MSME : The backbone of economy

A Special Feature | Courtesy – NABARD Head Office | Mumbai

 The Micro Small and Medium Enterprises (MSMEs) sector has been globally considered as an engine of economic growth and as a key instrument for promoting equitable development. The major advantage of this sector is its employment generation potential at low capital investment. The intensity of employment generation of this sector is much higher than that of large enterprises. MSMEs constitute more than 90% of total enterprises in most of the countries. They are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.

MSMEs in India

As per the National Sample Survey 73^rd Round (2015-16) as reported in MSME Annual Report 2021, India’s MSME Sector comprises of 633.88 lakh units employing over 11 crore people and contributing around 30.27% to GDP with 6.11% coming from manufacturing and around 24.16% being contributed by services, 45% of the manufacturing output, and approximately 45% of the country’s exports.

Micro enterprises constitutes more than 99% of the total estimated number while Small and Medium enterprises account for 0.52% and 0.021% of total estimated MSMEs respectively. MSMEs are present in both rural and urban areas. Nearly 51% of MSMEs are in rural area while 49% in urban areas.

Key data on MSMEs

S. No.	Particulars	Amount Number
1	No. of MSME units	633.88 Lakh
2	No. of persons employed in MSME sector	1109.19 Lakh
3	Margin money assistance extended to MSMEs under PM Employment Generation Programme (PMEGP) to 32227 units	Rs.1002.58 crore
4	Quantum of subsidy released to MSME units under Credit Linked Capital Subsidy Scheme (CLCSS)	Rs.454.16 crore
5	Credit guarantee cover approved for 4.07 lakh MSME units	Rs.27192 crore
{Source: National Sample Survey 73rd Round (2015-16) and Annual Report on MSME 2020-21}

MSMES are a major contributor to the socio-economic development of the country. The sector has gained significant importance due to its contribution to Gross Domestic Product (GDP) of the country and exports.

In India, MSMEs are highly heterogeneous in terms of their size, outputs and services and adoption of level of technology. They are not only generating employment at low investment but also helping in reducing industrial backwardness of rural areas, regional imbalances and assuring equitable distribution of national income and wealth.

The location and size are two important characteristic features of Indian MSMEs which are affecting their growth and ability employment generation potential. As per MSME Annual Report 2020-21, about 51% of the MSMEs are in rural India. Uttar Pradesh is the leading state with the maximum number of MSMEs at 89.99 lakh, (14%) as per the 73^rd Round of NSSO survey. Among the total registered MSMEs, Micro enterprises constitute most of the enterprises (93%) while remaining are mostly the small enterprises (6%) with medium enterprises comprise of just 1% of the total enterprises registered on the Udyam Registration.

Thus, MSMEs are becoming the second-largest employment generating sector after agriculture. The MSME ministry targets to increase its contribution towards GDP by up to 50% by 2025 as India moves ahead to become a $5 trillion economy. It will not be out of place to refer to the MSME Sector as the ‘Backbone of the Country or Growth Engines of the Economy’.

MSMEs promote all-inclusive growth by providing employment opportunities, especially to people belonging to weaker sections of the society in the rural areas. Nearly 20.37% of the MSMEs are women-led enterprises. In tier-2 and tier-3 cities, MSMEs help in creating opportunities for people to use banking services and products, which help in financial inclusion. Socially backward groups owned almost 66.27% of the MSMEs and bulk of these at 44.72% are owned by OBCs. This inclination towards self-employment will help the empowerment of these communities and will go a long way in social re-engineering.

MSMEs have played an essential role in providing employment opportunities in rural areas, with about 40% of the total workers employed in the MSME sector being from the rural areas with 50% operative units located in rural areas. They have helped in the industrialization of these areas with a low capital cost compared to the large industries. Acting as a complementary unit to large sectors, the MSME sector has enormously contributed to the socio-economic development of the country.

The MSME segment has proven to be a highly dynamic sector of Indian economy. MSMEs produce and manufacture a variety of products for both domestic as well as international markets. They have helped in promoting the growth and development of khadi, village, and coir industries. They have collaborated and worked with the concerned ministries, state governments, and stakeholders towards the upbringing of rural areas.

The Indian MSME sector provides silent support to the national economy and act as a defence against global economic shock and adversities. Hence, we can say that Indian is propelling towards a robust global economy through a silent revolution powered by MSMEs.

