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Considered the backbone of the economy due to its capacity to create jobs, the MSME sectors have been the hit hardest in the COVID19 pandemic. In an interview with The Indian Express, Ram Iyer, CEO and founder of Vayana Network, a supply chain financing platform catering to the sector, talks about the various problems faced by the MSMEs.
Repeated surveys have shown how access to funds is a major issue for MSMEs especially the micro industries. What are the major impediments in access to funds for such units? Are banks reluctant to lend to smaller units?
MSMEs have been underserved by the formal banking system due to a trust deficit arising from the absence of credible data about them and the prohibitive cost of servicing large numbers of small MSMEs. Being less organized, MSMEs also find it tough to meet the documentation demands and internal rating thresholds. Hence, banks resort to longer-term and collateralized lending to a small base of these MSMEs. Over 70% of micro SMEs continue to face working capital gaps.
The trust deficit can be addressed by using credible alternative data like GST and real-time trade data analytics to facilitate credit to MSMEs. Traditional underwriting models have relied on financial statements, asset ownership, and on-ground assessment. At Vayana we are working with our financing partners to replace the same with cash flow-based lending. This is enabling the smallest of MSMEs in supply chains to access affordable credit through the formal credit system. This has led to up to 600 basis points savings in interest cost for micro-enterprises.
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The lockdown had seen the government announce credit extension for the sector. Has it helped or increased the indebtedness of the units? What would be the total number of micro-units which would have to face closure in the Pune region due to financial constraints?
The announcement of credit extension did bring a sense of temporary relief to the MSME sector, and in turn, helped ease of access to liquidity. This move was made with the aim of supporting MSMEs who were under severe financial strain due to the pandemic. However, with the second wave of Covid hitting the country, small business owners and financial institutes are again bound to face difficult times ahead. With that said, the government is also making efforts towards supporting the sector during this challenging phase. The recent announcement by the RBI on introducing the restructuring of MSME loans is one such initiative by the Government which gives hope to lenders as well as many small business owners impacted by the ongoing pandemic.
While the loan re-structuring/moratorium can give temporary relief, in absence of any demand offtake, it will lead the MSMEs to eventually shut their operations, and the loans turning bad. It is important that while the restructuring has been allowed, the Govt. seriously look at equity infusion as a means of revival.
In the Pune region, the impact across sectors has been varied. Service industries like hospitality, travel, and even professional education have been badly hit with over 20% of units facing permanent closure. The impact on manufacturing and auto components was less severe post the recovery in 2020. Yet 10% plus of these units are now under closure threat due to the 2nd wave.
How has the lockdown affected the sector? With the country again going for extended lockdowns how do you see the sector coping up?
As the second wave of Covid-19 pandemic continues to impact the country, businesses both big and small are experiencing disruptions but are faring better due to the learning from the previous lockdowns. MSMEs operating in the essential sectors like pharma, healthcare, FMCG are less impacted, but the same can’t be said about the larger base of MSMEs. As per a survey done by MCCIA Pune, close to 65% of the MSMEs reported that they looking at the reduction in the orders and 21% of those surveyed believed that the customers would ask for reduced rates.
The current wave has seen significant economic and human costs and may shrink consumer demand for some time, delaying the recovery by a few months. This can lead to a bigger impact on the MSME sector and calls for bigger support mechanisms to be devised.
A lot of talks have happened about the adoption of technology by the sector. What is the status of the same in the units in Pune? What is the status of Industry 3.0 in the district?
Post the national lockdown last year, the country witnessed a new wave of digitization across sectors which was an answer to business continuity. Amongst the big shifts to digitization across the sector include – digital bookkeeping, banking and payments, E-Invoicing, video-conferencing, and digital sales channels. According to a recent industry study, 53% of small enterprises and 47% of micro-enterprises have pivoted to digital sales channels, an increase of 29% prior to the pandemic.
MSME digitization is a positive and permanent change and can contribute an additional USD 125 Bn to the country’s GDP by 2025.
As far as investments in production and related activities are concerned, there is a definite shift towards automation in the larger SME units. The migrant worker crisis and labour shortage of 2020 accelerated this. However, for the small and micro units, the current battle is of survival and settling their dues. Any form of Capex is not a priority till the economy normalises.
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