> New Definition of MSMEs:
From a legal perspective, the definition of MSMEs as under Section 7 (1) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) will be revised by raising the investment limit and while earlier, the Section 7(1) of the MSMED Act classified enterprises as micro, small and medium enterprises based on the size of their investments now an additional criterion of turnover is also being introduced. The distinction between manufacturing and service sector will also be eliminated. The existing and revised definition of MSME‟s is as under:
|Enterprise||Existing Definition||Revised Definition|
|Micro Enterprise||Manufacturing: Investment of less than INR 25 lakh||Investment of less than INR 1 crore and turnover of less than INR 5 crore|
|Service: Investment of less than INR 10 lakh|
|Small Enterprise||Manufacturing: Investment of less than INR 5 crore||Investment of less than INR 10 crore and turnover of less than INR 50 crore|
|Service: Investment of less than INR 2 crore|
|Medium Enterprise||Manufacturing: Investment of less than INR 10 crore||Investment of less than INR 20 crore and turnover of less than INR 100 crore|
|Service: Investment of less than INR 5 crores|
The revised definition now allows a greater number of entities to come under the ambit of the definition of MSMEs, based on the criteria of investment threshold and turnover. Thus, a greater number of entities may benefit from the advantages such as low interest rate loans, direct tax incentives, stamp duty and registration exemptions and other central and state incentives provided to MSMEs. The earlier held position that MSMEs would lose their benefits if they grow has been removed to enable growth of these entities with the continuing benefits.
> Collateral-free Automatic Loans for Businesses, including MSMEs
To provide relief to the business including MSMEs, additional working capital finance of 20% of the outstanding credit as on 29 February 2020, in the form of a Term Loan at a concessional rate of interest will be provided. This will be available to units with upto Rs. 25 crore outstanding and turnover of up to Rs. 100 crore whose accounts are standard. The units will not have to provide any guarantee or collateral of their own. The amount will be 100% guaranteed by the Government of India providing a total liquidity of Rs. 3 lakh crores to more than 45 lakh MSMEs.
The key features of the said emergency line of credit are as follows:
1. Borrowers that have up to INR 25 crore outstanding and INR 100 crore turnover, shall be eligible.
2. The loans shall have a 4 year tenor with a moratorium of 12 months on principal repayment.
3. The loans shall be secured by a 100% credit guarantee cover on both the principal and interest.
Although several measures like the emergency line of credit are being introduced for the MSME sector, there is no clarity and direction about prioritising the relief to the entities who are really in need of the relief. There are more than 6 crore registered MSMEs in India. With the change of the definition proposed by the finance minister, this number is going to rise. Not all of them require the same amount of attention. Several entities that are in the business of providing essential services or are in the agriculture sector, may not be in need of such a line of credit, as their businesses may not have suffered on account of the Covid-19 pandemic. On the contrary there are MSMEs like those in the retail sector (like jewellers etc) who have had negligent business till a few days before lockdown and no business from the beginning of lockdown. Such retail MSMEs whose products are luxury or items being purchased as savings, will at least take another year to have any possibility of normalcy to their business. Such MSMEs need relief in priority and would need assistance to cut through all the red tape. It would therefore be preferable to have guidelines and directions to prioritise applications made to financial institutions by certain sectoral MSMEs. The financial institutions should also be obligated to report the details of loans provided to the government under each of the schemes. A proper MIS should be submitted to ensure due compliance. It would be key to take note that the moratorium for repayment extends only to the principle amount of the loan and not to the interest component. It may be realistic that most MSMEs may need the respite from making the interest payments as well for the first year. It is anyway part of a stimulus package and therefore adequate comfort would be available to the financial institution. Only receipt of interest would no way be making up for the fund requirements of the financial institutions. However, by providing complete reprieve for a year, the risk of default would have reduced and so would have stress on the government credit guarantee.
> Schemes provided for marketing to MSMEs by Government of India
The Ministry implements the Marketing Assistance scheme through National Small Industries Corporation (NSIC) Limited for providing marketing support to MSMEs. The main objectives of the scheme is to enhance the marketing competitiveness of MSMEs; to provide them a platform for interaction with the individual/institutional buyers; to update them with prevalent market scenario and to provide them a form for redressing their problems. MSMEs are supported under the Scheme for capturing the new market opportunities through organising/ participating in various domestic & international exhibitions/ trade fairs, Buyer-Seller meets intensive-campaigns and other marketing events.
> The status of lending by banks to this sector
Bank’s lending to the Micro and Small enterprises engaged in the manufacture or production of goods specified in the first schedule to the Industries (Development and regulation) Act, 1951 and notified by the Government from time to time is reckoned for priority sector advances. However, bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006 are eligible to be reckoned for priority sector advances. Lending to Medium enterprises is not eligible to be included for the purpose of computation of priority sector lending.
> Targets prescribed for lending by banks to MSMEs
As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. In terms of the recommendations of the Prime Minister’s Task Force on MSMEs banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises, a 10 per cent annual growth in the number of micro enterprise accounts and 60% of total lending to MSE sector as on preceding March 31st to Micro enterprises. In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that: 40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 10 lakh and micro (service) enterprises having investment in equipment up to Rs. 4 lakh ; 20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 10 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 4 lakh and up to Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises.
> Government disallows global tendering up to ₹200 crore in boost to MSMEs
The ministry of finance stated that no global tender however shall be invited for tenders up to 200 Crore or such limit as may be prescribed by the department of expenditure from time to time.
> Indian MSMEs and other companies have often faced unfair competition from foreign companies;
> Necessary amendments of General Financial Rules will be effected;
> This will be a step towards Self- Reliant India (Aatamnirbhar Bharat) and support Make in India; and
> This will also help MSMEs to increase their business.
Authored By: Dharmendar Kamti & Nancy Garg