We must also appreciate that it is the MSMEs that provide work to weavers and artisans in the rural areas. The MSMEs are the succor of the youth who wish to set up enterprises, emerge as new age entrepreneurs with scarce capital but with a burning ambition and the zeal to achieve something in life. MSMEs promote innovation by providing an opportunity to budding entrepreneurs to help them build creative products and thereby boost competition in business and fuel the growth.

With the extensive promotion and support being extended by the Government, the environment in which MSMEs have been operating has considerably improved over the years and the opportunities for MSMEs are enormous. The Government has provided for reservations to MSMEs for exclusive manufacture of 836 specified products and also exclusive purchase by the government, as well as incentives for exports, has eased restrictions on procurement of machinery and raw material, has modified the labour laws in favour of the MSMEs. It has also devised schemes and provided incentives to avail credit, subsidies, collateral free loans and credit guarantees available to entrepreneurs.

The Government as well as corporates have helped to create a vast pool of trained technical man-power as well as managerial staff through skill development and reskilling programmes. Project profiles and consultants are easily available to set up projects on a turn-key basis. The requirements for ancillary units due to the increase in number of green field units coming up in the large-scale sector has also helped MSME sector to perform exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification.  There is good demand from the domestic market for goods and services as well.

Major challenges for Indian MSMEs

However, all is not well with the MSME sector. Although policies are in place, the absence of adequate and timely banking finance, especially working capital, lack of Access to financing solutions, are major impediments in the sustainability of MSMEs. The entrepreneur too has limited capital and financial expertise. He also suffers from lack of sufficient knowledge, know-how and non-availability of suitable technology. MSMEs also suffer from low production capacity, ineffective marketing strategy, constraints on modernization & expansion, non-availability of skilled labour at affordable cost, labour issues, etc. Ability to access cheap modern technology remains a major deterrent for MSMEs, which in turn results in high costs and low quality products.

Access to finance remains a continuing challenge. The risks in turn can be traced to inability to pay and unwillingness to pay. The inability to pay can be traced to business risk factors such as delayed buyer payments embedded in supply chains or supplying to government entities and other business risks, including changes in consumer demand or extraneous events that create a slow-down in the market.

Assessing the creditworthiness of MSMEs can be difficult due to information asymmetry, particularly with respect to financial performance of the business. In the absence of collateral, under-writing the customer often entails a “high-touch” approach which translates into higher operating cost. This can be addressed by bringing greater innovation in how small business loans are evaluated, underwritten, and managed. Electronic KYC, paperless (digital) applications, rapid loan underwriting and a greater emphasis on customer service can redefine the lending to MSME sector.

The third reason of credit gap is lender coverage. While many urban areas have sufficient lender coverage, there is very poor credit depth in large parts of the country especially in rural areas. This remoteness translates into weaker access to formal credit. The Govt. and the RBI are continuously trying to address the banking and credit related issues of the MSME sector.

Given the vastness of the country and the MSME sector, it is only imperative that a multi-agency approach is adopted to tackle the issues of the sector, including GoI, Ministry of MSME, SIDBI, RBI, NABARD, CII, Assocham, associations of the MSME, etc.

The micro, small and medium-sized enterprises (MSMEs), the most vulnerable to the Covid-19 induced economic stress, are facing a hard time in getting loans as banks remain risk-averse and continue cherry-picking credit portfolios with caution. However, it is extremely encouraging to note that credit growth to the MSME sector has witnessed sharp rebound and registered a 5.7% YoY growth in September 2020 on account of the large policy stimulus by the Government including ECLGS. As on December 2020, 423 lakh MSMEs had a loan outstanding of Rs.1686325 crore.

Policy interventions of Government of India for development of MSMEs Emergency Credit Line Guarantee Scheme for MSME

The Government is looking to make urban co-operative banks eligible to lend under the Rs.3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for micro, small and medium enterprises (MSMEs), introduced under the GOI’s Atma Nirbhar Bharat package for reviving enterprises that suffered losses during Covid-19 lockdown.

Credit Guarantee Scheme for Subordinate Debt (CGSSD)

This scheme has been launched by GoI to provide guarantee coverage to Scheduled Commercial banks (SCBs) for providing personal loan through banks to the promoters of stressed MSMEs for infusion as equity / quasi equity / sub-debt in the business eligible for restructuring, as per RBI guidelines.

Public Procurement Policy for Micro and Small Enterprises (MSMEs)

The objective of Policy is promotion and development of Micro and Small Enterprises by supporting them in marketing of products produced and services rendered by them. Some of the concessions and facilities provided under the policy are given below:

• Every Central Ministry / Department / PSUs shall set an annual target for 25% procurement from MSME sector.

