According to a World Bank Group report released in January 2014, 35 percent or one in three MSMEs receive payment only after 90 days or more. While larger corporations can alleviate the adverse effects of delayed payment, managing cash flows is a struggle for MSMEs due to the nature of their businesses. The consequence of delayed payments is that at any given point in time, 15-20 percent of an MSME's cash flow remains locked up - or not liquid - which in turn affects their business.

1. Cash flow Management
Part 11
MSME Financing - Key Issues and Solutions

2. Cash flow Management
According to a World Bank Group report released in January 2014, 35 percent
or one in three MSMEs receive payment only after 90 days or more. While
larger corporations can alleviate the adverse effects of delayed payment,
managing cash flows is a struggle for MSMEs due to the nature of their
businesses. The consequence of delayed payments is that at any given point in
time, 15-20 percent of an MSME's cash flow remains locked up - or not liquid -
which in turn affects their business.

3. Cash flow Management
Manufacturers face the biggest difficulty. They need to invest in raw
materials, manufacture goods, and sell them to customers. Manufacturers,
who have already invested substantially in buying raw materials for
production, end up with a huge cash crunch due to the 90-120-day cycle for
cash receivables and subsequent delays by their customers. Also, they are
hampered by weak bargaining power as they juggle between corporate
buyers and a highly networked raw material supplier base.

4. Cash flow Management
In the services sector similarly, small firms that have limited cash and cater to
large corporate entities do not get funds before 45-60 days, despite billing on
a monthly cycle. This limits the ability of small business owners to add value,
seek new clients and upgrade technologies. While the cash flow situation is
bleak for MSMEs at present, the recent announcement by Union Minister for
MSMEs Shri Kalraj Mishra about the constitution of Micro and Small
Enterprises Facilitation Councils (MSEFCs) to enable quick adjudication and
disposal of delayed payment cases is a welcome move.

5. Recommendations Suggestions on
MSME Credit & Finance
Recommendations Suggestions on MSME Credit & Finance
1. The corpus under the Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE) can be increased to benefit higher number of MSMEs by
offering them collateral free credit.
2. RBI-registered ‘AAA’ and ‘AA+’ rated NBFCs should be made eligible for
becoming Member Lending Institution of CGTMSE, subject to availability of
additional corpus of CGTMSE.

6. Recommendations Suggestions on
MSME Credit & Finance
3. SIDBI to play a pivotal role in developing and promoting specialized
instruments that augment the access to credit for the MSMEs. Additionally,
special exercises should be undertaken for meeting the credit gap in the
MSME sector. In this regard, modifications in the existing CGSTMSE scheme
can be debated to ensure a wider coverage, Banks can be directed to make
fuller use of CGTMSE dispensation and collaboration can be sought with other
relevant institutions in the state government and Development Institutes of
Ministry of MSME so as to reach out to needy MSME units with credit offers.

7. Recommendations Suggestions on
MSME Credit & Finance
4. RBI should firmly enforce its guidelines to Banks for not seeking collateral
up to a loan of INR 100 lakhs. This will reduce the tendency to seek security,
which is a foremost deterrent to fostering entrepreneurship.
5. Banks to simplify loan application forms and establish a common Scoring
Model for loan up to INR 25 lakh.
6. The banks should issue directives to further enhance the awareness of CGS
amongst its branch level functionaries in different parts of the country for
securing greater coverage of MSME loans under CGS.

8. Recommendations Suggestions on
MSME Credit & Finance
7. Banks should educate and clearly specify there requirements for assessing a
loan proposal, i.e. what information they require from MSMEs, what
essentially they look for while assessing a loan proposal and how they will be
convinced.
8. Banks should create separate cells to provide consultancy to MSMEs to
impart learning on data / information management so that their performance
can be analyzed easily and thus expediting the loan sanctioning process.
9. Bank to establish robust credit evaluation systems and invest in training and
development of loan officers. Additionally, proper credit evaluation systems /
frameworks should be developed so as to ensure that valid due diligence
checks are done with no scope for personal biases in assessment of loan
proposals from MSMEs.

9. Recommendations Suggestions on
MSME Credit & Finance
10. State level Public Procurement Policy must be launched.
11. A monitoring mechanism should be put in place to monitor the effective
implementation of the Public Procurement Policy.
12. The District Industry Centers should ensure the provision of continuous
power supply to MSMEs to facilitate smooth operation.
13. Incubation Centers should be developed to assist MSMEs with marketing
operations and acquisition of knowledge and technical know-how.
14. Sector Specific industrial zones must be developed in various locations
with 50% space allocated to MSME with world class infrastructure &
connectivity & other facilities like banks, insurance etc.

10. Recommendations Suggestions on
MSME Credit & Finance
15. A Bankruptcy Code must be developed specifically for MSMEs to facilitate
compliances with respect to banking requirements, statutory dues, etc. and
to make the ecit of MSMEs speedy and easy.
16. A single window nodal agency may be set up to address all approvals and
clearances to MSMEs in a time-bound manner.
17. MSMEs should be allowed a special dispensation from various
compliances related to taxation, labour laws, etc. for an initial period of 3
years to remove hurdles in their growth.
18. In order to encourage technology upgradation in MSMEs, the cost
incurred for technology upgradation, including acquiring new technologies
and that for protection of IPR, shall be excluded from the monetary limit of
respective sectors, once in 10 years.

11. THANK YOU
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