Published in TISA Mar 2014 Issue
STATE OF AFFAIRS
Micro and
Small Enterprises are dotting the trade and commerce scenario in each and every
corner of the world whether developed, developing or underdeveloped. They are
literally the cornerstone of the economic fabric of a nation.
The sector
not only delivers manufacturing output or services but creates immense job
opportunities especially for unskilled people and women in rural and other
backward areas. Thus, they provide the much needed economic independence for a
better quality of life.
However,
these MSEs do not have a smooth life themselves. In most cases they are like
babies, resilient till either they grow stronger and prosper or die due to
malnourishment or disease. Here the malnourishment or disease manifests in the
form of inadequate credit or funds to channelize energy in the initial few
years of existence.
In the
entire scheme of things, there are three parties – the business entity itself,
the banks and the government. They are all equally responsible for the dynamics
of the sector and the prevailing issues.
Let us
consider a brief at a glance picture of the sectors’ overall performance in the
last few years to create a context for this paper.
There is a
lot of gap in the data since much of the MSE segment is unorganized, scattered
and continuously in a state of flux. Reports routinely highlight “26.1
million enterprises” but only 1.5 – 1.75 million are registered and
properly accounted for. Much of these are micro units. This fragmented state of
the sector is one of the key reasons attributed to constant lack of timely
credit from banks. Partly it is true but this is only a one – sided argument. There
are many contributory factors.
At
inception, businesses need funds for everything from plant and machinery,
furniture and fixtures, operating expenses, buying raw materials. MSEs start
their venture with the owner’s capital and some amount of borrowed capital from
family and friends. Often property mortgage or pledging of existing assets generates
additional funds from banks or financial institutions. It is only in the later
years do they receive structured capital and credit support from banks.
Banks
According to
MSME sector Fourth census data (2006-07), around 5.2% (13 lakhs out of 261
lakhs) MSME firms have received any financial support from financial bodies. There
is a huge credit gap. The reason is plainly that only this number of firms was
granted credit after probably close to 95% of them seeking for support. The generalized
reason is lack of creditworthiness of MSEs. This increases due to the inability
to provide collateral assurance, poor management and business control.
There is a
lot remaining to be done by public sector banks to support MSEs in India. A
substantial portion of the support comes from small marginal localized
scheduled banks as presented in Ministry of MSME, GOI’s 2012-13 Annual Report.
The prime
question is can we blame the banks alone for this state of affairs? Whose money
do these banks manage and lend? It is common man’s savings that have been
deposited with the assurance of accessing it whenever one wants for any kind of
needs. We do not have a social security system in India unlike many other
countries. It is our savings that provide our security. Can we really blame our
banks to be cautious and stingy and choosy while lending to firms just because
they need the funds and credit? The sector is grossly unorganized which truly
compounds the problem of granting credit. The census data is old and full of
garbage. We do not know the exact size and shape of the sector. Most of the
data and scenarios are based on assumptions and extrapolation. Companies are
being setup and closed every other day for various reasons. Are we able to keep
track of the same?
Government
The
government’s effort towards this sector is again haphazard and fragmented. Too
many schemes and policies have been initiated but there is no review of the
success percentage or effectiveness of each of them.
The severity
of credit shortage is clearly evident to the people in power but very rarely
are they seen discussing the same in any forum with clear numbers or
conviction. The MSEs are not attractive to the political parties as the entire
vote bank politics revolve around NREGA type schemes and Food Bill etc which
honestly are a drain of our resources with no tangible returns.
The
government’s performance also leaves a lot to be desired. Inspector Raj is
anyway acting like a borer, too many taxes, compliances, reports to be
submitted each month, clearances are riddled with corruption, there is no
seriousness or strategy to gather MSE data about number of companies/ firms,
established in, performance etc.
Business
Entities
The biggest problem for MSEs is scarcity of
information and guidance to avail various schemes and lending facilities
provided by the government. Most of the firms do not understand clearly how to
prepare papers and present their case to the financial institutions for their
credit needs. CGTMSE scheme is grossly underutilized. The firms do not stress
on their ability to repay loans through strong documentation as evidence. This
is often a contributing factor in banks’ books where recoveries from MSEs are
low. Such instances further caution the banks and prevent them from being
enthusiastic and proactive about lending.
There is indeed another significant concern
which is not voiced regularly in clear terms is the role of the business
entities and the owners themselves in compounding the inadequacy of credit. It
can be liberally stated that MSEs have clear issues of “corporate governance.”
There are too many holes in the firms which raise red flags when banks try to
evaluate them.
It is commonly seen that small business owners
often squander their earnings in buying flashy cars, funding foreign trips or
home/ office purchase or renovation as soon as some funds start flowing in.
They do not focus on becoming independent and cash rich improving the liquidity
of the business. There are too many irrational expenses and all billed to the
firm thus reducing profits and taxes. The CA’s are often complicit in such
cases. The books are invariably cooked at times and banks are also aware of this.
CAs cannot be entirely blamed. They are service providers. How we avail their
services shows our competence. Rarely would you find owners asking CAs to
strategize for the company. Rather the questions focus on whether certain
arbitrary expenses can be billed to the company or how the data can be fudged
to lower taxation and channelize funds to other avenues. In the short term, it
helps but then the firms stumble while seeking bank funding. This
short-sightedness of firms compromise their repaying ability and the
seriousness of managing the firm as a true business entity. The general
condition of the sector thus diminishes the chances of firms that are run
honestly with full transparency.
The focus today is what should be done to
resolve the credit availability concern.
PLAN OF ACTION
We need a
clear plan of action to resolve the credit crisis.
