Why MSMEs don’t want to go cashless | Business Line–Old Article–November 2016

All it takes A little help from friends in high places. – G Ramakrishna

That could expose their violations of PF, ESI and minimum wage norms. The government should, however, be a bit lenient here

Today, many MSME companies and workers are reluctant to receive payments through banks. It is important for the Government to consider the ground realities, understand the challenges and apprehensions of these employers and employees and address them appropriately.

The only way the Government can expect a rapid transformation from cash wages to wages through the respective bank accounts is by mandating that all wage payments are done through the bank.

There will be huge resistance to this move, and one of the reasons cited may be the absence of bank accounts. However, there are other reasons.

Why the resistance

Two important reasons for employers resisting payment through banks would be the need to make contributions to PF and ESI, and the need to pay minimum wages.

Further, even if employers are prepared make these payments, or pay minimum wages, they are afraid to do so for fear of harassment over past non-compliance.

As far as workers are concerned, they do not like their already low take-home salaries to be further reduced by contributions to PF and ESI. It would not benefit a poor worker who is already in debt with borrowings attracting interest varying from 24 per cent to 100 per cent, to keep 20 per cent of his or her earnings in a PF account and get sub 9 per cent interest.

Similarly, ESI facilities in general cannot be enjoyed by those working in MSME companies; they can be enjoyed only by employees of large companies thanks to the demands made by their unions. Workers in smaller companies do not get any meaningful service in most ESI hospitals.

The Government, therefore, needs to take a quick decision by raising the exemption limit on number of employees to enforce compulsory ESI and PF benefits. It must assure SME companies that they will suffer no harassment on account of past omissions as long as they follow the modified rules in future.

Unless the team that is trying to ease the pain post demonetisation puts on its thinking cap and acts wisely, this issue will continue to cause pain and will not allow the dream of a cashless society to fructify.

Making a few concessions to the SME sector will work well in the long run. These changes will help ease the pain and ensure better compliance in the future.

Firstly, ESI exemptions for MSMEs could be extended to cover a larger number of workers. Secondly, they could be given a year’s time to slowly increase wages and comply with the Minimum Wages Act.

Thirdly, the employees’ contribution to PF could be paid by the Government for two years: in full the first year, and 50 per cent the next.

What will work

These measures will help MSMEs recalibrate their costing to be viable with higher wage costs. However, we should be prepared for a slower increase in employment in this sector should the effective per worker costs move up for even MSMEs will start investing in automation.

Another important reality that should be factored in concerns working capital finance. Many MSMEs have private loans borrowed from private players as banks exercise extreme caution while lending to this sector; mostly this is in cash, forcing them to keep a part of their business outside the books.

If banks can be persuaded to increase the working capital limit for SMEs up to 25 per cent and provide in the budget an insurance amount to compensate banks should the companies fail to service the extra debt, it will go a very long way in helping the job creating sector to quickly clean up its act as well operate in a more viable manner.

In may not be out of place to remember that we are writing off close to ₹500 crore a day on loans given on hugely over-invoiced assets to a few thousands of borrowers and the Government is providing a very large sum each year in its budget to help banks clean up their books.

Extending to millions of small players a small percentage of the benefits that are being given to undeserving, unscrupulous large players will ease the passage to a cashless business model even as it accelerates job creation.

The writer is CMD, Loyal Textiles

(This article was published on November 29, 2016)

via Why MSMEs don’t want to go cashless | Business Line

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