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Many MSMEs are dying—can we realize the full potential of the digital revolution to save them?

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MSMEs are facing an existential crisis. The economic impact of the COVID-19 has been as bad as we had feared … possibly worse.

About 17% of businesses surveyed by MSC in India, Indonesia, Kenya, and the Philippines have closed due to local restrictions and low demand for goods and services, while micro and small enterprises (MSEs) in the informal sector fared worse. A recent World Bank report suggests that in Kenya, one-third of household-run MSEs have not been operating for months.

 

Declining income and rising expenses is a double whammy for enterprises in such trying times. On the demand side, the income of businesses declined due to reduced footfall, lower customer demand, and reduced purchasing power of customers. At the household level, MSME owners have had to pay for increased household expenses for basic goods, electricity, and the education of children. On the supply side, the factors contributing to the decline in income included disruptions in the supply chain and limited operating hours for the businesses impacted by the lockdowns and restrictions on movement.

Entrepreneurs have experienced severe challenges related to cash flow. This was due to three key issues—limited access to goods on supplier credit, most sales being conducted on credit, which resulted in increasing receivables, and the rising cost of supplies. MSMEs have resorted to running down their life savings, borrowing from their social networks, and even selling off business and household assets to meet their cash flow requirements.

In Kenya, with other expenses gradually stabilizing, repayment of loans has emerged as the biggest challenge for entrepreneurs. They have been struggling to repay new loans taken during the pandemic or pay penalties on old loans, or both, due to delays in installments.

MSMEs have struggled to borrow from formal financial institutions as they encounter more stringent terms, such as higher costs of credit and requests for physical collateral. Financial service providers are also reluctant to offer loans, let alone discounted interest rates as the pandemic devastated their cash-flows. But many MSMEs need credit to be able to revive their business, restock, and survive the crisis. In December, 2020, 50% of the respondents reported that they applied for the loan compared to 39% of MSMEs in September, 2020.

This situation is not unique for entrepreneurs in Kenya and is replicated worldwide—as seen from studies by MSC and the World Bank. Both the studies note that local enterprises now have limited access to cash and credit for business. In the absence of credit for MSMEs, they will be unable to restart their businesses or reach their previous scale—as their efforts to respond to the pandemic have eaten into much of their working capital.

How has the inclusive finance sector responded to these challenges?

The response from the inclusive finance sector to this crisis has been largely traditional—and, as a consequence, we risk losing an important opportunity to “build back better”.

Governments and donors remain largely focused on traditional solutions, such as supporting microfinance institutions and credit guarantee initiatives that are managed largely by traditional banks. For example, in December, 2020, the Government of Kenya launched the credit guarantee scheme (CGS) by allocating an initial seed capital of KES 3 billion (˜USD 30 million). This approach may be necessary and relatively easy in the short run, but we should think more strategically.

We should not let this crisis go to waste. It provides us the opportunity to accelerate several interrelated transitions to allow MSMEs and the financial institutions that serve them to realize the full potential of the digital revolution.

  1. Formalize informal enterprises

Most micro- and many small enterprises remain informal and thus do not qualify for the stimulus packages of governments. The fallout from COVID-19 could provide the push needed for these enterprises to register and formalize. Using COVID-specific cash transfers, access to government procurement as well as credit facilities, and support for digitization as incentives, governments may encourage informal enterprises to formalize. Countries could introduce a low-touch and paper-lite registration for informal enterprises to allow them to qualify for support in the event of a disaster. Such a system would have to recognize the disincentives to formalization, in particular the entrepreneurs’ fear of falling into the tax net, and set reasonable levels of revenue for enterprises as a threshold to be taxed.

  1. Digitize MSME operations

The pandemic pushed some MSMEs to increase their use of digital marketing and payment channels. While the change has been more pronounced in some countries, such as India and Indonesia, it was significantly incremental in others, such as in the Philippines and Uganda. Nonetheless, formalization and the growing range of technology available to support enterprises would allow them to manage their business more effectively and create a digital footprint upon which financial service providers can make informed lending decisions. MSC’s analysis has shown, unsurprisingly, that different merchants, for example, are at different stages of readiness to make this transition.

