It’s been a year of shutdowns, pay cuts, layoffs and mounting debt for over 47 lakh MSMEs in Maharashtra, thanks to the COVID-19 pandemic and stringent lockdowns. Even as the road to recovery began clearing up a few months ago, a second wave threatens to derail the hope of revival.
Despite the state allowed manufacturing activity amid fresh curbs, a rapid rise in COVID cases, another exodus of labour and delayed payment cycles have added to the already long list of their existing woes. In the absence of support, those in the sector say that nearly 2.5 lakh companies are on the verge of shut down by next month.
President of the SME Chamber of India and the founder of Maharashtra Industrial and Economic Development Association (MIEDA) Chandrakant Salunkhe said, "Around October-November, we thought that the impact of Covid will die down and we will continue business activity. We were seeing about 35% business recovery for MSMEs. But from mid-January cases stated rising again and before we knew it, a lockdown was imposed in Maharashtra."
He added without government support, nearly 2.5 lakh companies are likely to collapse.
The situation is dire. More than half the projects of Raju Jagtap’s engineering and fabrication firm Insteel Engineers based out of Navi Mumbai are now stuck. The remaining are moving at a snail’s pace. Jagtap says that they’re facing a shortage of manpower after most of the labour returned to their hometowns. Moreover, businesses like his can't ‘work from home’. As a result, his business is down nearly 70 percent.
“We’re not able to go out for work. Construction projects aren't moving and so most of our work is stuck. We require labour, but in the current situation most of them went back citing uncertainty. Whoever, stayed back is worried for their health. Our work is on a standstill,” Jagtap says.
Salunkhe estimates over 25 lakh workers have left Maharashtra, leaving most MSMEs with an acute manpower shortage.
The shortage of labour has also led to delivery cycles of the micro enterprises these companies work with increase substantially.
TR Varadhan, MD of Mascot Systems, an engineering goods industry located in Vashi, says, “Many micro-enterprises we work with earlier delivered work in a week but are now saying 6 weeks. This is because while they worked with about 15 workers earlier, they’re now left with only 4-5."
"Most workers are leaving out of the fear of yet another lockdown. They don’t want to have to walk back home. There’s no certainty here and most SMEs aren't even able to pay salaries,” Varadhan adds.
In addition to a shortage of labour, payment cycles of these enterprises have also been impacted both from the supplier and client side, leaving them with barely any working capital.
“Earlier suppliers would supply raw materials on a credit cycle of 35-40 days, but now they want upfront payment. On the other hand, clients are not paying us on time because their businesses are also suffering due to the pandemic. As a result, all projects are stuck,” Jagtap adds.
Varadhan adds that even large corporates don’t pay on time. While payment terms state that they’re supposed to pay in 10-15 days, some don’t pay even after 150 days.
This also comes at a time when SMEs across industries have been grappling with a rapidly rising raw material prices. From copper and steel to plastic, prices of raw materials across industries saw anywhere between a 30-70 percent rise over the past six months.
In fact, the Federation of Indian Micro and Small & Medium Enterprises (FISME) wrote to Finance Minister Nirmala Sitharaman on April 27 alleging unethical behaviour on the part of major raw material producers of iron and steel, copper, aluminium & polymers by jacking up prices during last six months, almost on a weekly basis.
“With most of them having captive mines, captive power plants and global scale, there is scant justification for their hike in prices ranging from 25% to 60% except profiteering in a pandemic,” FISME wrote, calling for close monitoring of price movements of the top 10 raw material commodities and rationalisation of import duties.
THE CREDIT TROUBLE
Making matters worse, MSMEs say that loan repayments are due, with financial institutions not offering any respite. Getting further credit has also become an issue.
Salunkhe alleges that despite the government announcing collateral-free loans, banks were not very forthcoming in disbursing credit.
“Bankers are more worried about getting their money back now than further helping SMEs. I was at the forefront in helping MSMEs get collateral-free loans, but for loans up to Rs 2 crore it has proven very difficult because banks insist on looking at past balance sheets, and how much GST was paid,” he adds.
Jagtap also alleges that banks prefer lending to larger enterprises with healthy balance sheets but are not willing to offer collateral-free loans to smaller enterprises, who often do not have enough property to pledge.
Last year, the six-month moratorium offered by the RBI and the government’s ECLGS scheme and the debt restructuring scheme brought some respite for MSMEs.
However, while there were many who didn’t qualify for the loan scheme, MSMEs now also have to repay debt with the burden on interest once the moratorium ended. This at a time when business has come to a standstill and they’re having to also pay fixed costs and meet regulatory compliance deadlines.
To battle the second wave, MSMEs say that a lot more needs to be done, especially with the sector now staring at more debt than before.
“No one has money left for capital expenditure or to execute their projects. In such a situation even if the government announces further schemes, the benefits should trickle down to us,” Jagtap says.
“Govt should extend the same benefits as last time. We need it more this time because most SMEs have used up whatever credit facility was available. Financial institutions also need to provide another 10-20% credit line and that has to be collateral free because SMEs don’t have any collateral left to give,” he adds.
Salunkhe, on behalf of the MSMEs in the state, has written to the Maharashtra government, to RBI and the Commerce Ministry seeking financial support for the industry in the form of credit without interest for 6-9 months, deferment on paying interest, installments, and GST for next 6 months at least. He also wants RBI not to declare MSMEs as NPAs till December this year.
“The second wave is bigger than the first in terms of impact. The government should come with a good package to handhold MSMEs and improve their financial health. Financial institutions too should start giving loans based on the projected balance sheet of companies and not focus on business in the past 1-2 years, which was anyway impacted by slowdown and COVID,” Salunkhe added.
RBI'S EFFORTS TO RESCUE MSMEs
On Wednesday, the RBI Governor Shaktikanta Das announced a second round of loan restructuring, the Resolution Framework 2.0 for small businesses and for MSMEs where those who did not avail the facility the last time can opt for loan restructuring option for dues of up to Rs 25 crore.
However, FISME president Anil Bharadwaj says that this does not address the main issue being faced by the sector today, which is flexibility, especially in the Special Mention Account (SMA) framework.
“Unlike last year, owing to local restrictions the situation is different from city to city and problems faced by MSMEs also varied. The biggest problem today is that of flexibility. Many companies are not able to deploy resources in the second wave due to severity of the situation leading to non compliance with many of the commitments like payment of dues, payments to buyers, suppliers, banks, among others,” Bharadwaj says.
According to him, the sector’s biggest requirement is flexibility in terms of repayments, compliance deadlines, working capital requirements, utilisation of funds, etc.
FISME addressed the issue in its letter to the FM as well.
“The Special Mention Account (SMA) framework has been devised for normal times. Now the payment cycles are longer, and markets are disrupted. Banking cannot be just excel-sheet based; the system ought to provide much needed flexibility to the banker so that these facts could be factored in. There is an urgent need to revise the norms for Covid years,” it wrote.
FISME has also sought protection from prosecution and penalties due to non-compliance during pandemic up to March 31, 2022, without credit ratings of the companies being impacted.
Insteel's Jagtap says that several instances of job losses and company shutdowns are already happening.
“Many of us in the sector are working towards cutting our expenditures while taking care of the staff. But many companies aren't able to sustain and are even trying to sell off their business because there is no concrete support available at the moment and it’s not like there is hope that business will get better either,” Jagtap adds.