Opinion piece by Mohit Sahney, Managing Director & CEO, Finova Capital, exclusively for SMEpost.com
The prosperous startup landscape of India is a goofproof element in the development of the nation’s economy. As per a recent report released by the Government – ‘Economic Survey 2015-2016’, the country witnessed the emergence of almost 19, 000 technology-enabled startups, led by consumer internet and financial services. Likewise, another report published by startup data aggregator Tracxn, revealed that the total amount of funding released by Indian venture capitalists, in the country’s home-grown companies, topped $ 12 billion for more than 1, 220 deals in the past two years. Adding to the insights, around $7.3 billion was invested in over 880 deals in the year 2015 alone.
Over and above the funding story, the ruling Government’s efforts to beef up manufacturing productivity and transform India into an economic force, through initiatives like “Make in India”, also had a major role to play in driving entrepreneurial growth.
Now within the entrepreneurial ecosystem are the Micro, Small and Medium Enterprise that makes for the foundation of any economy and has massive potential to unravel India’s entrepreneurial clout, create employment opportunities and add to India’s global competitiveness.
Their competitive business model gives them an edge over any other form of enterprise, as it focuses on utilizing cost-effective and homegrown resources, capital, procedures and man power, which ensures rapid ROI. However, in order for these MSMEs to fully realize their potential and leverage their USPs, they need regular and uninterrupted access to funds, which in reality is a major roadblock faced by the segment.
Putting things into perspective, despite the adoption of some viable business models by MSMEs; especially the one with no formal documentation, cash flow continues to haunt such business owners, keeping them up all night. Healthy cash flow is vital to any profitable business as it can literally make or break small and medium businesses and fund raising without any paper work, that too in semi urban or rural market, could be as tedious and trying as, finding a needle in a haystack.
Nevertheless, it is not impossible! MSMEs looking for credit in semi-urban and rural markets need to approach NBFC’s catering specifically to this segment, as they understand nuances of this market and have the necessary expertise to judge eligibility of these businesses basis rates. Spurred by evolving market demands, the investment sector has seen the emergence of NBFCs that caters categorically to the MSME sector. These are NBFCs that have created a niche for them in the market, by primarily lending to players in informal segments like tea staller, kirana store, pan walas, small food kiosk runners, washermen, electrician, carpenter, plumber etc.
Let us take a look at how these informal segment players can procure funds to further scale their business. While the absence of any formal business document is a major hindrance for MSMEs in semi-urban and rural areas, these small time players should always keep every bit of miscellaneous bills that could showcase case inflow and outflow for verification. These MSME’s should also be able to show the record of asset creation & investment done by them till date, as that works in their favour. Any investor would want to know what they have done with savings generated out of so many years’ operations. NBFCs working in this segment have created templates for each segment, wherein they understand on what margins these sectors are working.
NBFCs catering to the informal MSME segment expect such small players to be able to project future cash flow and business expansion against the loan proposed. Apart from producing their strategic business plan, they should also be able to demonstrate their progressive thinking to add to the comfort of the investors. Additionally, even if their cibil score does not fulfill the eligibility criteria for a loan, these small business owners must not shy away from their truth. NBFCs operating in the MSME segment are mostly aware of the kind adversities that could hit such micro and small businesses. It could be anything from medical emergencies at home, circumstantial default because of downturn in the past to credit card missile etc.
However, in such situations, copies of loans settled in the past with previous lenders could prove to be beneficial. It could add tremendous value and the cibil score could shoot up, if you pay all penal charges or overdoes of past for previous lenders rather than settling the loan. In addition to this, references of suppliers and vendors, whom you have worked with for years and are still working with, could work in your favour as well.
The MSME sector is constantly battling the odds to stay competitive in the national and global scenario. However, apart from the challenge of timely and unrestricted access of credit, which still remains the most critical reason, limiting regulatory policies, lack of infrastructure facilities, absence of marketing platforms and non-availability of modern technology are amongst others posing as a road block. Inflexible lending guidelines and the risk-averse nature of financial institutes compel such MSMEs to borrow money from informal sources of capital for their monetary necessities.
In the given scenario, while MSMEs are expected to continue innovating and be farsighted about their business growth to sustain the growth traction, there is a strong need for financial bodies to leave aside their risk-averse mindset. Financial bodies and Government authorities need to device innovative mechanisms of financial management to ensure uninterrupted flow of credit to the MSME sector.
