When the government announced a stringent lockdown in March to counter the coronavirus pandemic, few people really gave a thought to the economy. Employers, employees, entrepreneurs and everyone assumed that life would get back on track after a couple of weeks of lockdown. When workers began walking across the country to reach their homes, the economic implications of an extended lockdown percolated. And then, of course, there was a virtual meltdown among economists, with dire predictions being made about the next Great Depression.
The numbers during the first few months of the pandemic seemed to bear out the most drastic forecasts. Exports fell 34.57% in March 2020 and by 60.28% in April. In a statement released by the commerce ministry, the government said: "The decline in exports has been mainly because of the ongoing global slowdown, which got aggravated due to the current COVID-19 crisis. The latter resulted in large-scale disruptions in supply chains and demand resulting in the cancellation of orders.”
Till the government eased the lockdown, MSMEs faced the twin issues of lack of demand and supply. Manpower and raw materials were scarce, and with countries closing their borders, trade-in 'non-essential commodities' was increasingly difficult. The government announced several packages to stimulate demand and supply. Of these, the most ambitious is the Atmanirbhar Bharat Abhiyaan, aimed at self-reliance, which could be just the shot in the arm that MSMEs need.
However, a lot has eased since those dark days. Domestic demand has stabilized, and there is hope on the exports front. According to the Trade Promotion Council of India, food exports, for one, went up 27% between March and July. It is not just-food exports. As more and more countries look to substitute Chinese goods, Indian exporters can tap into newer markets.
If only things were so simple. For MSMEs to take advantage of this pandemic-led opportunity, we need to resolve their systemic problems at the earliest. The biggest issue for these players is finance. From working capital to trade finance, an MSME exporter finds access to credit extremely difficult. The Reserve Bank of India's data shows that loans to MSMEs had fallen 4.96% year-on-year.
The government has tried to aid the sector by offering moratoriums on MSME loans. The government’s Emergency Credit Line Guarantee (ECLG) scheme has disbursed a little over Rs 1 trillion till August this year. But this is just not enough. Reports say that close to 80% of the MSMEs do not have access to formal credit and rely on informal means of raising money. It gets worse for MSME exporters, who have to figure out trade finance along with working capital finance.
Moreover, banks have been increasingly reluctant to lend to these exporters, fearing bad loans. And when they agree to extend credit, the paperwork and other requirements are onerous and deter the borrowers. The government, on its part, can only issue directives. It cannot force banks to lend to this sector. What then is the answer?
Fintech companies are entering this space, offering easy credit to MSME exporters. They offer working capital, capex loans, and trade finance solutions to small businesses. Fintech lenders use new-age technologies such as artificial intelligence and data analytics to perform due diligence checks on MSMEs with no financial records, collateral, or credit histories. Their agile business model allows them to cut down processing time and make funds available faster at a lower cost.
While Fintech could be the answer to MSMEs’ problem of accessing credit, there is a lot that needs to be done to grow this market. Bill Gates is supposed to have said: “Banks don’t matter, banking does”. Whether or not he said it, the spirit of that line is something the government can do well to imbibe. Easing some restrictive banking rules, particularly concerning NBFCs, maybe a good starting point.
The government will also need to look at how economic and tax policy decisions can impact digital finance in the coming future. Fintech companies have taken the lead in offering innovative lending solutions. On the other side, banks are constrained by time-consuming processes and collateral requirements. Easing these regulations could be a good starting point for formulating these policies and making credit easily accessible to those who need it.
The creation of a COVID-19 vaccine may see the world return to what it was a year ago. However, the recent announcement around the new mutations of the virus could mean a step back. Advances or regression in this space should not stand in the way of boosting Indian MSME exporters. As has been shown, repeatedly, these small businesses will help boost the country's economy, so a helping hand today could prove immensely profitable tomorrow.
(This article was first published in The Economic Times