Indian MSMEs: Seamless Credit To Facilitate Vision Of $5 Tn Economy
For decades, micro, small and medium enterprises (MSMEs) have been acknowledged as the silent pillars of India’s economy. To elaborate, the segment accounts for 30 per cent of India’s gross domestic product (GDP) while 40 per cent of the 63 million MSMEs contribute to exports.
Overall, MSMEs also generate 80 per cent of the country’s employment.
Despite the crucial role of MSMEs in the Indian economy, including the vision of a USD 5 trillion economy, the segment faces constant cash flow issues, hindering the ability of small entrepreneurs to operate seamlessly.
In the past few years, MSMEs have also confronted challenges from policy measures such as Demonetisation, the introduction of goods and services tax (GST) and the pandemic, among others. In particular, the pandemic was a harsh disruptor of MSME operations.
Payment and cash flow issues
Meanwhile, one of the perennial problems of MSMEs is the issue of delayed payments. As per 2021 estimates, MSMEs were owed approximately Rs15 lakh crore. Even this isn’t a comprehensive number and only indicates the working capital deficit confronting some sections of India’s registered MSMEs representing barely 13 per cent of the existing small enterprises.
Here, micro-enterprises face a more serious problem as around 80 per cent witness payment delays exceeding the statutory 45 days while about 45 per cent endure delays beyond 180 days after the delivery of products or services.
Given the cash flow constraints, innovative solutions are required to overcome legacy challenges in receiving payments on time and bridging the credit shortfalls arising from the reluctance of traditional lenders to advance loans to small and micro enterprises.
While most B2B companies are struggling with delayed payments, part of the onus is being placed on MSMEs for not adopting technology solutions to undertake transactions. Consequently, the lack of adequate data and access to relevant information has been impacting their business performance.
A few potential solutions
Keeping these constraints in mind, outlined below are some solutions to improve payment turnaround times and drive seamless credit options for MSMEs:
Accelerating the digitalisation drive: As the Centre works towards transforming India into a cashless economy, policy reforms and initiatives such as Demonetisation, GST, Digital India and more have been nudging all enterprises, especially in the informal segment, to deploy digital tools in meeting compliance norms.
Though Demonetisation forced more than 86 per cent of cash out of circulation, thereby accelerating the transition towards digital deals by forcing individuals and institutions to undertake online transactions, market reports indicate much of the cash has now come back into circulation. Likewise, the advent of GST meant many companies had to streamline and digitise their records to comply with the latest financial guidelines.
However, sustained efforts are necessary to ascertain companies continue adhering to digital adoption norms. The focus must also be turned to most MSMEs that have not yet adopted technology-driven solutions in managing billing and credit cycles.
Highlighting the importance of credit history: Most small enterprises in the unorganised sector do not understand the significance of having a good credit score or robust credit history. As a result, they end up providing credit to customers without ascertaining their creditworthiness or ability to repay and do so in time.
If the importance of credit scores were grasped, these small businesses would only offer credit to clients after assessing the risks of non-payment or delayed payments.
Similarly, since such small enterprises lack a credit history or a healthy credit score, banks and other organised lenders are reluctant to advance funds to these entrepreneurs. Through digital transactions and the avoidance of cash deals, MSMEs would be in a position to create their credit history, increasing the chances of being eligible for institutional credit.
Encouraging organised lenders to provide credit: One of the major reasons for MSMEs facing cash flow issues is the lack of credit support from formal financial institutions, including banks. As formal lenders do not advance loans, small businesses are forced to seek credit from unorganised entities that typically charge exorbitant interest rates.
This makes it more challenging for small entrepreneurs to meet financial commitments as they find it difficult to scale up their operations and struggle to repay loans. But loans from organised lenders at more competitive rates and reasonable terms would ease the cash flow concerns of MSMEs.
Emphasising the criticality of data: Without the adoption of the latest tech solutions to undertake transactions, MSMEs do not have access to captive data that could be used to assess and improve their business.
Furthermore, with a major percentage of deals undertaken in cash, many transactions are not fully accounted for or may be recorded without complete accuracy. Inadequate data and lack of transparency make it more challenging to follow up vigorously on non-payments, encouraging the late repayment and missed payment culture.
MSMEs and the USD five trillion economy vision
The value of accelerating credit flows to MSMEs is highlighted by KPMG’s latest 2022 report on NBFCs (non-banking finance companies) and HFCs (housing finance companies). The KPMG report states that MSMEs have been instrumental in India’s emergence as the fifth-largest economy globally and would also be key for the country in achieving its USD five trillion economy objective.
The report further notes that by deploying innovative tech tools, novel risk modelling and customised offerings, NBFCs have enhanced the credit flow to MSMEs, particularly in underserved segments of the country.
Yet, despite the efforts of NBFCs, one telling statistic encapsulates the entire missing opportunity in India’s MSME market. The report reveals that the outstanding credit of NBFCs to MSMEs in June 2022 was Rs 3.6 lakh crore whereas the MSME market’s credit opportunity is estimated at Rs40 lakh crore.
In essence, MSMEs have only accessed around six to seven per cent of the available credit in India, showing the immense scope for growth in the lending segment.
Such simple statistics stress the stupendous role MSMEs could play in helping India emerge as a USD five trillion economy – if seamless credit flows to the segment are assured.
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