But, even as small businesses across the country go through a bad patch, lenders are willing to take on the risk and give them the support they need. Similarly, technology players are developing solutions to make them relevant for SMEs.
“The banking industry has exposure of Rs. 10 lakh crore in the MSME sector and NPAs are at 18-19 per cent of the book,” said RK Gupta, Executive Director, Bank of Maharashtra. “The slowdown of the economy is the main reason for this.”
Micro, small and medium enterprises (MSME) are the backbone of India’s industrial landscape. With about 40 million units employing about 100 million people, directly and indirectly, the sector is the largest job provider in the country. It contributes about 8 per cent to the GDP, has a share of 45 per cent in the country’s manufacturing output growth, and contributes 40 per cent to the country’s exports.
The biggest bottleneck to the growth of entrepreneurship in the MSME segment is the lack of financial support. The support from banks to this sector is meagre, with less than 15 per cent of bank credit going to this segment.
Unregistered companies
A vast part of the non-corporate sector operates as unregistered enterprises.
They do not maintain proper books of accounts and are not formally covered under taxation. Therefore, banks face difficulty in lending to them. The majority of players this sector do not access outside sources of finance.
The sector comprises a myriad small manufacturing units, shopkeepers, fruits/vegetable vendors, truck and taxi operators, food service units, repair shops, machine operators, small industries, artisans, food processors and street vendors, among others.
Newer banks, in fact, are using the opportunity to bet on the SME sector, said Bhadresh Pathak, Senior President and Head, Business Banking, YES Bank. “While the stress in this sector has come because of several reasons, banks have evolved new methods of evaluating the good SMEs from the bad ones,” he said.
Sunrise sector
Sekhar Mosur, Executive Vice-President, Aditya Birla Finance, said that non-banking financial companies (NBFCs) are also betting big on small businesses, since they see this as a sunrise sector.
“NBFCs, by their nature, can make smaller-ticket loans and are more nimble-footed and can take decisions faster,” Mosur said. “This is a very attractive segment for us and we are consciously diversifying into SMEs and it is growing at an exponential rate.”
SMEs can look for financing other than formal banking by listing on stock exchanges, said Ravi Varanasi, Group Head, Equity Derivatives and SME Verticals, National Stock Exchange (NSE).
He said NSE is also in the process of setting up a receivables exchange, and it will let promoters discount their bills of exchange over a formal platform.
“The RBI approval for this exchange is awaited,” Varanasi added.
At a time when India Inc’s appetite for credit has turned tepid, bankers seem to have put their shoulders to the wheel in giving loans to small manufacturing units, including shopkeepers, street vendors, truck and taxi operators, and others under the Pradhan Mantri MUDRA Yojana.
Banks, including State Bank of India and its six associate bank; other public sector banks (21), private sector banks (13), regional rural banks (56) and foreign banks (2) have stepped on the gas since the Yojana was launched on April 8.
Three categories
Under PMMY, loans are given by banks and MFIs under three categories — Shishu (loans up to Rs. 50,000); Kishor (loans above Rs. 50,000 and up to Rs. 5 lakh); and Tarun (loans above Rs. 5 lakh and up to Rs. 10 lakh).
They have to ensure that at least 60 per cent of the credit flows to Shishu category units and the balance to Kishor and Tarun categories.
The government came up with PMMY as the formal or institutional architecture has not been able to reach out to the NCBS to meet their financial requirements. They are largely self-financed or rely on personal networks or moneylenders.
Sanjay Agarwal, Group Business Head-SME Finance, CARE Ratings, said SMEs are often not aware of how to present data that put them in the best light. “Data with SMEs are often optimised for tax management, but what credit rating agencies are looking for is the cash flow required to pay back loans.”
Overseas buys
Pushkar Mishra, Deputy General Manager, Small Industries Development Bank of India, Pune, said several small industries have made successful overseas buys, and some have been very lucrative. “But it is important to make a good cost-benefit analysis first,” he added.
Considering all this, it is also important for promoters and businesses to focus on cash management, said Bhavdeep Bhatt, Head, Institutional business, Birla Sun Life AMC.
“Use liquid funds, make use of treasury management facilities,” he said.
“As a promoter, a lot of instruments are available that allow you to de-risk and participate in the growth of other businesses,” he added.
When it comes to technology, SMEs often stay away from investing due to the fear of high investments, and thus something that can give them a competitive advantage turns into the last priority.
Tech investments
Santanu Dutt, Head of Solutions Architecture (West of India) with Amazon Web Services, said SMEs need to experiment and not look at only the obvious extensions of their business.
“At Amazon, we were just an online book store. But we realised that the potential of the platform was a lot more,” said Dutt. “We started Amazon Web Services as an experiment and that paid off really well. Technology today not only provides a platform to enable your business, but also look at new lines of business.”
“For SMEs, technology can be a growth enabler or a great threat,” said Mukul Mathur, Vice-President, Global Business Partners and CSI, IBM India/South Asia. He added that technology can help in business growth. The lack of it could help a competitor to completely destroy. “You could now look at the technology not from the point of investing heavily, but can spend in byte size pieces, and if you fail, it will help you to move on immediately,” .
To improve customer service, Sanjiv Mahesh, Director, Sales Consulting, Oracle India CX, suggested that organisations need to better understand the customer. “Customer experience tools, which are an extension of customer relationship management solutions, can help you to achieve it,” he said.
Know the customer
“You need to know your customer extremely well. For example, for a hotel, it would mean knowing if the customer likes a hard pillow or a soft one, or if they prefer a pool-facing room or garden-facing one –– and keeping that ready even before the customer enters. Tracking such information through CRX solutions can help you retain existing customers and build loyalty,” Mahesh said.
With limited budgets, it is difficult for SMEs to decide on which technologies they could invest in.
Talking about the solution for this conundrum, Manoj Joshi, Head, Western Region, Cisco, said: “It is often very hard to decide where to spend and what to prioritise when it comes to IT spending. The use of the cloud or rental model allows SMEs to try out different technologies without the fear of a lock-in.”
Source: The Hindu Business Line