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MSMEs are accepted by all as backbone of employment and many governments around the world have declared \"packages\" to support them. Indian government is supposed to be working on a \"package\" and there is furious debate about size, shape and timing of the same.

Here is a suggestion from an MSME- who is the supposed beneficiary.

First and foremost- no MSME wants khairaat or daan. The fact that you are an MSME means you are used to hardships. Too many laws, too less working capital, stingy customers, unreliable suppliers, limited team..... this is cakewalk for us MSMEs and we survive and thrive despite these challenges.

Covid-19 is a once in hundred year event that no one planned for and thus we are looking for extra steps from Government.

The entire issue is of cash flow. There is massive outstanding with our customers- most of them corporate, there are dues from Government- mainly IT refunds and GST credits.

We can suggest a scheme to Government as follows:

1. All outstanding invoices of MSMEs are already on GSTN portal with GST id of corporate. Government can put these on an \"Approval Portal\"
2. On this portal, Corporate can confirm that they are ready to pay so many invoices- but they do not have funds
3. Government can extend loan guarantee to banker of corporate to the extent of confirmed invoice amount, thus extending working capital limit of corporate without affecting his overall rating with the bank
4. Corporate then use this \"guarantee\" to get additional funds from his existing bankers
5. Corporate then transfers payment to MSME against agreed invoices and updates \"Approval Portal\" with Transaction Reference Number and bank details
6. Government will guarantee next tranche only on actual transfer to MSME (Transaction can be verified via RBI to be genuine using reference number)

Benefits of this approach:

• Government is only standing guarantee to Banks and Banks are paying corporate with whom they have existing relationship
• Banks are able to deploy the excess liquidity- as of today they have parked over Rs. 8.4 trn with RBI See Article
• The administration of actual payments to tens of thousands of MSMEs is done by hundreds of corporate - thus Government does not have to deal with last mile delivery
• MSMEs are getting what is their due thus their balance sheets are not stretched at all and in fact reduced outstanding will mean their bankers will release more money to them

Why will corporate and banks agree to this scheme?

• The corporate needs the MSME supplier to survive to help in restarting his business- so they are keen to pay but are hoarding money for very rainy days ahead
• Timely payment to MSME is an legal obligation thus corporate are only doing what they should have done on their own
• They got an additional funding window outside of their current arrangements with banks- thus not affecting their overall ratings with banks
• Banks are getting a guarantee from Government thus they do not have to mark this additional lending in same category as other funds
• Banks are able to deploy excess liquidity where they currently earn very less interest. Using this scheme they are able to lend more - do more business- and still not increase their provisioning

What are pitfalls and possible frauds?

1. MSMEs and corporate can decide to create fictitious invoices and siphon off funds. Solution: Only allow invoices uploaded in GST portal till say April 30, so no scope of such a fraud
2. Corporate may default and government then needs to make good the money to banks Solution: First, chose top rated corporate with AAA ratings and then go downwards
3. Corporate may not subscribe to the scheme. Solution: Government can impress upon them their legal obligation to pay. They can also ask banks to stop working capital till they pay the MSMEs

No scheme is perfect. There will be leakages. But above approach saves administration for Government and basically leverages the systems already in place. It shifts the execution to corporate and banks - who are anyways experts in the same.