Ensure small biz not choked by high interest rate regime
As India strives to rein in inflation by hiking interest rates, a string of micro, small and medium enterprises (MSMEs) is staring at a potential blackout. The MSME family, referred to as the backbone of India’s economy, is spread across the country with 7.9 million units, per the latest government enumeration. The sheer number gives an insight into their essential role in providing employment opportunities, especially in underprivileged areas. What sets them apart is their high job-creation potential despite the low capital investment and an admirable contribution to domestic production.
Recent reports suggest that many biz units that survived the terrible pandemic are gasping for breath again, with low-priced loans turning out to be a mirage. The expansion of payment cycles and unavailability of working capital have threatened to pull the rug from under their feet. It had already dealt a blow to some small enterprises, as hurting as it was in the aftermath of demonetisation in 2016 when cash flow became the first casualty. Delayed payments from large enterprises and original equipment manufacturers have pushed many small business people to the brink. According to the RBI data, credit growth to micro and small enterprises has accelerated to 28.2% from 12.1% a year ago. In comparison, medium enterprises recorded credit growth of 35.6%, much lower than the 52.3% growth reported last year.
Most businesspersons are looking for higher credit to keep their businesses on track. A young entrepreneur who runs an auto component manufacturing unit in Chennai’s Ambattur told TNIE they are forced to run from pillar to post for working capital daily, with banks refusing to give loans without collateral. The Centre’s Emergency Credit Line Guarantee Scheme (ECLGS) aims to revive pandemic-hit units with unsecured loans, mostly benefiting large players.
While banks levy interest anywhere between 9–12%, NBFCs charge upwards of 16% depending on the client’s risk profile. On the flip side, several small business owners are living with unsustainable debt piled up over the years and discrepancies in CIBIL scores. The government should address these issues on a priority basis. An interest subvention and other policy interventions, such as additional export incentives, will give them a lifeline. While lending, banks should count their order book size and years of business experience. Nurturing a healthy ecosystem of MSMEs will help the government achieve its three objectives: job creation, eradication of poverty and increased social inclusiveness.