video Based KYC - Presently the KYC process is manual and necessitates a physical presence, thus increasing costs and timelines in completing the required KYC processes. As an alternative to enabling e-KYC, the Committee recommends video KYC to be adopted as a part of digital financial architecture as a suitable alternative to performing a digital Aadhaar-based KYC process towards enabling non – physical customer onboarding.

[Para 8.1.8]

E: Approach to Universal Enterprise ID

The Committee strongly recommends that PAN, with appropriate changes prescribed in Chapter 8 be used as the Universal Enterprise Identifier. This will enable rapid adoption of this scheme and will allow many existing systems to adopt with no or minimal changes.

[Para 8.1.12]

[Action: Department of Revenue for PMLA changes, MeitY for digital signature and e-Governance changes, RBI for lending guidelines]

9.36 Regulatory Action Plan for Cash-Flow Lending

A. Create a new category of Loan Service Providers

With a view to enabling more customers to access credit, the regulator must create a new category - Loan Service Providers (LSPs) – who will be an agent of the borrowers. The LSPs offering individualized advice should act in borrowers' best interest, respecting fiduciary duties of disclosure, loyalty and prudence. Similarly, Lender agents like DSAs and brokers should be required to disclose conflicts that compromise their impartiality, such as incentives from lenders to market higher-priced loans over others, and clearly break out the fees they add to loans. Creating a clear, straightforward, lightly regulated charter of LSPs and DSAs would encourage additional innovation in the MSME lending space. Further, the Committee recommends that the RBI facilitate the creation of a Self-Regulatory Organization, on the lines of AMFI and RIAs, to organize and provide light touch regulation for this category of players.

B. Mandating Disclosure of Originations, Annual Percentage Rate (APRs), Default Rates, and Borrower Satisfaction across the MSME Lending market. The regulator must collect specific data, through the proposed PCR, from market players on their small business loan transactions, such as average APRs and default rates. This data, which should be released quarterly by RBI, will shed light on current practices and on the state of access to credit, deterring bad actors and reducing the risk of cumbersome regulation stifling important innovations.

C. MSME Lending Innovation Sandbox

RBI has already announced a draft framework for a Regulatory Sandbox. The Committee recommends that this be extended to bring in a focus on MSME lending with a view to simplifying the compliance process without compromising on the regulatory objectives. Sandbox participants should seek out innovative ways of executing the regulatory tasks such as data collection, compliance and reporting, and disclosure that takes advantage of technology, keep processes simple and leave room for continuous improvement and innovation in the way the regulations are implemented.

[Action: RBI Para 8.2]

9.37 Digital Public Infrastructure Action Plan for Cash-Flow Lending

A. Accelerate industry deployment of E-Liens so that future incoming cash-flows can be locked down for better loan repayment rates. Specifically, following needs to be done:

i. GST Council should require Buyers to pay only to the payment address mentioned in the GST Invoice.

ii. Issuance of a new standard for utilization of Transaction ID field such that invoice number and date are included. RBI should encourage unbundled payments against each invoice. This unbundling would allow for automatic reconciliations to happen and for E-Lien triggers to be generated. This shift is necessary to support lending in the MSME sector against future cash-flows.

iii. Upgradation of UPI e-mandate markup language to include event-triggers (in addition to time triggers) and its standardization across merchant credit card accounts, CASA accounts and UPI for E-Lien creation. The new E-Lien system allows for these future cash-flows to be locked to repay a loan. Today, this happens with post-dated cheques and e-NACH. There are time-based triggers. When this is expanded to include event-based triggers (e.g. when Buyer ABC pays, send 80% of the received amount to the Lender), cash-flow lending can be unleashed at full-scale. The system of describing the time or event-based triggers has to be a national standard so that lenders can make this work for incoming cash-flow into any bank account, credit card merchant account or UPI account. The quickest way to get to this national standard is to upgrade the already issued UPI 2.0 e-Mandate mark-up language.

iv. Instructions issued to report all E-Liens to PCR or CERSAI with provision for real-time lookups.

B. TReDS Second Window (discussed above)

C. Introduction Enterprise ID using PAN (as mentioned above) on a mission mode basis to ensure the availability of credit to MSMEs.

D. Connect GSTN to Account Aggregators (AA) and Upgrade E-Way Bill system to include Proof-of-Delivery (POD). Making GST invoices available to lender is essential for cash-flow lending to take off. For this, GSTN system needs to be connected to the AA system. Dematerializing of POD is essential for inventory financing for MSMEs to grow. The design is already in place. Only an implementation project needs to be created.