A 6 month financial support scheme for micro enterprises needed to ride through the pandemic

By Sanjay Sharma

The pandemic has now crossed our door and is increasingly spreading in the communities across a large number of districts in India. Like many other countries, we find ourselves between a rock and a hard place. Our inadequate health system further limits our choices. Given the situation, a lockdown was the only option to keep the pandemic at bay. However, as the lockdown prolongs, the possibility of huge multi-billion dollar financial damage to the economy is very real.

The 60 million micro enterprises that contribute 37% of GDP, employ over 110 million people and grow faster than our rate of GDP growth, are now at an existential challenge. If the problem is not managed effectively, there could be a significant part of these micro MSMEs may have to shut shop. If this were to happen, it would bring on an unimaginable calamity that would manifest itself as the large unemployment, suffering and the long-term damage to the Indian economy. This may undo the advances made over a decade in poverty reduction and improved social inclusion.

The micro enterprises have for years survived despite being neglected by the organized financial sector. The resilience and survival instinct of micro enterprises now faces a once in a hundred year challenge. Having survived and thrived despite the disruptions like demonetization and GST implementation, we are once again faced with an impossible challenge.

What is needed is an accommodation for upto six months, to allow the micro enterprises to tide over the financial turmoil that will ensue at the wake of the pandemic. These six months of accommodation will enable them to find their feet again.

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There are many ways the government can make this happen. Firstly, the NBFCs have been allowed to offer moratorium on their loans and not reflect this as a deterioration of their loan books. Secondly, the moratorium on funding to NBFCs should similarly be ensured by their Lenders and Banks, to maintain the transmission of liquidity. Thirdly, the government should make available a special line of aid or soft funding to allow these enterprises and their employees to see the next 6 months through. The government should also reformulate their credit guarantee scheme for lending to MSMEs to bring into its fold, these micro loans of Rs 1 lakh and remove the covenants of interest rate caps and minimum ageing of the loans. Without removing these restrictions, the credit guarantee would only benefit the SMEs and not the micro enterprises.

Having said this, the micro enterprises are in many ways better positioned than many small or medium scale enterprises to handle demand and supply disruptions. The micro business owners have many years of track record in running their businesses and they are the best in running with frugal resources. Their resourcefulness and skill at negotiating challenges is legendary. Most of them produce essential goods and services and the demand for these is inelastic and will revert back to where it was before. They work with very small fixed costs and use low levels of financial leverage. So a six month financial support can do wonders to their chances to recuperate from this shock. This was demonstrated in the micro finance sector in 2009-10 when the resilience and belief of the Banks and Financial institutions helped MFIs emerge from death throes and become a vibrant industry that has spawned many small finance banks.

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It is time for us to now think beyond the normal constructs of classical financial rules. To look at the micro enterprise ecosystem holistically and to do something magical.

The writer MD and Founder – Aye Finance)


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