Sickness in SME Sector (SME WORLD Note, 27 Sep 2012)
India has large number of SMEs but a whopping 90 – 95 per cent of them are said to be unregistered. This is a serious drawback of the sector. It becomes difficult to analyze how many of the industries fall sick and why. There is a lack of knowledge bank on this issue. However, statistically it is suggested that in today’s globalized economy atleast 1 in 4 entrepreneurial ventures fail or fall sick. The incidence is higher in case of micro and small businesses. The economic cycles are getting shorter, there is tremendous volatility and the business environment is highly unstable. The chances of enterprises getting caught in this whirlwind for causes beyond their control are quite high.
· A frequent reason for sickness is ownership and decision making pattern of these enterprises which are controlled by one or selected few people. There is lack of versatility and professionalism as well as shortage of competency to efficiently manage businesses in the new economic scenario.
· They have shortage of cheap funds to operate competitively. There is a growing problem of availability of labor forget about labor unions. Delayed payment (or total default in payment) is also a common cause.
· Banks ask for too much collateral and guarantee for loans and still lend at a higher rate than BPLR. It is a win – lose situation that only favors the banks. SMEs end up borrowing from other informal sources at high cost.
· MSMEs in the export business are much more susceptible to sickness with small changes in the exchange rate itself.
· MSMEs as well as industrial associations lack awareness and detailed information about mechanism to handle sickness, debt restructuring and options by banks to rehabilitate the business. There is a huge information and knowledge gap which needs to be bridged.
· There are sector specific issues too which needs to be taken into consideration while discussing about causes of sickness of SMEs. There are no blanket reasons across the board.
Role of Government
· MSMEs should be incentivized to bring them under the organized sector and implement a monitoring system to check the performance of the sector as a whole
· A clear policy and open platform for handling sick industries is required where entrepreneurs and owners can educate themselves about options and how to execute them to stay afloat or resurface with a clean slate
· Provide a mechanism for quick exit and revival while protecting lenders but also allowing the entrepreneur to start a new business without the tag of defaulter.
Role of Banks
· Provide case to case basis workable solutions or options to SMEs to exit fast by repaying all debts to lenders and creditors
· Create proper awareness of the options for the benefit of the entrepreneurs by magnifying the fine print
· Indian entrepreneurs also need to understand the pros and cons of various types of company formation like Proprietary or LLP from liability perspective.
Need for an Overseer
· An independent body should be installed to oversee the efforts of the government and the banking sector in rehabilitating sick industries and openly reporting their findings at fixed intervals.
Working Group on ‘Rehabilitation of sick SMEs’ under the chairmanship of Dr. K. C. Chakrabarty, Chairman & Managing Director, Punjab National Bank (2007).
SME WORLD Abridged Whitepaper on Power the Engine of Growth (Sep 2012)
* This is a note sent to ASSOCHAM by SME WORLD.