Rising commodity prices, problems in accessing credit and payment delays have accentuated the financial distress of MSMEs that have borne the brunt of the pandemic. Steps such as the Emergency Credit Line Guarantee Scheme (ECLGS) offered by banks to MSMEs to repay loans following the pandemic have helped. MSMEs also need equity support. They get only about 15% of their credit from banks, with the rest coming from shadow banks and informal sources at a high interest cost. So, these businesses need infusion of non-debt capital (read: equity) that they needn't service till they turn around.
GoI's fund of funds was meant to infuse over ₹50,000 crore in equity to invest in MSMEs. Apparently, MSMEs are wary over questions being asked (by investors) about their books, especially since most of them are proprietorship firms. GoI should have a dialogue with MSME promoters, but the need is to ensure swift equity infusion. The equity can be regained once the operations of these companies stabilise as the economy recovers. Buying equity stakes in MSMEs will help formalise the sector and enable these firms to access credit at much cheaper rates.
All outstanding public sector dues to MSMEs should be cleared. Although all companies with a turnover of ₹500 crore have to register on TReDS (Trade Receivables Discounting System), an online factoring platform that links buyers, suppliers and financiers, many are either not registered or don't use it. TReDS' purpose is to put an end to the use of monopsony power of large buyers vis-a-vis small buyers and help ease the working capital shortage of MSMEs. So, failure to register or use the platform must be declared an offence.