The survey found that over 31% of MSMEs still depend on money lenders for financial needs due to unfavourable interest rates and reluctance of banks to lend to them.

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Money MSME Wednesday, July 08, 2020 - 18:37

Nearly 78% Micro Small Medium Enterprises (MSME) in Tamil Nadu have temporarily shut down due to the COVID-19 pandemic, a report by IIT-Madras has revealed. Among these, 79% were micro and small firms, which were the worst hit. Around 68% of the enterprises have only less than one month of cash flows to cover their operations, while the rest have enough to meet expenses up to three months.

These findings were part of a study conducted by IIT-Madras titled: Covid-19 Outbreak and the Micro Small Medium Enterprises (MSMEs): A Study of Tamil Nadu.

The survey has also found that around 74% of the MSMEs surveyed have seen a revenue loss of more than 80%, while overall, the loss of revenue for MSMEs has been between 50-80%.

Talking about access to finance, the survey found that over 31% of MSMEs still depend on money lenders for financial needs.

MSMEs find that unfavourable interest rates (14.58%), mandating of collateral securities (21.14%), reluctance of banks to lend to MSMEs (45.32%) are the main obstacles to formal financing options.

In terms of business disruptions, delayed payments from buyers has been the major business disruption brought about due to the pandemic. Reduced logistics was the second biggest disruption.

MSMEs have also expressed concerns about employee absence due to ill health and domestic care.

Around 50% of MSMEs are also seeing cancellation of orders, making them financially fragile amid the slowdown in the economy.

“In the current context, especially for business to business (B2B) MSME enterprises, the financial fragility generated by the cancellation of orders is unsustainable. The cancellation of orders is likely to create a ripple effect since it is likely to create cash flow issues for the enterprises, which again will have a direct effect on the wage payments to the workers,” the report states.

Around 12% of the MSMEs say that it might take them 6 months to recover, while 14% feel that it might take them three months.

Interestingly, 68 percent of the enterprises have no intention to permanently shut-down.

The sectors that have been impacted the most are manufacturing, financial services, software, and transportation sector.

The survey also found that exporters have suffered more losses compared to the non-exporters with more than one third of the enterprises reporting payment towards raw materials and electricity tariff as a significant financial difficulty.

The survey states that these findings call for policies to mitigate the cash flow shortage, which has wider implications in the form of employee layoffs and large-scale firm exits.

Based on the findings of the survey, IIT Madras has also suggested a few policies that could be put in place to help MSMEs find new avenues for demand and skill development.

Improve access to capital: Improved access to finance, with reduced interest rate on loans and simpler processes is an essential step that would help business deal with the immediate aftermath of the crisis, the study notes.

“There should be targeted credit support policies aimed at supporting micro segment of the MSME sector. Credit should be extended not just to the existing borrowers but new borrowers, given that funding needs are likely to increase with the ensuing with the looming economic crisis. Steps should be taken to implement postponement of repayments of existing bank loans for specific time period (e.g., six months),” the study also suggested.

It also suggested that policy makers make payment of the pending GST compensation, increase borrowing of MSMEs finance its working capital requirements with the interest rate capped at 4-5% per annum and allow MSME to defer payment of principal and should pay interest till a period of one year after re-opening.

Among others, it has also suggested that MSMEs be given incentives such as concessions, deferral of the payment of property taxes, etc to reduce business costs. It also suggests that the challenge of skilled labour and human resource shortage be addressed.

“Tamil Nadu can introduce State Enterprise Development Grant, create a special fund for micro enterprises, provide subsidy to the MSMEs to produce PPEs, masks, gloves, and medical kits,” it further suggests.

In terms of long-term policy interventions, the study suggests that a Trade Loan Programme be initiated to allow medium and small firms to get higher amount of loan to finance trade needs. It also says that the government should enable job support scheme where it should co-fund for a period of not less than one year and also introduce wage credit scheme to support increase in wage rate.