The Big Funding Challenge SMEs In India Face With the spike in infections and lockdown restrictions looming large, SMEs now stare at an uncertain and gloomy scenario
By Rahul Raj •
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India has about 63 million Small and Medium Enterprises (SMEs), and they are one of the largest employment providers in India. Also, they account for nearly 50 per cent of the country's exports. This sector is also credited with producing millions of entrepreneurs. In recent years, Indian SMEs have been weaving the most inspiring success stories in various manufacturing and services sectors. All these make the growth of SMEs crucial for India to achieve its target of becoming a $5 trillion economy by 2025.
Notwithstanding the contribution, access to finance and constant cash flow have been the major challenges for the SME sector. The current pandemic has only aggravated the situation for them. As the overall economy is hit, most SMEs who depend on large corporates and public sector enterprises for job work are either receiving no or fewer orders. Further, they also experience delays in payments. With the spike in infections and lockdown restrictions looming large, SMEs now stare at an uncertain and gloomy scenario.
Let's deep dive into why access to credit and regular cash flow is the biggest challenge for SMEs in India.
Capital crunch
Most of the SMEs in India are unorganized and carry most of the transactions are done using cash. As a result, these transactions are not accounted for properly in the accounting books. In the absence of accurate data on turnover, receivables, payables, expenses, inventory, etc., these businesses do not get the required credit score to be eligible for credit. Therefore, due to the absence of credit rating or low credit rating, they find it difficult to access business loans from the formal sector. Capital crunch, thus, continues to be a perennial issue for SMEs.
Transaction cost
SMEs that do not produce high volumes for service providers such as banks or other financial institutions continue to face high transaction costs, both offline and online modes of payment. Except for a few digital platforms, companies end up paying a high transaction fee, which significantly affects business profitability. This forces them to depend on cash as a preferred mode of payment, restricting their options to avail credit in the current environment.
Risk perceptions by banks & financial institutions
There is also a classic problem of risk perceptions of giving credit to small businesses. There can be several reasons behind these perceptions - some of them are the non-availability of collateral and the absence of a high credit score. Hence, banks hesitate to provide loans to SMEs, especially those wanting to start new businesses. Even if the banks agree to give loans, the interest rates are high compared to standard rates and loan disbursements are delayed. These high-interest payments erode business capital and provide no benefit of having credit access in the first place.
Lack of tailormade solutions by the service providers
Considering the size and resources that small businesses have, service providers like banks and NBFCs do not offer tailormade solutions to SMEs. Credit requirements vary from one business to another. Therefore, the standard solutions provided by the banks do not cater to the specific requirements of SMEs in India.
To conclude, remedies to all these challenges faced by SMEs are - to formalise business transactions, reduce transaction costs charged by banks, open more credit avenues, and allow private institutions to provide formal credit with low-interest rates. These measures will aid SMEs to achieve easy access to credit and effectively manage their cash flow.
