India at 75: A vision for equal access to credit for MSMEs

India's labour codes and labour reforms
The discussions on labour reforms in India veer around the subject of labour market flexibility in relation with the Industrial Dispute Act 1947 and the four labour codes that await implementation.

By Shachindra Nath

MSMEs key to economic growth: As a nation, we are just 25 years short of being 100 years old. In the last several decades, we have been making up for years of captivity and struggle against invaders. Restoring the glory of our nation is directly linked in its people’s ability to earn well, live well, and fulfil their dreams. Small businesses are a major force in fulfilling this dream. They provide livelihood to more than 11 crore Indians.

MSMEs today contribute around 30% of India’s GDP. If India wants to achieve the status of an economic powerhouse, the contribution of MSMEs to the GDP must reach 40% and the employment must rise from the current level of 11 crore to at least 20 crore. This would directly impact at least 30-40% of our population, especially young people who are supported by the employed work force.

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Booming MSMEs key to economic growth

The growth of MSMEs in India is directly linked to their access to credit. Small businesses that are built around entrepreneurial sprit do not have the same level of capital support as the large enterprises of mid- and large-scale corporates. But they surely have the will to succeed and survive and possess a burning desire to grow despite all limiting factors such as credit availability. Most of these businesses need credit either for working capital or for expansion. When judged on the basis their historical track record, they fail to attract mainline lending institutions.

In the last decade, much of this has changed. The government and the regulators have understood that our nation’s potential cannot be achieved unless the access to credit is improved. However, we need the Vision 100 : 100 – or 100% credit access by India’s 100th Independence Day. It might look audacious to some, but is eminently possible through a CDGS approach.

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CDGS: Credit through digitally enhanced guaranteed structure

Indian MSMEs are at the cusp of a credit revolution through the digital economy which is getting created around them through GST, digital banking and OCEN, which can be called as India Stack 2.0.

We have the twin responsibilities as a nation to motivate MSMEs to be part of the digital economy and to encourage lending institutions to take support of digital data to lend to MSMEs. However, as we all know revolutions happen only through political leadership intervenes. The government today can play the pivotal role in achieving the Vision of 100 : 100 by providing 75-100% credit guarantee on the basis of MSMEs’ GST compliance, employment history, and digital banking.

It would be a simple scheme to offer. If an MSME has an increasing trend of GST turnover, bank records and employment generation as seen in the PF data, it would be eligible for up to 100% credit guarantee from the government of India.

This would drive lenders to provide credit, MSMEs to embrace and be part of the formal economy and the government would benefit from increased tax collection. Even if 10% of all such credit would require support, the increased tax base would make up for the guaranteed amount. Additionally, it would massively increase employment and would unleash the animal sprints of our economy. We have to dedicate ourselves to our coming generations so that they will be born in one of the most prosperous countries in the world and this could be the inflection point to achieve that vision.

(Shachindra Nath is Chairman and Managing Director of U GRO Capital, a technology-focused small business lending platform based in Mumbai.)