Sickness and Rehabilitation of MSMEs in India

India’s economy has been lauded far and wide for its indefatigable growth, multiple reforms as well as its opening up in the past 2 decades. An important part of this success is driven by small scale industries (SSIs), which constitute 40% of national of industrial production and 35% of exports. The explosive growth has a direct link to government reforms which have since 1991 opened the economy, reducing trade barriers and improving support for Indian enterprise great or small. Inevitably, some of the entrepreneurs will find themselves short in their business, and will become insolvent. The study proposed seeks to research the recourse for insolvent, struggling, or ‘sick’ industries in India.

SMEs will fail in a sector for a variety of reasons.  Global competitiveness has strained India’s already weak infrastructure, which severely hinders the production of small scale industries.  There are a multitude of reasons for failure, however, not all of them related to competition. Lack of knowledge, available capital, qualified workers or even motivation on the part of the owner are all viable reasons for business failure.  Whatever the reason for failure, the business must have some sort of recourse to ‘declare’ its sickness.  In India, what constitutes this mechanism is relatively unclear, and despite current progress, has left much inefficiency.  

There is no single party to blame for this state of affairs.  Certainly increased competition, government actions, corruption, and shortsightedness all play a part in creating the current system. The study will examine the extent of this inefficiency, if it does indeed exist, and determine a plan of action to implement by all actors including governments, banks, consultants and entrepreneurs. Especially in the latter two cases, the knowledge generated will be useful to ensure that MSMEs are well informed about the potential exit hazards and to plan accordingly.

• Only 12% MSMEs get rehabilitations under BIFR (Bureaus of Industrial and Financial Restructuring)

• Credit to MSMEs declines to all time low of 8% of overall credit down from a peak of 14% in 2002.

• 75% SMEs turn sick because of lack of finance, 53% due to government delays

• 70% and above blame stakeholder cooperation and regulatory delays for turning sick

• Introduction 5
• The Indian MSME Space 5
• The Definition of Sickness 6
• Extent of Sickness in Indian MSMES 6
• Sickness in Stages – A Typical Trajectory 7
  • The Mindset of MSMEs 7
  • The Mindset of Banks 8
  • The Mindset of the Government 9
  • Lack of Deep Dialogue 9
• Specific Causes of Sickness 10
• Methodology for Data Collection 10
• Disclaimer About Quantitative Merits of the Data 10
• Results of Interviews 10
  • Marketing 12
  • Infrastructure 12
  • Finance 13
  • Managerial 15
  • Technology 16
  • Competition 16
  • Excessive Cost of Funds 16
  • Government Causes 17
  • Others (suppliers, quality, excise duty, labour, external market conditions) 19
• Conclusion 21
• Rehabilitation in Practice 22
• Illness: A Progression 22
• Vetting for Rehabilitation 23
• Specific Difficulties with Rehabilitation 23
• Methodology for Data Collection 23
• Disclaimer About Quantitative Merits of The Data 23
• Results of Interviews  24
  • Lack of Stakeholder Cooperation 24
  • Lack of effective government schemes 25
  • Legal/Judiciary Issues 25
  • Managerial Problems 26
  • Delays in Action 26
  • Excessive Cost of Funds During Rehabilitation 26
  • Trust Issues between Stakeholders 27
  • Other 27
• A Current Way Out 28
• Progress Towards Greater Assistance 29
• Recent  Developments of the  Government 29
• Credit Guaranteed Trust for SMES 30
• New Legislation 30
• Research   30
• Punjab National Bank: Implementation of the Working Group's Recommendations   31
• Competition in the Financial Sector: Chine Trust Commercial Bank 32
• Recommendations 33
• Government Recommendations 33
• New Norms  33
• The Right Stuff  33
• Public Private Partnerships 33
• ‘NIP IT IN THE BUD’ 34
• Hedging for the Masses   34
• State and Central Government Alignment  34
• Utilization of Pooled Infrastructure  35
• Convergaence and Hybridization  35
• Credit Counselling  35
• Exit Route35
• Limited Liability Partnership  36
• Acknoledgement 37
• Government Officials 37
• Professional Experts 37
• MSME 37
• APPENDIX 38
• APPENDIX I - Struggles of the Glass Industry in Firozabad: A Sketch 38
• APPENDIX II - Strengthening of Delayed Payment Act  39
• APPENDIX III – Schemes for MSMEs(FISME Report) 1

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