Governments, donor agencies, and the private sector will need to work together to enhance the digital capability and the uptake and usage of digital marketing and payment systems. This collaboration will require mobile money and other digital payment providers to revisit their pricing and commission systems for both cash-in/cash-out (CICO) agents and merchants. These changes are essential to encourage the move to keep money digital and to maximize digital payments. CICO agents and merchants will need to be equipped and incentivized to utilize their position as community influencers to become agents of change. The agents and merchants are uniquely positioned to do this at the key “teachable moments” when their customers come to transact.

  1. Facilitate the digital transformation of traditional financial service providers

As an integral part of seizing the opportunity provided by COVID-19 to accelerate the digital revolution, financial institutions (including MFIs) must implement digital transformation. This will allow them to deliver faster and cheaper services, equip them to serve MSME customers better, and allow microfinance institutions to utilize their strengths to continue to serve rural and urban markets.

Part of these changes will be through partnerships between traditional incumbents and fintechs to help achieve the objectives of digital transformation. Governments and donor agencies should set up a lab, a community of practice, and earmarked funds that financial institutions can avail of on a matching fund basis to encourage digital transformation. Forward-thinking microfinance investment vehicles should help their investee organizations with the required matching funds to protect their investments.

  1. Re-engineer digital credit to focus on enterprise rather than consumer lending

Digital credit providers have the potential to play a leadership role in the response to the pandemic. They could offer rapid loans based on alternative data, particularly if they could access the credit guarantee schemes provided by a range of agencies across the globe. Yet currently, many of the burgeoning digital credit operations, particularly in Africa, are focused on the consumer rather than enterprise lending. This needs to change.

The unintended consequences of aggressive push marketing, unacceptable collection practices, borrowing for sports betting, and negative listing on credit bureaus have been profoundly negative. MSC has already made a range of recommendations on how digital credit providers can make their products more user-friendly and thus profitable. However, to realize the full potential of digital credit, providers will have to both rethink their applications, user interfaces and experience (UI/UX), algorithms, and make use of the digitization of MSMEs we advocate in point 2 above. The regulators must ensure that fintechs have a level and fair playing field and build adequate provisions to protect the end-users.

We do not want to pretend that this transformation will be easy. It will require collaboration and a huge effort from governments, donors, the private sector, and fintechs. Yet it can potentially change—at a fundamental level—how enterprises conduct their business, how they access financial services, and how well they can respond to the next crisis.

MGNREGA: The delay in wage payments – Part II

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In the first part of this blog series, we looked at the genesis of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a social protection program introduced by the Government of India (GoI) in 2005 to help rural Indians achieve livelihood security. However, delayed wage payments and rejected transactions continue to plague the system and compromise the goals MGNREGA was established to achieve. In the second part of this blog series, we will look at the cause of such delays and ways to alleviate process inefficiencies going forward.

Why do delays occur?

While delays may occur at the first, second, or both stages of the payments process, payments are rejected only during Stage 2. We discus some reasons behind the delay or rejection of wage payments under MGNREGA below.

I) Delays at Stage 1: Delays at this stage occur during the generation and approval of fund transfer orders (FTOs) by field-level officials at the block and village levels. The causes for these delays may include a shortage of work officials, lack of capacity building, or the lack of computers or internet connectivity needed to generate FTOs at the block level. The Fourth Common Review Mission of the Ministry of Rural Development (MoRD) (2018) observed significant vacancies for the position of field assistant. This suggests the number of staff tasked to handle FTOs is inadequate. Additionally, some studies have also identified other administrative lapses, such as the loss or mismanagement of attendance sheets before the entry of data into the MGNREGA system, failure to generate or authorize FTOs, and the closure of work in the system without the completion of payments.

In 2015, the government introduced a Mobile Monitoring System (MMS) as a pilot project across 35,000 village councils to eliminate inefficiencies at the ground level. The pilot also sought to enable field functionaries to update the database in real-time through an MGNREGA mobile-based application. However, this system managed to achieve only limited progress. As of 16th March, 2021,[1] only 13% (34,212) of the total village councils across India are registered under MMS. Of these, only 21% (7,027) have used the system to update data. Though village councils can use this system to record the demand and allocation of work to workers and measure the works completed, they use it solely to fill attendance sheets at present. Delays at Stage 1 cause a ripple effect throughout the process, which subsequently delays the completion of the second stage within the stipulated timeframe.

