Solutions to the Challenges faced by MSMEs: COVID times and way forward

With a very large number of MSMEs struggling with cash flows, due to delayed payments, reduced customer demand and a general slow-down in the economy, it is important to focus on getting demand back as soon as possible. The best way would be to incentivise accelerated spending over the next 6 months.

  1. Revenue – the cash flow challenges

Over the past few weeks, MSMEs across the world have been facing unprecedented challenges. For MSMEs in consumer businesses such as hotels, restaurants, salons, gyms, movie theatres, distribution firms, and other non-essential retail, revenues are down to near zero.

Firms operating in the B2B space have also seen revenues dip substantially. We have heard of multiple instances of large customers canceling long term contracts and enterprise customers delaying payments. Cash collections have slowed down or completely stopped.

Most of the MSME founders are in a state of shock and there is a total lack of clarity on when customers will return. The rare few who don’t face this problem should consider themselves lucky.

  1. Expenses – how do you pay?

On the other hand, the firms have to continue to pay for certain necessary expenses, such as employee salaries, utility payments, rentals, etc. With the lack of cash collections, many of these payments are being delayed or reduced. Firms are resorting to reduced salaries and asking landlords to delay rental payments. Supplier payments are being delayed.

Firms are looking to mitigate cash flow pressures, through the RBI provided a temporary moratorium on existing borrowings and the set-off benefits on GST and TDS payments provided by the government, though these come at a cost.

  1. Can one turn to the bank for help?

The firms can look to the banks for loans to help with cash flows, but given the uncertainty over the business, banks are also reluctant to lend till there is more clarity. Remember, the bank can lend only if they are confident of collecting the principal and interest. If there is a material risk for the loan to be repaid, it is not in the best interest of the bank to provide the loan – else the bank runs a high risk of default on the loan.

Given the triple pressures of Low or No Cash Collections (Revenues), necessary payments to be made and limited borrowing opportunities, the MSMEs are using whatever little cash cushion to manage, but if the weak demand continues for slightly longer, then the situation looks dire for a large number of MSMEs. The Risk of bankruptcies is very high.

  1. What are MSMEs doing

In this situation, MSMEs are first focussing on evaluating if customers will get back and planning accordingly. Wherever possible, they are reducing costs and new initiatives are being shelved. In conversations, many promoters have mentioned that they have set aside some additional capital to take care of the expenses over the next few months and if the business does not get back to profitable mode, they may have to start taking hard calls.

  1. The challenges for the government

There is much clamor for the government to provide a large stimulus, but this is a complicated path. Already the fiscal deficit has been under strain and the COVID related lockdown has further exacerbated this problem, with tax collections already down and guaranteed to go down even more. Any increase in tax rates will delay an already fragile economic recovery. And just providing increased liquidity, can only help the MSMEs to some extent, as the money will go down the drain if customers don’t return soon.

  1. What support do MSMEs need from the government

For the entire economy, this is a complicated challenge. At the root of the problem is delayed customer demand. Enterprise businesses are going into a cash conservation mode and delaying spending, as they prepare for the uncertain times ahead. Individuals are also conserving their cash as they are uncertain about their future.

In this scenario, it is imperative to get demand back as early as possible. In order to do this, firms and individuals who have sufficient cash reserves and cash flows should be incentivised to start their spending early. This will ensure the MSMEs (and also larger businesses) get back to normalcy sooner. There are precedents on how the government has addressed this in the past:

  • For businesses, allow for say 100% depreciation as an expense on Capex done before September 2020
  • Provide discounted GST rates on consumption done before Sept 2020 for both businesses and individuals. In the past, we have seen reduced excise and service tax for limited periods

This will get the economy back on its feet sooner, save jobs, reduce bankruptcies,  reduce bad loans for banks, and get the MSME engine moving. The government will also benefit, as demand recovers and the tax lost out on the depreciation benefit will just be delayed. Jobs saved will lead to higher income tax collections and the increased consumption will lead to improved GST collections.

As they say, teach a man to fish….

1 comment
  • Navin Gupta

    ” Hi Ravi,

    I must say, your article has very simply covered the ongoing pain in the sector. In my mind, the issue is the cashflow mismatch during a slow down period. In this scenario, most of the time, trade takes care of each other by extending a better credit period, but, the trade cycle breaks when the banking system starts taking out liquidity from the trade cycle which leads to breakage in the trade cycle. This time, if banks can provide extended nonfund based limits and reduce the collateral requirement for availing more credit will stabilize the trade cycle.

    In case, the situation is not improving in the next 3 months, then, we need to consider it as a ” Crop Failure Situation ” and should apply the norms of ” Farm Waivers “. This a natural calamity and government should help directly to the MSME sector.

    The government should not try to pass on benefits through the banking system. I always think, if the Government can force banks to organize Loan Melas and put money in MSME sector, then, this time, they should also give comfort to select banks that we guarantee Bank loans if they continue to support deserving MSME.

    These are my personal opinion, hence, should not be considered as ” Incred ” opinion.

    Regards.

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