COVID-19 impacts 82% of small businesses: Survey

Context:

A recent survey has showed that more than 82% of businesses have suffered a negative impact on account of COVID-19 and 70% expect it will take almost a year for demand to recover to pre-pandemic levels.

Relevance:

GS-III: Indian Economy (Growth & Development of Indian Economy)

Dimensions of the Article:

1. Highlights of the Survey
2. Problems Faced by MSMEs in India
3. Problem Aggravated due to Covid-19

Highlights of the Survey

• More than 82% of businesses have suffered a negative impact on account of COVID-19 and 70% expect it will take almost a year for demand to recover to pre-pandemic levels.
• About 60% of the companies surveyed said that they would require more support measures, including government initiatives, to withstand the adverse impact.
• Market access (42%), improving overall productivity (37%) and access to more finance (34%) were cited as the three key challenges that were most likely to hinder small businesses’ recovery.
• The data indicated that about 95% of firms were impacted in April 2020 when the nationwide lockdown was imposed. Even with progressive unlocking, 70% of businesses remained disrupted till August 2020 and 40% till the end of February 2021.

Problems Faced by MSMEs in India

• Being out of the formal network, the MSMEs do not have to maintain accounts, pay taxes or adhere to regulatory norms etc., which brings down their costs. But in a time of crisis, it also constrains a government’s ability to help them.
• Most of the MSME funding comes from informal sources and it explains why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs have had a limited impact. Also, the government has launched schemes in this regard.
• Further, banks dither from extending loans to MSMEs due to the high ratio of bad loans.
• According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the MSME credit need that it can potentially fund.
• Delays in Payments to MSMEs is one of the biggest reasons for financial turmoil in the MSME sector. MSMEs face delays in payment from their buyers which also includes the government. It also faces delays in GST refunds.

Problem Aggravated due to Covid-19

1. Declining Revenues: MSMEs are already struggling — in terms of declining revenues and capacity utilisation — in the lead-up to the Covid-19 crisis.
2. Unavailability of Cash: The total lockdown has raised an issue of the existence of MSMEs primarily due to unavailability of cash which subsequently will result in the job losses.
3. Lack of Labour Availability: The return of migrant labourers will create an issue of lack of labour availability.
4. Loan Against Collateral: Loans to MSMEs are mostly given against property (as collateral) but in times of crisis, property values fall and that inhibits the extension of new loans.
5. Steps Taken: To ease the firms’ financial distress during this period, the Reserve bank of India has announced several measures such as a moratorium on term loans, and easier working capital financing. Some public sector banks have also opened up emergency credit lines for businesses.

-Source: The Hindu