MSME Udyam Process

Source: Indian Express

Syllabus:Gs3: Inclusive Growth and issues arising from it.

Context: Udyam initiative is promising in terms of capturing reliable and verified information about MSMEs but it can impact some MSME’s from accessing formal finance

Why the information available on MSME’s are not adequate?

• Reliable and updated information regarding small businesses in India is absent.
• Also, a dedicated census for MSME sector was not conducted in last 13 years.
• Now, basic information available on MSME units is scattered across various databases such as the UAM, MSME Databank, and GSTN.
• UAM, MSME Databank contain self-certified, voluntary information provided by a fraction of MSMEs
• Whereas the GSTN has information on businesses with a turnover of more than Rs 40 lakh, the minimum requirement to be registered on it.

What is Udyog Aadhaar Memorandum?

• An online filing system for MSMEs notified by the government in 2015.
• The registration process is free, paperless and awarded instant registration.
• It was based on the self-declaration and self-certification of basic information regarding the enterprise’s existence and functioning.
• In 2016, the government notified rules under which MSMEs had to furnish information relating to their enterprises, online, in an MSME databank.

Why Udyam registration process?

• Compared to UAM, the Udyam registration stress on importance of generating a verified database of MSME units.
• Under the Udyam registration process, Aadhaar is made mandatory for proprietors
• Irrespective of the number of manufacturing and service activities provided, every enterprise can have only one Udyam Registration Number,
• The Income Tax department database and the GSTN is used to verify the self-declared information regarding investment and turnover.
• The government has integrated the Udyam system with the Trade Receivables Electronic Discounting System (TReDS) and the Government e-Marketplace (GeM), In an attempt to nudge more enterprises.
• This will significantly benefit MSMEs by offering a free and automatic route to onboard bill discounting mechanisms and the government’s online procurement system.

How Udyam process can affect MSME’s Financial inclusion?

• RBI has clarified that all lenders may now obtain the Udyam Registration Certificate from entrepreneurs.
• It is clear that in future financial institutions can make the Udyam registration mandatory for lending purposes.
• Whereas most of the MSME has characteristic features of household enterprises and operate with less than five workers.
• Most of these firms are not formally registered as being invisible benefits these firms from paying income tax or getting registered under the GST, Also the cost of formalisation and compliance are high.
• With Udyam registration being the only valid proof for an entity to be recognised as an MSME as per the revised definition invisible MSME’s will lack legal backing to source finance from the financial institutions

 Read also Government Schemes

What is the way forward?

• In 2018, the International Finance Corporation estimated that the finance from formal sources met only one-third of the credit demand of the MSME sector.
• Due to their inability to meet documentation protocols, inadequate collateral, disorganised book-keeping etc. these businesses prefer relying on informal sources for financing.
• So, the government and RBI should consider to exempt registration of units with investment and turnover in the lower end. Such that institutional lending initiatives continue to remain accessible for all businesses, formal and informal.