MSME Sector: COVID-19 has made a very negative impact on the Indian economy. Especially the micro, small and medium industries (MSME) have had a great impact on it. There was a huge decline in the revenue of this sector, which employs about 10 crore people. The working capital problem has arisen in front of the sector. This has also affected its supply chain. Payment is delayed and there is a shortage of workers. Liquidity problems have put the sector at risk and now it is forced to work on a reduced scale. But the sector can be strengthened by implementing new policy interventions such as the Fund of Funds properly. At the same time, an India fund is needed for MSMEs to move away from the existing venture capital ecosystem.
Dependent on debt financing
As far as funding of this sector is concerned, traditionally this sector depends on debt financing. Despite all instructions from the government, financial institutions and non-banking financial companies have been taking a cautious approach in funding this sector. In view of these conditions, the Government of India has announced the ‘Fund of Funds’ scheme as a step of financial relief. With this, the capital flow of 10 thousand crores will be possible for the MSME sector in the country. With this, around 25 lakh MSME enterprises across the country will be able to get funds.
The allocation under this campaign has also been increased in the budget of the next financial year. The aim is to provide funds to MSMEs so that they can overcome the current crisis of capital shortage.
Under ‘Fund of Funds’, funds will be made available to triple-A-rated MSMEs who do not have funds or have not been able to get funds from any other source.
Will this be helpful for MSME?
The Fund of Funds announced by the Government of India is indeed a step in the right direction. This will help to revive the 2.5 million MSME enterprises that are struggling to expand and stay in the market. This will also be helpful for those MSMEs who are in the very early stage. This fund can buy up to 15 per cent of their equity. This will help MSMEs to get listed in the stock market. This will not only bring many enterprises into the mainstream, but they will also be able to get funds from formal channels with appropriate credit rating.
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Credit guarantee scheme
With this, the government has announced a credit guarantee scheme. This scheme will help MSMEs to get loans during the crisis. Traditionally, it is a bit difficult for MSMEs to get loans as there is a high credit risk associated with this sector. However, this guarantee will help MSMEs to get loans from financial institutions.
Trouble for small businessmen
Since this fund is only for Triple-A rated MSMEs, this scheme will not be sufficient for most MSMEs in the country. This means that there will be a problem of small businessmen who have always faced difficulties in getting funds from formal financial channels.
Although the Performance and Credit Rating Scheme launched by the MSME Ministry can be a solution to this problem in the long term, it will not provide any special relief to the small MSMEs. The current situation has created a situation of crisis in front of them.
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Regional Exchanges Needed
If you look at the MSME scenario of the country, you will find that how unbalanced the situation is. There are 77 lakh MSMEs in the southern states, in which one crore ninety million workers work. After this comes the number of North India, Western India and North East.
Therefore, there is a need for regional exchanges so that initiatives can be taken towards MSME funding and funds can be provided to MSMEs according to their business size and needs. Apart from exchanges, this sector can also be opened for retail investors. It can also provide the income tax benefit.
Why regional exchange is important
Regional exchanges are also important because not only will retail investors of non-metro and mini-metro cities get an opportunity to invest but will also get an opportunity to understand the specific business of the respective areas. This will give them good valuation as well as a better understanding of the problems and challenges of local MSMEs. It can also help in a better understanding of cash flow.
Why the need for an alternative eco-system for MSME?
We play a role in accelerating the MSME economy, so it is very important to groom it carefully through policies and regulations so that they can stand on their own feet.
Amidst the news of the emerging start-up ecosystem and record fundraising, the focus is on increasing the number of accelerators/programs from well-known venture capital funds and start-ups. Therefore, there is a need to provide both funds and human resources to MSMEs on behalf of the government and private players. This will allow the expansion of the entrepreneurial eco-system in India.
MSMEs that serve the value chain at the grassroots level will not only give a solid boost to the basic economy but will also develop a culture of risk-taking, innovation and entrepreneurship. This will further strengthen India’s capabilities in the global market