31 Aug 2020 20:54 IST

Cost of funds for most MSMEs still on higher side

At SPJIMR, panellists discussed how the collapse of small businesses risks sapping economic growth

The Centre for Family Managed Business (CFMB) and the Centre for Financial Studies (CFS) of Bharatiya Vidya Bhavan’s SPJIMR organised a webinar on ‘MSMEs — Breaking out of the Chakravyuh.’ Dr Nirvikar Singh, Professor of Economics, University of California, Santa Cruz; Vardhan TR, MD, Mascot Systems; and Manish Jaiswal, MD and CEO, Magma Housing Finance and SME Business; were the panel members. The discussion was moderated by Dr Tulsi Jayakumar, Professor and Chairperson of CFMB, and hosted by Mohan Natarajan, MD - India Head, Avista Advisory, and an advisor to the CFS.







Challenges faced by MSMEs

After the recent change in the definition of MSMEs, data reveals that over 99 per cent of businesses in India are MSMEs, which makes the sector crucial for the growth of economy. Gradually, the discussion moved towards understanding India’s small and mid-size business representation, in comparison to the world.

India is relatively under-represented in this category when compared to the global numbers. The main reason highlighted for this was financing. The cost of funds for these businesses has always been on a higher end and banks have been weary of lending funds to this sector, out of the fear of money turning bad. These apprehensions have made it difficult for MSMEs to tap funds and grow their business.

Ease of doing business

There are many complications for MSMEs when it comes to dealing with large companies and government entities. The global pandemic seems to have hurt the MSME sector much more than it has hurt larger enterprises. One of the panellists pointed to the opportunities that the present geopolitical situation could offer to the MSMEs and how these firms could harness them.

Receivables management was an important aspect that was discussed at length for the growth of this sector. Larger corporates and governments, which are the major customer base for the MSMEs, are at a much stronger position. They tend to take advantage of their position and offer terms of business heavily skewed towards their own benefit. A panellist even mentioned, how he has seen some of the MSMEs face problems, such as, large unpaid bills affecting their cash management. This hinders the business operations running smoothly.

Global scale

Magma Housing Finance MD Jaiswal mentioned that, when the moratorium was initially announced, more than 50 per cent of MSME accounts were already under moratorium. However, the current number stands at 25 per cent, which reflects a softer revival. They also discussed about the regional disparities in the MSME performance, where businesses in the northern states have been stronger than those in western and central regions.

Prof Nirvikar threw light on the difference in the situation of MSMEs in the US from that in India, where the relationship with other constituents, such as, large companies and governments, is less adversarial.

Disruptive mode

The panellists went on to further discuss how Covid-19 is likely to change the business models of MSMEs. Jaiswal suggested that MSMEs consider making their businesses-asset light, reduce fixed cost, shed off excess baggage of assets, survive the crisis by looking through for new opportunities in the crisis. Mascot systems MD Vardhan, added to the discussion, by proposing that MSMEs consider contribution margin over gross margin as the basis for taking calls on business growth. “It will help them better analyse their standing and improve decision making.”

The panel members also analysed the viability of the fiscal stimulus announced by the government. They noted that the ₹3 lakh crore stimulus was a credit facility, which implies that the amount would have to be paid back. Also, it was available only to those businesses which already have a loan account, and not to new businesses. Their discussions identified where the problems lay — the package seems to have been percolated only to the better performing MSMEs.

Towards digitisation

According to Prof Nirvikar, the stimulus is focused more on the credit rather than providing targeted support to the MSMEs. He also added that people have been taking the alternative view due to concerns of inflation expectations and fiscal deficit. The fiscal deficit, although an important consideration, is not the focus, agreed panellists. Right now, reviving the economy and pushing the demand should be in focus and the measures should be taken accordingly. The panellists also suggested that MSMEs look at revising their cost structures downward as Covid-19 has created a fog of uncertainty, and consumption is not likely to go up any time soon.

Discussions further went on towards digitisation. The panellists talked about the importance of adapting to changes and how digitisation could be used effectively in mass production. While highlighting the issues in technological adoption by many MSMEs, they remarked about how supply side of things wasn’t the issue, but the demand side and the gaps that exists because of the lack of skill set.

Long-term goals

MSMEs should approach their business with a long-term vision and hire the best that can push their businesses ahead, said experts. They also highlighted the growth of e-commerce and pointed out how MSMEs could reap the benefits of the changing spending patterns of consumers.

The webinar received an overwhelming response online.