COVID-19 Threw Away Our Traditional Wisdom: Dr. Viral V. Acharya

Reserve Bank of India's former deputy governor and Indian economist talks about the role of micro entrepreneurs in nation building and how financial institutions can play a crucial role, especially during the pandemic

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The impact of COVID-19 on micro-businesses across retail, peer-to-peer lending and social-enterprise financing highlights the need for alternative skill generation to enable crisis management and meet the changing demands. However, there is an urgent need to up-skill micro-enterprises, optimize the supply chain and provide access to technology.

Over 200 million small businesses around the world need financing to invest, grow and create new jobs. But we know that SMEs (small and medium enterprises) need more than financing to thrive. They need access to information, markets and technology to become more productive, efficient and resilient. They also need access to resources that can help strengthen their well-being. Increasingly banks and fintech companies are becoming embedded in the SME ecosystem and playing a key role beyond finance to build and grow the capabilities of small businesses. However, COVID-19 continues to test the resilience of millions of SMEs globally.

In a webinar organized by Entrepreneur India, Viral V. Acharya, former deputy governor of Reserve Bank of India, discussed the importance of upskilling, and technology support in enabling micro-enterprises to weather the impact of COVID-19 and adapt to the changing demand and market dynamics.

Promoting women entrepreneurship

According to Acharya, women are the true micro entrepreneurs. “I have discovered that a large number of women in India are actually the true micro entrepreneurs. They take on most fascinating services jobs at the last mile. They start off with very small working capital, sometimes extremely small loans. They start out very small and gradually increase the sizes of their loans and the terms of their maturity,” he said.

Going beyond

In India, where there is a massive credit gap due to no collateral, patchy credit histories or no records to present to banks, aim should be to bridge this gap between MSMEs (micro, small and medium enterprises) and financial institutions.

Tools should be developed that digitize financial records, bank statements and allow small businesses to manage their bookkeeping, invoicing and operations. Training components should be provided to MSMEs on how to use digital platforms, how to do financial management, working with cash flows and most importantly, how to borrow money and its impact.

As the impact of the COVID-19 pandemic grows, it is threatening the survival of micro and small businesses across the world. Quarantines, social distancing and cascading economic impacts make it difficult for many of these enterprises to carry out business. Nevertheless, it is vital to save these businesses. Micro and small businesses form the backbone of emerging economies. While micro and small businesses are vital, they face immediate threats to their survival and a difficult road to recovery. As entrepreneurs grapple with how to meet dramatically shifting market demands, reach their customers in an era of social distancing, manage new staffing challenges, secure their finances and confront the stress of the moment, the prospects for their businesses may appear difficult.

Acharya believes, “COVID-19 throws away our traditional wisdoms on its head. I would like to push my former advisor Marti Subrahmanyam’s idea that during COVID-19, entrepreneurs need more long-term and equity finance. If it has to be credit then it can’t be the typical very short-term credit. It has to be a longer term credit because we are in a fog of uncertainty.”

“There are two possibilities that are on the table which will give banks the confidence to be able to make these types of loans. First and foremost, banks need to be capitalized. They need to have capital on their balanced sheets to be able to absorb losses. The second thing is that we should start recognizing different classes of financial institutions in the country. We need small payments banks, small finance banks and micro-credit institutions. We need to ensure that this whole range of financial institutions is in good health to allow the entrepreneurs to be able to take up the opportunities,” he added.

Whirlpool of black money

The former deputy governor talking about black money, said, “One reason why formalization, sachetization of credit and a public credit registry might help is precisely because it is going to make the informal borrowers and their credit formalized. E-commerce is a great example as anyone can buy and sell something on eBay as long as they have a decent transaction history. Once they are rated by their past transactions and counter parties, it gives sufficient confidence to do transactions with relatively anonymized parties. The same way, formalization of credit is about being able to lend people based on formal and hard-coded aspects of their activity rather than having to rely exclusively on informal relationships. At the last mile, relationships and informality is important because the hard coding would help formalize credit.”

When small businesses hit plateau

“We want to create a lot of small businesses but eventually, some of these become very large. What is not happening in India much is that small businesses are remaining just small businesses. Not many of them are migrating into becoming large mega firms. There is not as much churn. We can make this happen by making it attractive for small businesses to become large. Access to finance is one of the reasons small businesses in other parts of the country want to become large. Once they are in the formal credit system and public credit registry, they can use the account aggregator to share the sum total of their financial activity. It will be an indirect and more nuances way of actually dealing with black credits,” asserts Acharya.

Small businesses have different pain points—access to resources, markets, finance and training, and it is important to meet these needs end-to-end. Enabling SMEs to be more bankable helps build financially educated customers and garner long-term customer loyalty. This motivates banks and financial institutions to go beyond financing to support small enterprises, especially during this global pandemic. And by building digitally enabled businesses, there is less pressure on brick and mortar operations and this digital transition will prepare businesses for a post-pandemic environment. It will facilitate innovation, flexibility, and growth of enterprises.


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