It is a well-documented fact that MSMEs are the backbone of India’s economy. There are 50 million+ MSMEs, employing 117 million+ (~ 40% of India’s workforce), contributing 37% to non-agricultural GDP and 43% of India’s exports. MSMEs are the focal point of several initiatives like Make in India, Start-up India and Digital India and the Government continues to provide further emphasis to MSMEs as it stresses on self-employment.
The Government, the RBI and Banks have come forward with several financing mechanisms for MSMEs. Yet, all these schemes fall short, as MSMEs are at the tail end of the value chain for working capital financing.
As the figure depicts, each player passes on the burden of financing to the one lower in the value chain. The last person in the value chain is invariably a MSME – unfortunately, they are the ones who have the least access to finance. They are forced to borrow, especially in the short term, from unorganized or private financers. Despite all the efforts made by the organized financial services sector, they are unable to provide solutions to MSMEs for their short-term liquidity mismatches which are based on factors such as demand, seasonal fluctuations, suppliers / customer’s credit policies etc. which are all outside the MSME’s control.
In this scenario, what is the solution?
While, there is no silver bullet to solve this problem, a multi-pronged approach is very helpful.
Financial institutions, particularly NBFCs and digital lenders are developing new products that are more flexible to meet short-term liquidity mismatches. The use of technologies like blockchain also makes it possible for them to introduce products which were not operationally feasible in the past. For e.g. variants of invoice financing or factoring. This will certainly address problems to an extent.
Another important facet of this solution is the need for MSMEs themselves to recognize the challenges they face, and make plans to optimally use available solutions. MSMEs need to understand where they fit in the value chain of the industry and what leverage they have over their suppliers / customers when it comes to financing. For example, an industry characterized by strong suppliers who demand immediate payment will expand the working capital needs of an MSME. Likewise, in many instances, large customers delay payments because of their sheer negotiating power. Even though MSMEs are aware of this, they sometimes lack awareness and expertise in securing credit products to mitigate these problems. For e.g. Factoring / bill discounting is a good solution for a company that has large well-rated customers. The challenge is in seeking the right advice, before implementation.
billionloans not only helps MSMEs in fulfilling their credit needs, but also hand-holds MSMEs to help them to understand structural credit challenges of their industry and provides them with the right solutions to address these problems. Thus, MSMEs can get back to doing what they are best at: Growing by serving their customers profitably.
Source: CIBIL MSME Pulse (March 2018)