II) Delays at Stage 2: Delays at this stage can be broadly examined in terms of administrative delays, shortage of funds, rejection of payment transactions, and technical errors.

  • Administrative delays: These delays are attributed to the central government withholding wage payments for certain states. This is because some states fail to submit their audited fund statements for the previous year as well as utilization certificates or bank reconciliation certificates within the specified time frame. The government is yet to process around 21% and 70% of the FTO transactions generated for January and February, 2021 respectively, for wage payments. Sometimes, the government also withholds payments due to a shortage of funds allocated for various states.
  • Shortage of funds: On average, approximately 20% of the funds available under MGNREGA are used annually to cover the payment liabilities of the previous year. Due to this, some states overutilize their funds and struggle with payments for the work completed in the third and fourth quarters of the financial year. This is evident by the fact that the GoI allocated an additional INR 110 billion (USD 1.5 billion[1]) above the budget of INR 600 billion (USD 8.2 billion) for MGNREGA in 2019-20.

The chart below illustrates the annual expenditure, which is higher than MGNREGA’s annual budget and availability of funds over the years.

(Source[3])

Estimates suggest that to provide 100 days of employment to all 149.9 million registered households at the national average wage of INR 202 per person per day, the GoI will need to allocate at least INR 3.03 trillion (USD 41.3 billion) annually. As per the data of 2020-21, registered households were provided with an average of 49.5 workdays.

  • Rejection of payment transactions: Around 777 bank branches across India reported rejecting at least 100 transactions each in the past six months. Banks cited various reasons for the rejection, such as the absence of accounts to which payments were made, invalid accounts, and a mismatch in account description, among various others. Banks also rejected transactions if the account was closed or the participant was not mapped to the product. While rejected transactions are supposed to be regenerated for reprocessing, 5% of the rejected transactions have not been regenerated yet, which causes further delays or rejection of payments.

Of the total FTO transactions through Ne-FMS, 45% of the payments were processed through the Aadhaar Payment Bridge (APB) System. Of these, about 3% were rejected in 2020-21. The reasons include unlinked or unverified Aadhaar numbers (unique identification numbers) with the MGNREGA registration number of workers. So far, the Aadhaar numbers of only 68% of active workers have been linked, and only 77% of these have been verified.

  • Technical errors: Additional delays also occur during the online processing of FTOs when some of the transaction files are lost during online transmission. Though the Ministry of Rural Development’s program division may receive some files, they cannot be processed due to errors while some others may lack digital signatures of authorizing officials.

Other than delays at various stages of the payment process, the accounting of delays by the MGNREGA server is also flawed, as highlighted in the first part of our blog series. This affects the calculation and payment of delayed compensation that workers are legally entitled to if their wage payments get delayed. While the central government and payment agencies are absolved due to this flaw, the state governments are left to bear the burden of the delayed compensation.

While the causes mentioned above shine a light on the reasons for delays or rejection of payments, a recent assessment examines the last-mile challenges workers face in accessing their wages once they have been credited into their bank or post office accounts. From the sample of 1,947 MGNREGA workers across three Indian states, about 45% of respondents had to make multiple visits to banks and 52% to post offices to withdraw their wages. Of the 249 respondents with rejected payments, 77% did not know why their payments had failed. Multiple visits to withdraw wages and get information about rejected payments lead to loss of a day’s work and wages for the workers.

The way forward

Delayed MGNREGA payments run counter to the program’s objective of providing livelihood security and social protection to millions of rural households in India. As wage rates under MGNREGA are 40% to 50% lower than minimum wages paid to unskilled agricultural workers in India, delays could further discourage workers from requesting work under the program. However, recognizing the potential of MGNREGA, GoI had allocated an additional INR 400 billion (USD 5.45 billion) above the estimated budget of INR 610 billion (USD 8.3 billion) for 2020-21. The additional budget helped provide livelihood security to the growing number of unemployed people in rural India, which saw a rise due to the COVID-19 global health pandemic and the subsequent lockdown in the country. Though the allocation of more funds is a step in the right direction, it is not sufficient to curb the growing economic distress in rural India if delays in wage payments persist.

