On the account of current lockdown, Medium and Small Enterprises, which covers a huge part in Business sector, will face closure if the lockdown is extended beyond four weeks. As per the 73rd round of National Sample Survey Report, the impact will be high considering the fact that these MSMEs provide employment to over 110 million people and contribute 30 to 35 percent to the GDP.

MSMEs involved in the hotel industry, tourism sector and logistics are having difficult times, only the e-commerce sector is partly engaged. The impact on businesses has cascading effect on the other business such as consumer goods segments, automotive segments. All these sectors are having a major decline due to decreased demand.

What could be the possible measures to adopt for MSMEs in this time?

The possible measures are as follows:

  • The mismatch of demand and payment cycle is creating challenges to repay the loans, be it a personal or business in a timely manner. Hence payment of installments of loans should be deferred by a few months without charging of any penalty.  
  • Some discussions for extension of contract tenure with client which are due within the next 6 months, if this works then it will help to mitigate financial loss that may arise from the performance risk.
  • Small and medium enterprises should avoid fresh capex or capital expenditure plans for the next six months.
  • Due to shutdown of production, the salaries/wages will become a huge liability for MSMEs, so during this period salaries/wages could be paid through Employees’ State Insurance Corporation (ESIC) or there should be some government assistance in this regard.
  • All GST and other tax refunds should be credited to the businesses immediately to overcome the lack of fund availability.
  • Increasing the open cash credit (OCC) account limits for MSMEs by 20 percent would have a positive impact on the liquidity available with these businesses.
  • SMEs should discuss with their banks to get a minimum of 50% of their fund based outstanding converted in short term WCDL/FCDL. It will help to reduce interest costs by 0.25%-0.75%.
  • To conserve human resources is important for small enterprises during these times. All other benefits and incentives can be structured based upon the period of services to increase employee stickiness.
  • This time provides ample opportunities to review various cost elements in the P & L statement. Hence they should utilize this opportunity to identify and discuss with experts on ways to optimize cost without impacting overall productivity.

Just like State Bank of India has introduced an emergency line of credit for businesses impacted by the COVID-19 and this specifically aimed at aiding MSMEs, other banks should also come forward with some similar measures like low/flat interest rates, ease of sanction, flexible repayment schedules.