Interest subsidy given to MSEs likely to result in nearly 3 times rise in govt's indirect taxes: Crisil
Interest subsidy of Rs 1 crore given to micro and small enterprises (MSEs) is likely to generate nearly three times rise in the government's indirect taxes resulting in creating 38 jobs and increase in revenue and profitability of MSEs, said Crisil in its latest report.
To boost the country's MSE sector, Crisil in analytical report has suggested the government to provide direct interest rate subsidy and subsidy support for re-rating.
“We see two ways in which the government can completely change the game for the MSE sector: one, by offering direct interest rate subsidy between 1% to 4% depending on government’s Performance and Credit Rating Scheme (PCRS), and two, by subsidising annual rating reviews for three to five years. These steps may seem like giveaways, but are actually very revenue positive for the government," Crisil SME Ratings Business Head Manish Jaiswal, said in a press release on Tuesday.
The Ministry of Micro, Small and Medium Enterprises had started PCRS scheme in April 2005 and it has been a very successful scheme with more than 1.25 lakh MSEs getting themselves rated since 2005.
The scheme has also helped lenders identify the better-rated MSEs, which improved their asset portfolios, cited Crisil in a statement.
However, the scheme does not provide subsidy support for re-rating and annual reviews of ratings of MSEs, which keeps away 90% of the companies in the sector from re-rating themselves.
According to separate analysis of Crisil ratings of 1,583 MSEs across the country, those getting rated for a four-year period saw their average cost of borrowings falling 75 basis points (100 basis points is one percentage point) because ratings had induced financial discipline and improved credit profiles.
It also improved MSE access to growth capital and facilitated 70% higher borrowings, it added.
“Continuous rating over three to five years is necessary to develop a strong credit culture among MSEs. Subsidy support under PCRS for annual rating reviews will improve financial discipline, afford greater access to formal finance, and strengthen MSEs structurally. It will also engender scalability and ultimately help achieve the objective of PCRS," Crisil SME Ratings senior director R Vasudevan, said in a statement.
The ratings agency further suggested that the Reserve Bank of India (RBI) may also consider recommending banks and non-banks to seek external assessment of MSEs under PCRS.
As per Crisil Ratings, PCRS will help the government's initiative to boost the economy and its employment.
"PCRS can have at least two more positive impacts. One, the independence of the PCRS rating scale will help the government segregate lender’s assets and allow only non-toxic ones in the Government of India's Credit Guarantee Trust for Micro and Small Enterprises (CGTSME) scheme, whose ceiling was recently enhanced by Prime Minister Narendra Modi from one crore to two crore of collateral free financing for MSME’s," Jaiswal said.
"Second, it can help in early identification of eligible companies for the government’s ‘Make in India’ initiative through its sponsorship of Zero Effect, Zero Defect, or ZED, ratings. Indeed, PCRS can be a great example of collaboration within various government initiatives for the larger economy and employment good," he added.