Therefore, the following measures should be adopted or implemented to resolve issues that cause these delays:

  • Investment in human resources: As highlighted in the previous section, vacancies in the administrative structure hinder the effective operations of MGNREGA. Therefore, respective state governments and district program officers should identify vacancies and employ field functionaries at the village level at the earliest. Moreover, overburdened with work, program officers like the Block Development Officer fail to approve FTOs promptly, despite the support of accountants and technicians. State governments could assign assistant program officers specifically to implement MGNREGA.
  • Investment in technology: Utilizing technology can help reduce operational delays. For this, governments should actively adopt and implement the existing Mobile Monitoring System (MMS) across all village councils to keep the database updated in real-time through demand submission and work allocation, recording attendance, and measurement of work at the village level. Additionally, governments must also equip block offices with computers, printers, and internet connectivity to implement and review MGNREGA effectively through its MIS at the block level.
  • Adoption of automated processes: With the adoption of MMS at the village level, governments should rethink the necessity for the current two-step process of generation and approval of FTOs at the block level. The government can automate the approval of FTOs, with the fulfillment of necessary inputs at the village level. Further, with the generation of FTOs, the wages should be credited automatically into the accounts of workers without seeking manual approvals to process FTOs at the program division of MoRD.

Additionally, field functionaries should verify and capture the details of registered households on the MMS, such as their names, registration numbers, bank account details, and Aadhaar numbers. The verification process will reduce both the cases of transaction failures and the burden of the verification process at the block level. Gradually, the government can adopt the single source of truth technology across line ministries and programs, which will allow it to automate the collection and verification processes of the details of workers.

Since MGNREGA is largely automated with a digital process of fund flow, the central government can adopt the concept of automated utilization certificates generated through the MGNREGA MIS. Meanwhile, even if state governments delay submitting the necessary financial and administrative documents, the center should not withhold wage payments.

The Ministry of Rural Development and the governments of state and union territories should collectively enforce the mandate for timely payment of wages. They should work to address delays caused by burdensome administrative, manual processes, and infrastructural gaps. Utilizing technology, capacity building, and allocation of sufficient funds can help accomplish this goal. The state and central governments, all of which share one goal, should also collaborate to ensure rural Indians receive employment as well as wages on time.

[1] The data from the MGNREGA MIS used throughout the blog is as reported on 16th March, 2021, unless specified otherwise.

[2] Conversion rate of 1 USD = INR 73.3 has been used throughout the blog (as on 3rd March, 2021)

[3] Sources: MGNREGA Financial statements as on 22nd March, 2021 – 2017-18, 2018-19, 2019-20, 2020-21; Budget – 2017-18, 2018-19, 2019-20, 2020 to 2022.

MGNREGA: The delay in wage payments – Part I

Posted on by MSC

Introduction

Between 2011 and 2018, almost 32 million casual laborers[1] lost their jobs in rural India. Of these, 94% were farm jobs, which reflects the growing distress in the agriculture sector and rural economy of India.

At the time of the Socio Economic and Caste Census of 2011—India’s most recent census, 81% of the total households in rural India derived their income from either manual labor or cultivation.[2] Moreover, workers in rural India earn an average daily wage of INR 175 (USD 2.4),[3] which is less than half of what a worker in urban India earns—INR 384 (USD 5.2).

The Government of India (GoI) introduced Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a social protection program to provide livelihood security to the rural poor, in 2005.

This blog, the first of a two-part series, examines the MGNREGA program and its accomplishments. It also provides an overview of the delay in wage payments to workers. In the second part of this series, we will look at the reasons behind the delay in wage payments and suggest ways to improve the efficiency of payments to optimize the impact of the program on India’s rural poor.

Under MGNREGA, the state (provincial) governments offer each household at least 100 days of unskilled manual work each year. The list of permissible works includes those related to agriculture, livestock, water conservation, and road construction, among others. People above the age of 18 who reside in rural areas[4] can register themselves and their family members at the gram panchayat (village council). The village council issues a job card to each registered household. As of 16th March, 2021, MGNREGA has 147.6 million active workers.[5] In 2017-20, an average of 2.55 billion workdays has been generated under the program per year. Whereas, 3.67 billion workdays[6] were generated in 2020-21 alone, as illustrated in chart 1.