• A sub-target of 4% out of 25% target of annual procurement earmarked for procurement from MSMEs owned by SC/ST entrepreneurs.

• Special provision for Micro and Small Enterprise owned by women is that out of the total annual procurement from Micro and Small Enterprises, 3 per cent from within the 25 per cent target shall be earmarked for procurement from MSEs owned by women.

• Tender sets free of cost and exemption from payment of earnest money to registered MSEs.

Role of NABARD in GoI Schemes designed for MSMEs

1. Stand-up India

Stand Up India Scheme (SUI) launched by Government of India facilitates bank loans ranging from Rs.10.00 lakh to Rs.1.00 crore to at least one SC or ST borrower, and at least one woman borrower, per bank branch for setting up and enterprise. NABARD continues to be the Connect Centre for organizing pre and post disbursement handholding events at district level, to share best practices, review the programme, problem solving and guiding the potential borrowers. Now, agriculture and allied activities have also been included under the Scheme. During 2020-21, 238 events have been organized by DDMs of NABARD who act as Stand up India Connect Centres.

1. Credit Linked Capital Subsidy Scheme for Technology upgradation of micro and small enterprises

NABARD is one of the nodal agencies for implementing the Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation of Micro & Small Enterprises of Government of India. The Scheme supports the induction of proven and improved technologies into micro and small units in specified products/sub-sectors. A total of 239 CLCSS subsidy applications pertaining to 2017-18, 2018-19 and 2019-20 were scrutinized and forwarded to the Ministry for sanction of subsidy.

Recently, Ministry of MSME, GoI has introduced the Special Credit Linked Capital Subsidy Scheme (SCLCSS) under National SC-ST Hub (NSSH) with the objective to promote new enterprises and support the existing enterprises in their capacity development for enhanced participation in the public procurement. The subsidy of 25% will be provided to the eligible SC/ST MSEs of manufacturing sector from National SCST Hub. National Small Industries Corporation Ltd will settle the subsidy claims under the scheme with budgetary support available under NSSH. The scheme is operational up to 31^st March 2026.

1. Scheme of Fund for Regeneration of Traditional Industries (SFURTI)

It is an initiative by Ministry of MSME to promote cluster development. The objectives of this Scheme are to provide sustained employment for traditional industry artisans, weavers, rural entrepreneurs; skill development of artisans and entrepreneurs; development of new products and designs; develop better packaging and marketing infrastructure, etc. These objectives are in resonance with those of NABARD. Hence, NABARD is exploring the possibility of undertaking collaborative interventions in the SFURTI clusters by implementing various schemes of NABARD under GVN which are feasible, add value to the cluster.

For example, when the Chanapatna Wooden Toys Cluster secured funding support under the SFURTI Scheme of the Ministry of MSMEs. NABARD collaborated with the OFPO set up by the artisan community and provided financial assistance of Rs.86.80 lakh for setting up a localized manufacturing centres in hub and spoke model, institutional building, RFA, etc. While the SFURTI intervention provided machinery and CFC facilities, NABARD addressed the gap in marketing interventions that was not covered under SFURTI.

Major initiatives of NABARD for development of MSME sector

NABARD, as the “Development Bank of the Nation”, has the mandate of providing and regulating credit and grant assistance for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts, and other allied economic activities in rural areas for promotion of rural development and securing prosperity of rural India.

With its focused approach on mandate, NABARD has taken many initiatives for development of MSME sector in rural areas of the country and they are presented in the following paragraphs:

1. Refinance to Off Farm Sector

NABARD has been extending Short term, Medium term and Long term refinance support to rural financial institutions for their lending to rural off farm sector. The refinance product of NABARD covers the entire gamut of manufacturing, processing and service activities in the small and micro enterprises sector with a focus on cottage, village and tiny industries, rural artisans and rural crafts as also financing rural housing projects. Financial support to this sector is more than a third of NABARD’s total support for Investment credit purposes.

1. Promotion of Rural Enterprises and Local Employment through Off Farm Producer Organization (OFPO)

Off-Farm Producer Organizations (OFPOs) play an important role in promoting rural enterprises in handloom, handicraft and agro-processing sectors to generate local employment through value addition, design innovation and development, processing, brand building, creation of storage and logistics infrastructure, mechanization and development of technology plus strong forward and backward linkages. This ultimately brings in sustainable and inclusive development through collectivization and formalization.

