Sickness
in SME Sector (SME WORLD Note, 27
Sep 2012)
Status
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.
Ref.
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.
