U.K. Sinha Committee on MSMEs - Recommendations

Why in News?

The RBI-appointed U.K. Sinha-led committee, set up to study the problems faced by MSMEs, submitted its recommendations recently.

How significant is the MSME sector?

• Around 63 million MSMEs in India contribute significantly to the country’s economic growth; they account for -
  1. about 45% of manufacturing output
  2. more than 40% of exports
  3. over 28% of gross domestic product
• More importantly, the MSME sector employs about 111 million people.
• Worldwide, small businesses account for more than 50% of employment.
• They are key engines of job creation and economic growth in developing countries.
• Besides these, the MSME sector is also a true reflection of economics where people really matter.
• Given its employment share, the sector’s health is crucial to the economy’s vitality and society’s well-being.

Why was the committee formed?

• In India, small businesses have been facing a range of disruptions since the demonetisation decision in 2016.
• This disruptive move was followed by the hasty impslementation of the goods and services tax in 2017.
• Now, there is also the liquidity crunch issue triggered by a series of debt defaults by group companies of Infrastructure Leasing and Financial Services Ltd in 2018.
• All these have made the smooth functioning and development of the MSME sector very challenging.
• Given this, in January 2019, the RBI constituted the expert committee on MSMEs to undertake a comprehensive review of the MSME sector.
• It was tasked to study the problems faced by MSMEs, identify the causes, and propose long-term solutions.

What are the key recommendations?

• Distressed Asset Fund - The committee has suggested a Rs.5,000 crore stressed asset fund for domestic micro, small and medium enterprises (MSMEs).
• The creation of a distressed asset fund will be structured to assist units in clusters.
• This is intended as a relief to small businesses hurt by demonetization, GST and an ongoing liquidity crunch.
• The fund would go into reviving MSMEs in which a change in the external environment has led to them becoming non-performing asset (NPA).
• The fund could work in tandem with RBI-mandated restructuring schemes or bank-led NPA revival solutions for MSMEs.
• The onus of creating this fund would lie with the government.
• Fund of Funds - The committee suggested forming a government-sponsored Fund of Funds of Rs. 10,000 crore.
• This is to support venture capital and private equity firms investing in MSMEs.
• MSME Act - The committee observed that small industries face problems of delayed payments.
• They hesitate to enforce legal provisions available to them under the MSME Development Act, 2006 due to their weak bargaining power.
• The committee thus recommended an amendment to the Act.
• Under this, it calls for all MSMEs to mandatorily upload from time to time all their invoices above an amount (to be specified by the government) to an information utility.
• This mechanism will entail automatic display of the names of defaulting buyers.
• This will also act as moral suasion on them to release payment to these suppliers.
• Also, many Indian start-ups that are at the forefront of innovation are drawn to look overseas.
• So the new law ought to address the sector’s biggest bottlenecks, including access to credit and risk capital.
• This will go a long way in prioritizing market facilitation and ease of doing business.
• SIDBI - The committee has recommended expanding the role of the Small Industries Development Bank of India (SIDBI).
• It called for SIDBI to deepen credit markets for MSMEs in underserved districts and regions.
• It emphasised on the role of private lenders such as non-banking financial companies and micro finance institutions in this regard.
• Further, SIDBI was suggested to develop additional instruments for debt and equity.
• This would help crystallize new sources of funding for MSMEs and MSME lenders.
• Loan portal - New entrepreneurs may not necessarily have information like GSTIN, income-tax returns and bank statement.
• The committee thus suggested that the ‘PSBLoansIn59Minutes.com’ portal also cater to such new entrepreneurs.
• Besides, obtaining regular sanctions from the banks post in-principle approval had not been smooth for entrepreneurs.
• It was thus suggested to fix a timeline of 7-10 days for disposal of applications, which have received in-principle approval.
• The committee also recommended enhancing the threshold of loan up to Rs. 5 crore.
• Technology – The committee acknowledged the fact that technology, especially digital platforms, having become inevitable.
• It thus made a case for greater adoption of technology-facilitated solutions to many of the problems encountered by the MSME sector.
• Other suggestions include -
  1. introduction of adjusted priority sector lending guidelines for banks to specialize in lending to a specific sector
  2. doubling the collateral-free loan limit to Rs. 20 lakh
  3. providing insurance coverage to MSME employees by the government

• The committee also suggested to develop group policies for death and accident cover for MSME entrepreneurs.
• This, it said, should be significantly higher than the cover currently offered by the Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana.
• Another suggestion entails expediting the integration of information on the Government e-Marketplace (GeM) platform with the Trade Receivables Discounting System.

• The objective is to boost liquidity at MSMEs.
• Going forward, the task is now for the RBI and the Centre to act on these recommendations to help actualize the sector’s true economic potential.

Source: Livemint, The Hindu

Quick Facts

PSBLoansIn59Minutes.com

• PSBLoansIn59Minutes.com is an online marketplace.
• It enables in-principle approval of MSME loans up to Rs. 1 crore in 59 minutes from public sector banks.

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