As on 31^st March 2021, 40 OFPOs covering around 14043 artisans and weavers have been supported with grant assistance of Rs.17.38 crore across 20 States.

1. NABARD Agri Business Incubation Centres (ABIC) and Agri Startup Ecosystem

NABARD has been supporting the start-up eco system through Agri Business Incubation Centres (ABICs) since 2017. So far, NABARD has supported 7 Rural/Agri business Incubation Centres with total financial support of Rs.63.29 cr. These 7 centres will provide direct and indirect benefit to about 47000 farmers. The Rural/Agri Business Incubation centres have helped in nurturing start-ups and FPOs as sustainable business models. As on date, 350 incubatees have been registered with these incubation centres are likely to benefit 22,000 farmers.

Catalytic Capital Fund

NABARD has set up a Rs.100 crore Catalytic Capital Fund in 2020-21 to support Agri and Rural Start-ups through Incubation Centres and NABARD subsidiaries. The Catalytic Capital would cater to “Valley of Death” stage financing of Agri& Rural Startups.

1. Marketing initiatives

To support producers in the farm and off-farm sector to market their produce so as to get better returns, NABARD has been extending support for setting up of rural haat, rural marts and enabling participation of artisans and craftsmen in national and regional level exhibitions and melas.

1. Rural Haats (Local market setup)

Rural Haats have emerged as forward linkages for producer organizations, village watershed and tribal development committees, artisan groups, etc., by providing them with basic infrastructural facilities to sell their produce. As on 31.03.2021, cumulatively, 636 rural haats have been supported with grant assistance of Rs.42.27 crore.

• Rural Mart (Outlet for rural products)

Rural Marts help to promote entrepreneurship amongst producer communities. As on 31.03.2021, cumulatively, 1085 rural marts have been supported with grant assistance of Rs.23.15 crore.

Rural mobile vans:

Mobile vans in lieu of brick and mortar rural marts emerged as an important part of the agri value chain by helping FPOs to reach directly to the end user with their produce.

• Exhibitions / Melas for marketing of MSME produce

Exhibitions and Melas provide a direct marketing platform to the artisans enabling the artisan to gain valuable market intelligence, knowledge of customer preferences and also obtain bulk orders. The COVID-19 pandemic and the subsequent lock down impacted the artisans and weaver extremely hard as public gatherings were prohibited and exhibitions came to a complete halt in 2020-21.

v.         Promotion of Geographical Indications (GI) Products

The Geographical Indications (GI) tag ensures that only those registered as authorized users (or at least those residing inside the geographic territory) are allowed to use the popular product name right and provides for legal action against those infringing the provisions of the Act. NABARD has so far supported GI registration of 72 products including Black Pottery (Nizamabad), Wall hanging (Ghazipur), Soft Stone Jali Work (Varanasi), Gulabi Minakari (Banaras), Handmade Dari (Mirzapur), etc.

vi.        Skilling the unskilled through NABSKILL portal

In tune with Government of India’s goal, NABARD has developed a structured approach for addressing the skill gap in rural India through demand and outcome-based skilling programmes leading to wage employment or establishment of enterprises.

• Promotion of rural tourism

Rural Tourism benefits the local rural communities economically through opportunities for rural enterprises, income generation and employment. It helps in nurturing rural arts and crafts, rural infrastructure development while simultaneously preserving environment and cultural heritage.

NABARD promoted home stays as part of Rural Tourism in Pangi, Chamba district; Himachal Pradesh aimed at benefitting 263 tribal households.

Issues pertaining to MSME Lending by RRBs and Rural Co-operative Banks

1. The criteria prescribed for registration of RRBs as Member Lending Institution (MLIs) with Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is more stringent when compared to other category of Scheduled Commercial Banks. It is suggested that the criteria be uniform for commercial banks and RRBs to enable them to be registered as MLIs with CGTMSE. This will give a boost to enhancing MSME financing by RRBs.

• Under Emergency Credit Line Guarantee Scheme (ECLGS) of NCGTC, Scheduled Commercial Banks, Financial Institutions (As defined in sub-clause (i) of clause (c) of Section 45-I of RBI Act) and other NBFCs are made eligible as MLIs, and thus cooperative banks are excluded. If the co-operative banks having less NPAs are included as MLIs under ECLGS scheme, it will further boost to MSME financing.

(Shilpa Bichitra | Anniversary Edition | 2022)