(Source: Chart 1)

A rights-based framework under MGNREGA

With the existing wage disparity between urban and rural areas, and uncertainty around employment in rural India, MGNREGA has the potential to boost household incomes. The demand-driven program offers unskilled manual work to those who request it from their respective village council. The workers are employed within and around their villages and receive daily wages as per the rates determined by the Ministry of Rural Development (MoRD), GoI. The central government funds 100% of the wages for unskilled labor, as well as 75% of the material costs of projects sanctioned under the program. Conversely, state governments bear 25% of the material costs of projects and 100% of the unemployment allowance and delayed compensation. Moreover, state governments are permitted to claim 6% of the total labor budget for administrative expenses from the central government.

Through this rights-based framework, workers are entitled to employment within 15 days of requesting work. If the government fails to offer employment within this period, workers are entitled to receive an unemployment allowance.[7] Workers should receive wages within 15 days of completing work. Otherwise, they are entitled to compensation for the delay—0.05% of unpaid wages per day.

Shift from cash payments to direct benefit transfer

Before 2015, wages under MGNREGA were transferred to the bank account of the village council. Thereafter, members of the village council would distribute these wages in cash. This method was rife with inefficiencies, widespread corruption, payment to fake beneficiaries, and significant delays in payment. In 2014-15, 72% of the total wage payments saw a delay across India. As a result, the GoI switched from cash payments to direct benefit transfers (DBT)[8] to MGNREGA beneficiaries. DBT allowed the government to transfer the wages of workers directly into their bank or post office[9] accounts. DBT in MGNREGA was initially introduced in 2015 in 300 districts that had a strong penetration of banking infrastructure. The initiative was extended to the remaining districts across India in 2016.

Further, to streamline the system of fund release between the GoI and respective states and union territories, India adopted the National Electronic Fund Management System (Ne-FMS)[10] in 2016. Distributing wages through Ne-FMS is a two-stage process, as illustrated below. In Stage 1, a fund transfer order (FTO) for the payment of wages is generated and approved on MGNREGA’s online server after completion of work at the block level (sub-district administration). In Stage 2, MGNREGA’s Program Division officials at MoRD approve the FTOs. The payments are then processed and credited into the respective bank accounts or post office accounts of the workers. Though the wage payments are required to be credited within 15 days of work completion, the Stage 1 processes should be completed within eight days from the date the beneficiary completes the work and the attendance sheet is closed. Meanwhile the Ne-FMS is designed to credit wages (Stage 2) ideally within two days of the approval of FTOs at the block level.

Delays in wage payment

The nationwide lockdown imposed in the wake of COVID-19 pushed the unemployment rate in rural India to over 20%. MGNREGA has been a lifeline for many amid the pandemic—between 1 April and 20 May during the lockdown last year, approximately 3.5 million households applied for registration under MGNREGA. Whereas, the total number of new applications in 2019-20 was only 1.5 million.

While almost all those who requested work in the past three years got employment, delays in the timely payment of wages remain a persistent issue. As of 16th March, 2021, about 2% of total wage payments were delayed in 2020–21. The delays in wage payments range from 16 to 90+ days. Around 11.3% of the total FTOs sent for payment processing through Ne-FMS (Stage 2 processes) in 2020-21 are still pending, which amounts to INR 74.36 billion (USD 1.01 billion). Of these, 88% of transactions from March, 70% from February, and 21% from January remain pending. Moreover, banks and post offices rejected 12.6 million (2.5%) and 66,350 FTO transactions (5%) respectively in 2020-21. This led to further delays or resulted in no payments for workers.

(Source: Chart 3)

According to an evaluation study MSC conducted across 18 states and union territories in 2020, 41% of the respondents registered under MGNREGA interviewed in Round 1 (April and May, 2020) had not received their wages. Moreover, only 53% of the respondents received work between May and July last year. Of these, 8% of respondents had not received their wages and 9% had received partial wages, as per Round 2 (August and September, 2020) of the study.

Since the implementation of DBT in MGNREGA, the timely payment of wages has increased reportedly from 37% in 2015-16 to 98% in 2020-21. However, according to an independent assessment of payment transactions in the first two quarters of 2017-18 across 10 Indian states, only 32% of wage payments were made within the stipulated period of 15 days, as compared to the government’s claim of 85%. This is because the government only considers delays caused under Stage 1 processes. The Department of Expenditure, Ministry of Finance,  has acknowledged this flaw in the calculation. It has attributed the delays in Stage 2 to “infrastructural bottlenecks, unavailability of funds, and a lack of administrative compliance.”

