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Regulatory Intervention Is Essential For Building Risk Management Capabilities In Small Businesses MSMEs have some structural limitations that could unintentionally result in unforeseen difficulties

By Akash Gehani

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More than 80 per cent of the industrial organisations in India with the highest employment potential are micro, small, and medium-sized businesses (MSMEs). They generate more than 30 per cent of the country's GDP, as well as more than 40 per cent of its manufacturing production and exports as per industry reports. Despite the very essential role they play in the global supply chain and the economy of India, many do not have the expert assistance needed to recognise, manage, and take advantage of current business risks.

MSMEs are compelled to deal with uncertainty without having the capacity to fully assess the gravity and repercussions of their decisions because of the lack of access to the entire range of resources, data, and expert-help that bigger enterprises would have at their disposal. The importance of having access to these functions is increased for MSMEs because even the smallest shift in sales, cash flow, exports, or other areas can set off a downward trend that is impossible to reverse.

Additionally, MSMEs have some structural limitations that could unintentionally result in unforeseen difficulties. These may include challenges with raising money, obtaining credit and loans, problems with old equipment and accounting procedures, a lack of insurance, the inability to sell at profitable pricing, labour skill-gap, and budgetary restrictions for marketing, research and development, and technology. When you add fierce competition from big businesses to that list, it can seem almost impossible to run a business.

MSME owners and operators face the same dangers as some of the biggest companies in the world. Therefore, they need to be tactful and creative in building their businesses. MSMEs must be prepared to handle financial, insurance, project, engineering, supply chain, disaster, and healthcare/clinical risks in addition to their strategic and operational risks.

To this front, MSMEs can benefit greatly from having a strong risk management strategy. There has recently been a request for the government to impose stricter risk management procedures in order to maintain the resilience of the nation's economy, and with good reason. Top businesses and government bodies are pressing for new risk management standards. Some of the proposals and steps taken include:

1. A proposal by the Securities and Exchange Board of India states the top 1,000 listed businesses by market capitalization would need to form a risk management committee (RMC).

2. Beyond a certain level of market exposure, the RBI has mandated that non-banking financial companies (NBFC) hire a chief risk officer.

3. The Companies Act mentions that businesses have a risk management policy and that the audit committee frequently analyses the risk management systems, even if it doesn't ask for a formal risk management structure.

Risk management gives MSMEs the ability to recognize and manage uncertainty, avoid (or decrease) unexpected disruptions, and, in certain situations, indicates an avenue for generating cash. It also supports innovation, boosts resiliency, and promotes growth. The most significant benefit of risk management for MSMEs is that it helps managers better grasp their company's priorities and available resources. They will need this information to create a strategic plan that will more effectively allocate resources and, in the end, help them accomplish their short- and long-term goals.

The MSME business community has not yet adopted risk management capability to a large extent. The practices of the few MSMEs that do have risk management in place are typically informal, with no accountability for its execution or efficacy. Typically, each business function frequently manages risks in a standalone manner that is not consistent with the overall business strategy.

Organizations can discover risks and opportunities using formal, repeatable processes created by risk management. In addition to opening up channels for more efficient communication, it can give organizations important clues regarding alterations to their internal and external environments. Risk management can assist MSMEs in proactively preparing for negative events well in advance of when they might occur and become unmanageable. Organizations of size and scale, both in India and beyond, stand to gain from these practices; they will also be more agile and equipped to deal with difficulty since they have planned ahead. They can not only survive with risk management in place, but can also be prepared to use risk as a competitive advantage.

By establishing guidelines for risk monitoring, reporting, and mitigation, regulatory organisations have the potential to improve MSMEs' resilience and expand opportunities. To get ahead efficiently, regulators can also work with industry experts to provide MSMEs with more access to risk management benchmarking tools and pertinent certifications, recommend or provide educational programming for MSMEs to improve risk management, and create networks for peer-to-peer learning. There is a collective responsibility to act and offer more chances for MSMEs to improve their risk management capabilities given that there is a lot riding on their success.

Akash Gehani

Co-Founder & COO, Instamojo

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