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By Winny Patro
Credit and Finance for MSMEs: The MSME sector in India accounts for four-fifths of India’s employment sector, 40 per cent of the 6.3 crore Indian MSMEs are involved in exports, and it contributes a whopping 30 per cent to the country’s GDP. Despite showing such promising statistics and importance for the growth of the Indian economy, the sector is the most vulnerable to factors that disrupt cash flow, growth, and ease of doing business.
The pandemic has worsened the state for these Indian MSMEs that were already grappling with circumstances that emerged post demonetization and a subsequent cash flow crunch as the sector majorly dealt in cash. Most Indian businesses are still feeling the prolonged Covid effects as most B2B companies are reeling under the pressure of delayed payments. The following factors are the reasons why India’s poor payment culture has led to impact MSMEs:
Developed late payment culture
As pointed out earlier, the MSME sector has been largely unorganized and informal. Owing to its long years of payment culture, statistics point that 60 per cent of SMEs in India receive payments from clients only after 60 days or longer, and 35 per cent receive their receivables due only after 90 days or longer. The already existing large gap has widened over time owing to a sudden closure of business activities with the pandemic-induced lockdowns and uncertainty of doing business. Over the last 2 years, the repayment gap has only widened, leaving the sector at a hard stop with little to no signs of growth.
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Lack of support from formal sectors
MSMEs in India face a major constraint regarding support from financial institutions, the banking sector, and formal businesses. Reports and research suggest that even though 99 per cent of the 63 million MSMEs have been accounted for, their financial growth has been a priority. Despite this, financial support remains to be a major drawback that hinders their anticipated growth. From the gap in funding that arises from India’s formal sector, MSMEs have no choice but to turn to informal institutions to obtain credit at high interest rates. With the existing poor payment culture, they are doubly hit and struggle to repay loans or expand their businesses.
Slow adoption of digitization
The government is working towards resulting in a cashless economy and is launching programs, initiatives, and activities that turn the country towards digitization. While demonetization can be considered a pioneering step towards this direction, a large part of the country still relies on cash — the MSME sector being the largest and greatest example. The economy in this sector is still highly cash-driven. The pandemic might too have pushed a certain percentage in a direction to turn to digitization. There is a long-standing chance that cash is still the way to do business for most SMEs. Over and above, the majority of MSMEs are yet to adopt to technology drive solutions to manage their billing and credit cycles.
India wishes to be a cashless economy, but not much has changed since then. Until today, our economy is cash-driven. RBI data reinforces that cash in the economy is rising steadily despite its relentless pursuit of a cashless society. A comprehensive roadmap on digitization and online payment also seem ineffective.
Inaccurate transaction data
Due to the non-adoption of technology solutions to manage transactions, MSMEs face challenges in accessing and assessing data for improving their businesses. Also, a significant percentage of payments and deals are done in cash for MSMEs and most transactions are not accounted for or are entered with errors and delays. An improper data collection format is also a large contributing factor in developing a late and lazy repayment culture. Another point to note, this inaccuracy in accounting also leads to missing out on some payments.
Lack of recognition towards credit risks
A large part of the payment culture in India arises from the lack of understanding of the importance of credit scores and history. The MSME sector also has fallen into the same category. Owing to their nature of operating within a circle of trust, many SMEs offer a credit line to their customers without knowing their ability to repay, or whether they will pay back in time. Indian businesses must realize the importance of credit scores and history as they can reduce any business risks in terms of finances. Before making a deal, knowing a business entity or an individual’s credit history helps trim off risks that later result in non-payment. Most importantly, it helps MSMEs grow beyond their boundaries of familiarity.
Winny Patro is CEO & Co-Founder of Recordent. Views expressed are the author’s own.
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