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U.K. Sinha Committee on MSME’s Economic and Financial Sustainability

A Reserve Bank of India (RBI) committee has suggested a ₹5,000 crore stressed asset fund for domestic micro, small and medium enterprises (MSMEs) in relief to small businesses hurt by demonetization, the goods, and services tax and an ongoing liquidity crunch.

  • The committee to study the problems faced by MSMEs was chaired by U.K. Sinha, former chairman of the Securities and Exchange Board of India.
  • The RBI had constituted the committee in January to review the current framework for MSMEs and suggest long-term solutions for their economic and financial sustainability.
  • Distressed asset fund structured to assist units in clusters where a change in the external environment, e.g. a ban on plastics or ‘dumping’ has led to a large number of MSMEs becoming non-performing assets (NPAs).

Other important recommendation

  • The panel said that instead of making MSMEs register with various authorities, the permanent account number (PAN) should be made sufficient for most of their activities.
  • It recommended an amendment to the MSMED Act, 2006, requiring all MSMEs to mandatorily upload all their invoices above an amount to be specified by the government, from time to time. This mechanism will entail automatic display of names of defaulting buyers, and also act as moral suasion on buyers to release payments to these suppliers
    The report pointed out that small industries faced problems of delayed payments and were reluctant to enforce legal provisions available to them under the MSMED Act due to their low bargaining power.
  • The private sector should be incentivized by tax breaks or bonds to help MSMEs build skill sets in areas like product development, technology adoption, and marketing strategy.
    The private sector’s contribution to the segment, the committee noted, was minuscule, but the research and development facilities they possessed could be of enormous value.
  • The committee suggested that the PSBLoansIn59Minutes Portal should also cater to new entrepreneurs, who might not necessarily possess information, including GSTIN, income-tax returns, and bank statement.
  • On restructuring MSME accounts that have turned sour, the committee said an MSME account could be considered for an upgrade to “standard” after six months of satisfactory operation, instead of the current norm of one year. The account must also have additional equity in the business or a new source of cash flow.
    The RBI had announced a one-time restructuring scheme for MSMEaccounts in January, but the scheme is basically for accounts that are still standing.
  • The committee has also recommended banks that wish to specialize in MSME lending, their sub-targets for farm loans under the priority sector lender could be waived off and instead can be given a target for loans to the SME sector.
    The targets, the committee said, could be of 50% of the net bank credit for universal banks and 80% for small finance banks.
    At present, the overall priority sector lending target for a universal bank is 40% of their net bank credit and 75% for small finance bank.
  • Commercial banks have been suggested that they should develop customized products to assess the financing requirements based on expected cash flows moving away from traditional forms of assessment.
  • The committee recommends expanding the role of SIDBI, the apex body responsible for the development of the MSME sector.
    SIDBI should deepen credit markets for MSMEs in underserved districts and regions by handholding private lenders such as non-banking financial companies (NBFCs) and microfinance institutions (MFIs).
    Further, they must develop additional instruments for debt and equity, which would help crystallize new sources of funding for MSMEs and MSME lenders.
  • The committee has recommended a government-sponsored ‘fund of funds’ of Rs 10,000 crore to support the venture capital and private equity firms investing in the MSME sector on modified term sheets developed by SIDBI.

Other suggestions of the committee include;

  • Introduction of adjusted priority sector lending (PSL) guidelines for banks to specialize in lending to a specific sector.
  • Doubling the collateral-free loan limit to Rs 20 lakh.
  • Revision in loan limit sanctioned under MUDRA by the Finance Ministry to ₹20 lakh from ₹10 lakh.
  • Providing insurance coverage to MSME employees by the government.
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