Providing liquidity and cash availability a priority for survival of MSMEs and informal sector

It’s been a month since the nation-wide lockdown to contain the spread of COVID-19 was implemented. While some small businesses that somehow managed to get past the first month, are now beginning to feel the strain.

Unexpectedly, these unprecedented times have created an opportunity to fix issues across sectors, particularly those pertaining to small businesses and enterprises in the informal sector. To discuss the solutions that would help them through these times, the Global Alliance for Mass Entrepreneurship (GAME), as part of its webinar series powered by YourStory, ‘Small Businesses Coming Back To Life - Recovering from COVID-19’ held a panel discussion on ‘The GAME COVID-19 Coalition- Funding The Recovery.

The panel saw Dr. KP. Krishnan, Former Secretary, Ministry of Skill Development and Entrepreneurship, Government of India; Nat Malupillai, Director, MSDF; Tushar Thakkar, Specialist, Investing for Development, Dalberg Advisors; Samir Shah, Executive Vice Chair and Group President Dvara Trust, NorthernArc and Sharon Buteau, Executive Director, IFMR Lead in conversation with Mekin Maheshwari, Co-Founder, GAME.

Reaching out to the most vulnerable

Samir began the webinar by making a case for reaching out to the most needy and vulnerable households in these difficult times.

“When the RBI announced a moratorium on credit repayment, it was a voluntary exercise, and not mandatory. From this, certain banks believed that Non Banking Financial Corporations (NBFCs) and Micro Finance Institutions (MFI) should not be the beneficiaries of this moratorium. This has left not just these institutions in a lurch, but also their millions of customers that are low income households. They are the neediest who are the most vulnerable and shattered. In these times, income wise, they are stranded as most of them are daily-wage workers whose source of livelihoods are indefinitely put on hold,” he said.

Samir also noted that while the rest of the country has carried out an exemplary feat in maintaining social distancing norms to save lives, an equal emphasis must be placed on protecting the livelihoods of the most vulnerable in society. “We need to figure out how to get the moratorium for the neediest in society,” he said.

A liquidity crisis on a macro scale

Tushar, from Dalberg Advisers, provided some context from an investor’s point of view.

“Broadly, we are seeing the stress that is quite evident. Our early view is that the cash flows that were being stretched helped people to get through the first month, but the subsequent months will get worse,” he said, adding that the current situation is being seen as a liquidity crisis on a macro level as opposed to a fundamental level crisis, and that there seems to be a need to plug the liquidity gap.

“There is also a response put in place by a wide variety of actors. Investors are focusing on their enterprises, which in this case are the investees. Cross player collaboration is at its early stages. Enterprises like GAME are putting out early stage interventions, and it is important to see how this pans out, as it can support the broader things that the government is trying,” said Tushar.

A meaningful way to reach out to the informal sector

Dr. Krishnan said that there are a lot of limitations in the ability of the formal mechanism to reach out to the Micro, Small and Medium Enterprise (MSME) sector, and in particular, the informal sector.

“The RBI had put out a formal moratorium, and we have half of India’s financial institutions saying: Are these applicable to us? These are not COVID specific problems, these are existing problems. On the same lines Ashok Gulati had recently written on a related, but slightly different context, namely, agricultural marketing. We know that the APMC system, which was set up for the benefit of the farmers, was instead hurting their interests in the last 15-20 years, and we are collectively not being able to do anything about it due to various reasons,” he said.

Dr. Krishnan added that similarly, there were a lot of challenges in many areas concerning the MSME and informal sector, and that we must use the COVID-19 opportunity to reach out to them in a meaningful way. “The problems are known, and so are the solutions. Can we get the regulators and policy makers to come together and sort it out?” he asked.

Innovating and adapting to survive

IFMR Leads’ Sharon said that this type of crisis brings out our interconnectedness. “When we say that it is all in an ecosystem, there is no clear understanding of how deep or wide was the ecosystem important to the survival of the small businesses. Some are deeply affected, others less so, and then you have other repercussions that we are trying to connect,” she said.

Sharon added that the current crisis is having a negative impact on migration, gender based violence and on women’s employment.

“While these things are not an immediate [priority] for the crisis. India will need to work hard to bring back the progress made in these fields,” and that efforts are also made to bolster this “development” side along with the MSME ecosystem.

Sharon also noted that some have the resilience and ability to innovate and adapt. “There was no doubt that India was facing a demand crisis before this, making this a double whammy. Now you have a supply and demand crisis together. Those in the supply chains don’t know when they will revive again. However, on the demand side, people are still trying to create other demand. Many in the artisan cluster are shifting to making masks, and trying to figure out how to be useful in rural areas,” she said.

On whether there is any recovery in sight, Sharon said, “India is very heterogeneous. Any recovery is highly contextual and dependent on many factors. I do see [that] some people won’t survive, but that is because their position was highly precarious even before the crisis began. Others will innovate and adapt. A lot of people are in a waiting mode to see the measures the government would respond with.”

