Is it a dead-end for small and medium businesses? Or is it a new beginning?

What happened to MSME during the Pandemic?

The Covid-19 pandemic is by far the most significant economic phenomenon in our lives. The pandemic has disturbed socioeconomic life and continues to harm nations and individuals alike. According to the International Labor Organization, the situation has already deteriorated into a financial and labour force disruption, hurting not only supply but also mandate.

As we all know, the business has changed, maybe irreparably, with the largest impact on people’s lives. According to the ILO, approximately 400 million people in India’s unorganised sector are at risk of poverty due to the coronavirus’s unknown duration and severe financial consequences, with unique security issues in the arena of low-skilled jobs, where lost revenue would have a particularly damaging impact.
MSMEs, the bedrock of India’s inclusive growth story, have had a massive impact and significant disruptions as a result of the coronavirus disrupting their cash cycles. The situation of MSMEs is extremely alarming since they are an essential component of both local and international supply networks.

However, the crisis has driven small businesses and other sectors to adopt a strategy that necessitates higher efficiency and accelerates modernization. In some respects, Covid-19 is a watershed moment that might pave the path for speedier business change in India’s massive MSME sector. While there is no silver lining in this predicament, the reality of the situation has forced businesses to investigate all options for adapting and thriving. The pandemic has acted as a wake-up call in India to accelerate change and growth. According to McKinsey, a coordinated reform program may significantly enhance economic fundamentals by raising productivity in a variety of industries and creating the 90 million nonfarm employment India needs by 2030.

Factors responsible for the vulnerability of MSMEs

1) Capital Shortage – MSMEs in India are exceedingly unstructured; the vast majority of their transactions are handled in cash and are not effectively recorded in accounting records. Because of a lack of exact data records, these businesses do not earn the needed credit score and find it difficult to obtain lines of credit from the organised sector.

2) Heavy Transaction Cost – Because MSMEs’ transaction volumes remain low in most cases, trading costs remain expensive, both in online and offline payment channels. This has a significant influence on the company’s long-term profitability.

3) Banks’ and financial institutions’ risk assessments – In the lack of a good credit score or collateral, most banks perceive MSMEs as risky clients. This problem is compounded when the customer is a new business. Even if banks are convinced to lend, interest rates will continue to be higher than usual. Various MSMEs have variable revenue requirements based on the size of the organisation, working capital structure, and supplier agreements. All of this necessitates tailor-made services and goods.

4) Cybercrime – MSMEs are more vulnerable to dangers and hackers due to a lack of sufficient awareness and understanding of online banking and transaction operations.

Managing the crisis:

MSMEs must do an immediate examination of their financial status and security. The government may give soft loans with longer payback terms and increased credit ceilings to support MSMEs during a pandemic crisis. MSMEs must rethink their whole value approach by, among other things, improving product dependability, extending distribution networks, and employing new advertising techniques. In order to broaden market reach among buyers and suppliers, a robust digital ecosystem must be built.

The Government of India developed an e-marketplace(GeM) to increase the involvement of MSMEs in government tenders. A market ecology that is digitally active has the ability to reduce costs, increase labour efficiency, promote product invention, and improve employee safety. Collaboration with research institutes, tech start-ups, and established multinational corporations may be an effective business strategy for MSMEs seeking to develop a low-cost manufacturing base and access the Indian market. The Indian government’s assistance programs for MSMEs, such as the Emergency Credit Line Guarantee Scheme, low repo rates, e-market links, and PF and EPF support for both firms and employees, have begun to yield positive results.

The Reserve Bank of India has issued a notice that allows banks to deduct funds provided to new MSME lenders from their gross demand and time obligations. This implies that banks are excluded from maintaining a cash reserve ratio for loans given to first-time MSME clients from January 1 to October 31, 2021. Furthermore, the RBI has permitted Non-Banking Financial Companies (NBFCs) to get bank funding through Targeted Long Term Repo Operations (TLTRO) in order to stimulate incremental lending.

Looking forward:

The most recent changes send a strong message in favour of making it easier to conduct business, balancing competition for local firms and entrepreneurs, widening the community of beneficiaries, and boosting transparency. However, given the extent of the challenges, it is vital that the government reinforces its reforms and executes certain industry-changing measures.

Unresolved or late payments to MSMEs should be accelerated in terms of capital availability. TReDS payments to MSMEs should be rigorously controlled at the central level. The government is now encouraging MSMEs to join the TReDS platform since it allows them to cut bills and seek short-term funding from banks to handle their delinquent payments problem instantly. MSMEs should be encouraged to go digital and pay all invoices in TREDS to alleviate the liquidity impact on their working capital.

The sector will benefit if a strategic approach is taken and reforms are made to make credit and capital more readily available to MSMEs. As a result, the lending environment must be simplified and improved by utilising digital technologies for a more efficient loan procedure and analysing the creditworthiness of potential borrowers.