How COVID is Affecting MSMEs and Business Credits
Micro, small, and medium-sized enterprises (MSMEs) contribute 29 per cent of the economy and is projected to go upto 50 per cent but only 10 per cent of MSMEs have access to credit. That has been a challenge historically. Every business is different from other businesses. Lending and capital are elements through which they thrive and grow. Sustainability of MSMEs is highly dependent on timely availability of cash and credit in any form or shape. In the current situation, MSMEs are hit the hardest.
There are several problems that MSMEs are facing other than lack of capital. Suppose, there is a sole proprietor owning a shop. In the lockdown, there is a loss of income because he is not able to sell anything. He still has to pay off expenses and may have stocks that are bad also. Thus, there are a lot of problems but the government has come up with some schemes to help MSMEs.
"On the other hand, the government has given money to banks and non-banking financial companies (NBFCs) wherein interest keeps going up. So, it is the cost that is building up. Hence, that’s a huge problem. Some sectors are going to have bigger problems than others such as small eateries and hospitality sector," Rahul Chander, MD and CEO at LivFin NBFC told BusinessEx.
A Positive Impact of Pandemic
The pandemic has a mixed proportion of impacts on the MSME sector. While the negative effects weigh more, there are a handful of positive impacts as well. Owing to the pandemic, there will be a change in strategy. Small businesses that focus on relationships they have with wholesalers and manufacturers will develop their rapports much more.
A shift amongst MSMEs will also be visible as they will understand the business landscape and move to more digitised credit.
A Biggest Challenge for MSMEs
Small scale businesses that were operating in the pre-pandemic period are now shut for four months. They operate on a small margin of 10-12 per cent of their gross revenue. Thus, the entire year’s margin has evaporated and businesses do not come to the level of normalcy as well as expenses are still running. The only way to get support is when a business is viable to take more credit that is an incremental cost or some form of family savings or other support system.
"With respect to the incremental credit, there is a form of general discoversion to provide credit and it is testified in multi formats. The problem is that businesses are not able to comprehend what would be right going forward. Also, to some extent, it is self-reflection," Shachindra Nath, Executive Chairman and Managing Director, U GRO Capital.
Focusing on the severely hit hospitality sector, various small hospitality companies believe that only 3-4 months are challenging. Everything will come back to normal and thus, they are looking for credit right now, Nath talked about his company's market assessment.
Small businesses have failed to self-introspect and realise that actual pain and problems would be much longer. They do not embrace the technique of shrink, sustain and then, grow. Such a mindset has not been adopted. Unless, small businesses self-introspect how much cost, existing businesses actually shrink, and they have to reset into the reality of the world. They will land up in much bigger trouble.
The reason why the Indian government is not handing over cash to the small businesses is that unless small businesses do not evaluate themselves whether more incremental credit is helpful or harmful. Self-reflection of small businesses embracing the present scenario, absorbing it and resetting is the hard reality of the business.
Impact on the Lending Institutions
In this intensifying situation, it is important to apprehend the condition of a lending institution as well. Typically, a lending institution meets a borrower before it lends money, which is not possible right now. Documentation is another problem when a lending institution talks about small businesses.
Also, in India, a lending institution while giving a credit takes time to recheck which is not possible. Thus, there are a lot of problems that lenders are also facing owing to the crisis. Digitisation comes as a boon in the picture as it helps in better credit assessment of a borrower even from a remote location.
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