The need to fix the cash disbursement system

When asked about the foundational changes that can be put in place to ensure financial systems get significantly better, Samir said that it is an urgent matter to provide the cash disbursal systems that get cash out to the last mile.

“While the government was very prompt in identifying banking and businesses correspondents as essential services, it is just not sufficient. The number of cash in/cash out points is miniscule to meet the needs of the people. We need to enable millions of such cash in/cash out points as there is enough infrastructure available. One way to do this is to move away from the definition of who can be a cash in/cash out point as the urgency is in getting cash to the last mile,” he said.

Dr. Krishnan added that large numbers of these MSMEs and informal enterprises would find the Standard Public Sector Undertaking (PSU) - led model for getting credit as an expensive mechanism. “Since the 70s, we carried out a number of experiments, and we saw a significant improvement in the sector when private sector Micro Finance Institutions (MFIs) started to finance such enterprises. Today, there are many entities which now have good connections with these enterprises, and enabling them to be a part of the institutional financing is a quick step that the regulator and policy makers can do,” he said.

Dr. Krishnan also suggested bringing the 5,000-10,000 institutions who can carry out last mile financing to a refinancing model.

“As these are the people who can get small working capital, and support loans to people, this could be one step in marrying our longer-term financial agenda, as well as solving the current problem,” he said.

Giving a helping hand towards formalisation

Nat from MSDF said that while some innovation has been taking place through incubators and stack-based solutions to formalise small and informal businesses, the scale is not as desired.

“Formal MSMEs get government help through the MSME ministry and other government programmes. Now is an opportunity to use this time to formalise MSMEs without too much government bureaucracy,” he said.

Nat suggested that it is a good opportunity to carry out cash flow based assessments of such enterprises, ensure that more of their business shows up on their bank statements through using formal channels of credit and debit, and provide more Point of Sale terminals. The MSDF Director also said that we must think about ways to carry out disbursement and funding at a local level, be it through the clusters and the state chapters.

“One way to gauge the effectiveness of such disbursement measures it to get the small business and other stakeholders more involved in the process and see what works for them,” he said.

The need for greater experimentation

Sharon said that while the problems still existed, their solutions have become more innovative. “What is lacking is convincing action from the formal institutions. There are still stringent requirements,” she said, recounting her experience of working with a rural transformation project at the World Bank to figure out the quickest time to deliver funds.

“The quickest time was 40 days, despite research pointing out that many steps in the disbursal process were not needed. I think the formal sector should be less stringent. Now is the time to test and figure out the quickest way we can help people. If it works, it works,” she said.

Reaching out to your area of expertise

When asked to suggest ways to bring in people to solve the problem of liquidity and sustenance that most MSMEs face, Nat acknowledged that there were interesting approaches being taken like GAME’s $100 million stabilisation fund. He suggested that those in the panel reach those they were familiar with. “If you already have access to portfolio companies, MSMEs lenders, NBFCs, blue collar and grey collar workers, and you have data on their credit exposure and the kind businesses they run, do open up the liquidity tap to help them survive.” .

Bringing social and commercial capital together to create lasting impact

Samir said that a marriage between social capital and commercial capital, which traditionally have been operating in different directions, could have the necessary leverage to reach out to millions of needy households.

“Cultural capital can act as subordinate lender and commercial capital as senior lender to help evolve a $100 million fund that GAME has to a corpus of $1 billion. With several other like-minded players, that could total to $50 billion in funds. That is a different impact altogether,” said Samir.

Tushar also added that the partnerships between the commercial and social capital is critical as using the existing risk management systems from commercial capital will have implications for the speed of disbursal of funds. “It is also important to understand the areas we are trying to meet to ensure the effective disbursal of this capital to the right areas. Keep in mind that there could be scenarios where the financial system in itself would need some support, and thus there would be a need for a coordinated effort between both parties.”

The way forward

Dr. Krishnan said that there will be coordinated effort by the government with external funding agencies like the World Bank, the Asian Development Bank, to put a large MSME fund of an institutional kind and managed by a PSU vehicle.

“Typically, the government gets this part right. What will be difficult thereafter is that bringing liquidity on the ground as the government’s role is limited. While some state and district lead banks have done a good job, what will be needed is the marriage of social capital with institutional capital for channels to play this thing out through the last mile. This can be done by the identification of a series of partners and players at stage level, regional level and block level,” he said.

The former bureaucrat added that reaching out to people beyond the developed areas like Delhi and Mumbai will require a huge mapping exercise, and there are a lot of people undertaking this task. “I think, getting a handle of who is doing what, and parallely, getting ready to provide the non-finance, business development support is the need of the hour to finance a large number of these enterprises. A forum like this is well suited to bridge this gap,” he said.

Nat said that there will be a credit boom after the crisis is over, and there will be a need to cater while adjusting to a different landscape in the aftermath of the crisis. “The old ways of viewing three month to nine month statements is not going to be possible after the crisis abates, so stakeholders will have to adapt to this new normal,” he said.

Coming soon: Development experts make a case for evangelising mass entrepreneurship.