Corona has hit the shores of India and the entire nation is in an unprecedented lockdown, which may last for a minimum of three weeks.

This lockdown comes after almost a week of gradual build-up, outreach and shut down of most discretionary economic activities in the country.

That is, almost 8-9 per cent of a full year’s economic activity is already adversely affected and may well be irreversibly shrunk.

An extension of the lockdown may become inevitable. The government must ensure that the recall of lockdown, when done, is irreversible and does not introduce any element of instability to the businesses.

Government must also ensure that, the telecom infrastructure, which is most critical in this juncture, is run smoothly and all required support is provided to ensure this.

Businesses — especially MSMEs — are deeply affected by the lockdown. Here are 10 practical suggestions to the government, to help MSMEs tide over this critical period in the country’s economy.

1. Salary-linked Loan Programme: The government should introduce a loan programme for all companies with less than 500 employees registered with PF, to provide a soft loan/interest free loan for up to 2.5x average monthly payroll of last year.

This will act as a compensation for forcing these companies to pay salary without any deduction, during the lockdown period. The process should be made online, simple, collateral free, and with a quick turn-around time.

2. GST credit: For all registered MSMEs, the government should provide a GST deferral loan to the extent of the last 12-month GST paid; Given that the government has clear visibility on the GST paid, and the process is fully online, assessing track record of payment and developing a simple criteria for loan eligibility would be very simple.

In the alternate, the government can co-opt banks and NBFCs to provide this loan through an automated process, and provide interest subvention directly to these financial institutions. [Many NBFCs already have a loan product linked to GST paid, and have APIs developed to automatically extract relevant data from the GST portal with consent of the borrower].

The loan can have a tenure of 2-3 years and can be interest-free or very low interest (say 5 per cent) to provide much needed liquidity for the MSMEs. This measure will also have a positive long-term impact of better GST compliance among MSMEs.

3. CGTSMF loans: Several borrowers had availed collateral-free loans from banks with support from CGTSMF Credit Guarantee. All such past borrowers should be eligible to get an automatic renewal of this loan, or top-up to the sanctioned limit, if partially repaid.

As a temporary measure, and to improve the lenders’ confidence in this scheme, the government can increase the credit guarantee limit to 100 per cent of the loan amount.

The government should also seriously consider increasing the limit of CGTSMF to Rs. 5 crore (from the current Rs. 2 crore). This is a really low-cost option to the government as no upfront cash flows are involved, and CGTSMF is already adequately capitalized to meet this requirement.

4. Delink GST/TDS returns with GST/TDS payments: This has been requested by MSMEs in the past as increasingly, GST and TDS returns are being used by lenders to assess credit quality.

The filing of the returns creates an undisputed liability on the MSME which the authorities can recover in due course. If the MSMEs are allowed to file the return independent of making the payment, they can access credit from Banks/NBFCs which helps improve cash flows in these stressed times.

5. Powers for freezing of bank accounts (or even threatening to freeze bank accounts) for GST/ TDS / PF delays have been used to cripple operations of several MSMEs that face even short- term liquidity issues.

In these COVID times, several MSMEs will face liquidity issues, and punitive actions such as freezing bank accounts by lower level staff in regulatory agencies may create havoc among MSMEs. The government should enact laws to ensure that such powers are vested only with a Tribunal or with a fairly senior officer – such as a Commissioner.

6. Automatic cancellation of GST for non-filing of returns for 3 months, recently introduced by the government, is an ill-conceived idea and should be revoked ASAP. This issue will also get resolved to a large extent if the returns and payments are delinked, as mentioned above.

7. The scope of Vivad se Vishwas scheme should be extended for appeal cases where all appeals by the government below a certain threshold amount (say, Rs. 10 lakh) should be automatically withdrawn.

The current scheme is one-sided, and even if the assessee has won a tribunal order, the scheme expects the assessee to pay (and not the government to withdraw its claim).

8. Government should come out with a clear regulation for allowing private sector credit guarantee institutions and also provide with a viability gap funding for the initial years, for eligible participants. RBI (and not IRDA) would be the best institution to nurture growth of this new sector.

SBA in USA, KODIT in Korea, JFG in Japan and over 5,000 credit guarantee institutions in China have played a very crucial role in the development of MSMEs in these countries.

India seriously lags behind in this area; with a relatively small outlay towards viability gap funding, and robust regulatory guidelines, the government can create a thriving credit guarantee industry in a relatively short period of time.

9. Relaxation of ECB guidelines: The global interest rates have crashed to near zero; however, only the top-rated corporates in India are able to access these low-cost funds, because of the highly restrictive regulations for ECBs.

Particularly, two aspects of ECB regulation viz. the minimum average tenure requirement, and the cap on overall cost of borrowing, effectively, excludes MSMEs from accessing this market.

If the lenders have to lend at less than 5 per cent p.a. and for a minimum of 7 years, they would rather lend to a highly rated corporate than to an average-rated MSME.

These guidelines are meant to protect the local banks, but end up hurting the MSMEs. A more equitable way would be to place overall cap on ECB for the country as a whole, without any restriction on tenure or interest rates, which should be market driven.

10. Fund-raising process should be relaxed: The process of equity raising by MSMEs has been made very complex and entails huge costs towards meeting the regulatory norms.

Raising equity capital is crucial for SMEs to grow at this juncture and the current process is too onerous, and there is an urgent need to simplify the same. Just one example is the requirement of a valuation certificate.

The Ministry of Corporate Affairs requires certificate from a registered valuer, the Income Tax requires a valuation certificate, of the exact same value, from a Chartered Accountant while RBI (under FEMA norms) requires the same from a Category 1 Merchant Banker (if the amount raised is above USD 5 million).

There is an urgent need to standardise this requirement across regulatory bodies. Several such contradictions and process complexities can be addressed if concerted efforts are made to make the fund-raising process easier.

regulatory environment

Get Swarajya in your inbox.