3 out of 4 Indian SMEs can come out of this lockdown unscathed, provided they have this one key thing in place
Published on: April 21st, 2020

CEO's Desk

The extended lockdown that India has put in place to stop the spread of Covid-19 since March 25 is taking a heavy toll on Small and Medium Enterprises (SMEs), especially those that have had to shut operations entirely.

However, three out of four of these SMEs can come out of this lockdown, depending on the sector they operate in and their ability to source liquidity.

The ‘essential’ sectors

Around 15 percent of all SMEs in India are in the so-called “essential” sectors; medicine, medical equipment, and food are just some of them.

These will be the least impacted because for them it has been business as usual throughout the lockdown.

In fact, for them, the only problem would probably be how to keep up with the new demand.

The financially solid

These are the SMEs that are on a strong financial footing. This means they have enough money or monetary backing to keep their operations going for another 60-90 days, even if the lockdown is not lifted.

Now, this financial backing could be in the form of cash that the company may have in hand or credit lines from a financial institution — a bank or a non-banking financial company (NBFC).

Of the 85 percent SMEs in non-essential sectors, around one third are well-backed financially. They could sail through, especially with the Reserve Bank of India’s (RBI) moratorium on loan repayment, and the new incentives announced last week.

The viability of the rest

Of the 50-55 percent that remain, around 20-25 percent may not survive the prolonged lockdown, because they do not have sufficient cash flow to sustain them.

Some of these will take huge hits in terms of turnover. Some others will have to start from scratch.

These will be the ones that are “un-banked” from a credit point of view. These are the SMEs that, despite having a bank account, will have no credit history based on which a lender will onboard them after the lockdown is over.

By the time we get back to normal, or the new normal, we may see 75 percent of all SMEs surviving this lockdown either because they are in “essential” sectors or because they have sufficient liquidity, for which they can thank their credit relationships with lenders. For all SMEs, the time to start calling lenders may be around now.