It’s time to focus on making it easy to do ‘small’ businesses

For over 110 million people in India involved in the MSME sector, the past 12 months have been a nightmare. The pandemic-induced disruption of demand, credit availability and labor supply has been a pincer movement that has devastated the financial health of many MSMEs. Surveys estimate that 82% of MSMEs were negatively impacted by the first wave of the pandemic, and 25 to 40% of them could go out of business. The second wave will likely worsen these numbers.

But the problems of Indian MSMEs predate the pandemic. Systemic bottlenecks and red tape, lack of affordable credit, inefficient supply chains and poor market access have crippled the sector for decades. The current crisis has shone the spotlight on these issues. We therefore believe that it is appropriate to revisit the solutions to transform the business environment of Indian MSMEs and to present concrete proposals.

1. Rethinking MSME credit: Perhaps the biggest challenge for the MSME sector is the limited availability of formal credit. The World Bank had estimated that there is a credit deficit of Rs 16.6 lakh crore. The pandemic has exacerbated this situation because risk aversion has set in and has caused a credit flight to the detriment of micro-enterprises perceived as more risky.

While much is being done to address these issues, there are two new ideas that show promise.

First, double the credit guarantees focused on MSMEs. Credit guarantees can play an important role in channeling credit to MSMEs by mitigating some of the perceived risks associated with lending to this segment. While the Government’s Emergency Line of Credit Guarantee Program (ECLGS) has injected much needed guarantee capital of Rs 3 lakh crore over the past year, more can be done to help non-bank financial corporations (NBFCs) in particular, who are the main credit providers in the MSME sector. Credit guarantee systems should be extended to wholesale loans to ensure better credit transmission. We believe it’s time to think about a private sector-led credit guarantee company model that can fill critical gaps by focusing on wholesale lending by NBFCs and deploying efficient payment processes.

Second, introduce new MSME-focused financial instruments that respond to the lived reality of MSMEs. An example is a ‘repayable grant’, a hybrid financial instrument that aims to get the most out of a grant and a loan, where the borrowing firm repays the principal amount as it reaches certain limits. planned stages of financial recovery. This type of instrument is particularly useful during external shocks such as the pandemic and tends to be at least six times more capital efficient than a grant by providing a pool of revolving capital. Although in its infancy, the recently launched REVIVE repayable grant program is an example of such an effort.

2. Complete the loop on the digitization of MSMEs: From Kirana stores taking orders on WhatsApp to digital payments at your fruit vendor, the pandemic has been an inflection point in the MSME digitization journey. However, many of the critical government contact points for an MSME, including compliance statements, government program applications, and bank loan processing, still remain largely manual and cumbersome.

This is the time when governments should enable end-to-end digital platforms to allow smoother compliance and access to government programs. While many such efforts have been attempted, to be effective they need to ‘close the loop’ – that is, digital platforms need to go beyond information sharing and acceptance. applications, to allow a transparent execution of the task. This “plumbing” requires greater intergovernmental collaboration because it involves several ministries.

3. Take a systems approach to improve the ease of doing (small) business: For a small business owner, operating in the best of circumstances requires overcoming regulatory hurdles on a regular basis. Avantis research shows that a typical MSME must file more than 750 compliances each year. The specter of Inspector Raj looms daily. A plethora of reforms is needed, but tackling them piecemeal will not create a dent as the challenges facing MSMEs are particularly interconnected.

Recognizing interdependence, states need to make a paradigm shift to improve the “ease of doing (small) business”. This needs to be anchored on pillars such as decriminalization (of minor infractions), streamlining of compliances (such as reducing the number of labor registers to be maintained), digitizing processes and reducing bureaucratic discretion. Such an approach must be anchored by political and administrative leadership at the highest level. A recent effort by the government of Punjab in this direction, led by the Chief Minister and Chief Secretary, provides a promising case study. Based on a quick expert analysis, the government of Punjab was able to rationalize the number of labor registers to be kept by an MSME from 60 to 14, decriminalize over 300 low-risk infractions and reduce the discretionary powers of inspectors. of work, all in a few months. More ambitious measures such as the rationalization and reduction of the number of licenses, the change of land use and the facilitation of access to connections to public services are on the anvil. This could be a useful “flagship model” from which other states could learn.

Much like the cliché, this crisis presents a significant opportunity to continually reshape the ease of doing small businesses in India. Now is the time to seize it.

The authors work at Omidyar Network India, a social impact investment firm.


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