Workers need wages to support and enhance their livelihoods. The timely payment of wages and correct calculation of delayed compensation is necessary to fulfill the legal entitlements of workers under the program. Hence, the government must identify and address the reasons behind the existing delays at various levels of the process.

MGNREGA came into being based on the need to provide for employment opportunities for the rural poor who struggle to find work and subsist on minimum daily wages. This rationale was laudable and continues to help keep millions of rural Indians economically afloat. However, delays in wage payments must cease to ensure beneficiaries receive their compensation on time to meet their livelihood obligations. In the second part of this blog series, we will look at the causes of delayed payments and ways to alleviate process inefficiencies so the MGNREGA program can have an optimal impact.

[1] Casual laborers refer to individuals employed periodically according to the demand for work.

[2] The Census is a population enumeration exercise conducted in India each decade by the Registrar General of India, Ministry of Home Affairs, GOI. The 2011 Census is the latest for which data is available, with the next census planned for 2021.

[3] A conversion rate of 1 USD = INR 73.3 has been used throughout the blog (as on 3rd March, 2021)

[4] Under MGNREGA, “rural area” refers to all areas within a state except those covered by an urban local body or a Cantonment Board established or constituted under the laws in force at the time.

[5] Active workers refer to any individual of a household who has worked for at least a day in the last three financial years.

[6] The data from the MGNREGA MIS used throughout the blog is as reported on 16th March, 2021, unless specified otherwise.

[7] Under MGNREGA, if the village council is unable to offer work to workers within 15 days of their request, the state government is responsible for paying an unemployment allowance, which ceases as soon as work is allocated according to the provisions in the regulations.

[8] Direct benefit transfer (DBT) is a program launched by the Government of India to transfer benefits and subsidies of various social welfare programs directly into the bank accounts of beneficiaries.

[9] Post office accounts are banking services offered by the Department of Post, GoI. These accounts can be mapped with the beneficiary’s Aadhaar number, linked to their MGNREGA job cards, and used to receive their MGNREGA wages through DBT.

[10] Ne-FMS is presently implemented across 28 states and UTs in India, which enabled them to receive funds under MGNREGA from the central government. The remaining states and UTs use the electronic Fund Management System (e-FMS)—Andaman and Nicobar Islands, Dadra and Nagar Haveli, Daman and Diu, Goa, Lakshadweep, Manipur, and Nagaland.

Impact of COVID-19 on CICO agents in Indonesia

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COVID-19 has left businesses around the world struggling to keep afloat. Cash-in cash-out (CICO) agents are no exception. This report assesses the impact of COVID-19 on the macro environment, business operations, income and expenses, and management practices of CICO agents in Indonesia. It offers insights into the gender dynamics of CICO agents and their clients. The report further provides recommendations for the Government of Indonesia (GoI) and financial service providers to aid the recovery of CICO agents.

Helix Institute of Digital Finance inaugural Master Class series with Tamara Cook, CEO, FSD Kenya.

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In the inaugural session of our master class series, we talked with Tamara Cook, the CEO of FSD Kenya. An industry leader in the financial inclusion space with a professional history spanning more than 20 years, Tamara speaks at length about her professional journey, key achievements, challenges, and lessons learned.

Our conversation with her goes deeper to focus on the following topics:

  • The medium- to long-term impact of COVID-19 on the inclusive finance sector
  • How can financial markets address the financial constraints of low- and moderate-income populations effectively?
  • Is there a need for a renewed focus on financial inclusion considering COVID-19 has undone years of inclusive finance initiatives
  • Recommendations for the financial sector, development community, and multilateral organizations to future-proof against such crises

Click here to watch more of our master classes

Are pensions reaching the “last mile”? Insights into the digitization of payments—Part II

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The National Social Assistance Programme (NSAP) is a significant step toward providing social protection to Indian citizens. This note provides recommendations for state and central governments to address the challenges in the last-mile delivery of pension payments and provide better technical, logistical, and monitoring support for the optimal and efficient functioning of NSAP.