Banks
·
Start with
Education. It is the responsibility and obligation of banks to provide detailed
and specific information to MSEs about various lending options, documentation requirements
and fees to avail the credit facilities. This should not be restricted to
customary information on the website and few random leaflets and advertisement
in newspapers. There has be fortnightly workshops with business owners for one
to one interaction to understand specific needs and evaluation of papers,
reports to understand the lacunae and guide firms to overcome them and become
credit worthy.
·
There should
be dedicated staff to handle new business owners and existing firms as both
have different loan needs and ability to repay. One size will not fit all; one
solution will not resolve all needs.
·
Banks should
hire domain experts to evaluate loan requirements instead of standard financial
review. Every industry has specific dynamics and growth prospects, risks and
opportunities. A straight review of financial reports is grossly inadequate.
Further, the banks should send the evaluators for routine training and
management education to be in a better position to analyze and allocate funds.
·
Banks have
to strengthen their credit rating system with more realistic evaluation, make
it transparent and hand hold companies to become compliant. The system should be
broader in approach rather than focusing on narrow specifics which make or
break a credit request.
·
The business
environment is constantly shifting and going through rapid transformation.
Banks have to keep up with times and allow flexibility in repaying of credit and
remove any foreclosure penalty encouraging firms to be active and eager to
repay.
·
It is time
to move banks towards a developmental approach. They have to realize their role
in a nation’s development and not merely as guardian of our funds and assets
like Gringotts. There role is not to provide home and auto loans. They have to
support businesses which will employ more people and increase their purchasing
power. That will increase demand for home and auto loans not the other way
round. Independent agencies should critically review the developmental bent of
each bank and publicize their performance.
·
The
fundamental requirement today is need for accountability from banks and each
and every employee in these banks. It has to be hard coded in the form of
well-defined key result areas and key performance indicators. Only floating
schemes will not serve the purpose, people will have to be held responsible and
accountable to implement the plans and get tangible and quantifiable results.
Government
·
First and foremost plan should be to organize the sector by bringing not
more but all the enterprises into the official fold. Each and every firm should
be identified and their progress recorded by the Government. The data should be
in the public domain and available for proper statistical reporting.
·
Secondly, the Inspector Raj has to stop completely. The micro monitoring of businesses with the
confirmed premise that everyone is waiting to cheat and circumvent has to
cease. Allow people to report performance openly without subjecting them to
prejudice or hounding them with audits and assessment and inquiry. Use
technology. Create a chain of data to monitor performance rather than showing
up at their gates every other day keeping them in perpetual fear of being
penalized. Sales tax, Professional Tax, Income Tax data are all being filed
regularly. We have TAN, DIN, PAN etc. What is the purpose of all these if we
cannot create knowledge – base out of it? Today, everything can be linked. Why
bring inspectors to pore through books when they do not understand much about
the business and then after wasting time and resources ask for money? These
inspectors should be put in positions to do some real work instead of promoting
corruption.
·
Thirdly,
governments should make the nation investor friendly. Make the laws easier and
simpler. Create a straightforward method for compliance instead of wrangling
them in 40 different Acts and Laws with another 100 different types of forms
which are constantly changing. Educate the owners to file their reports
correctly. Make the periodicity comfortable for MSEs who are anyway short of
manpower.
·
Fourth,
protect small businesses from payment defaults by debtors through fast legal
recourse and major deterrent laws. Improve the delayed payment clause of the
MSMED Act 2006. Give the clause more effectiveness and teeth to deter largest
of the companies from taking MSEs for a ride and playing with their
receivables. Flow of regular funds will automatically improve the condition of
MSEs and their repaying ability. A CIBIL like agency will surely help in
monitoring the payment discipline of large companies thus creating a sense of
seriousness among them.
·
Finally,
government has to rein in inflation while strongly improving infrastructure and
clusters. As per the recommendations of the Working Group, allocation to the
tune of Rs. 19,500 through schemes has been suggested. Per unit funding limit
has to be substantially increased owing to the growing cost of doing business
due to inflation and improper growth of infrastructure costs.
Micro and Small Enterprises
·
Build a strong long term vision and mission for the firm. Write the year
on year growth plan specifically in terms of purchases, sales, profits, taxes
etc. If the owners themselves do not believe in the future of the business and
its economic viability, why will banks do? Define how the company aims to be
cash sufficient and liquid.
·
Creating a cult for corporate governance by inducing compliance system.
Every action of the firm should be bound by explicitly stating accountability
and transparency. Everything has to be process driven and disciplined. Implement
technology and software solutions to become lean. Adopt full disclosure system
thus removing any scope for doubt. Firms that are fundamentally clean about
their credentials automatically draw favor from banks.
·
Build strength
to finance from within instead of lending agencies. Once firms are independent
and self – reliant, banks will automatically swoop on them to extend credit
support and at very comfortable terms.
EXECUTING THE STRATEGY
The best of
plans can go awry if not executed properly with dedication and seriousness.
Banks
·
Start the
MSE Education Workshops immediately by advertising in the newspapers and bank
website. Entrepreneurs
should be enlightened on the benefits of capital build up for sustainability. Create a list of participants and advertise
the case studies on the website. Support the workshops with online forums to
continuously provide follow--up information. Report the results publicly.
·
Banks should carefully assess the problems faced by entrepreneurs in
getting credit from banks. Setup dedicated facilitation cum counseling cells
where entrepreneurs can seek advice on the funding problems. Such cells should
also work to enlighten the entrepreneurs on clean governance by maintaining honest
accounts.
·
Banks should
issue monthly statement of actual credit support to MSEs on their website. Provide
complete details of firms who availed the benefits including their contact
information so that other firms can get in touch and learn.
·
Success case studies should be publicized freely to encourage
entrepreneurs to follow the traits for getting finance.
·
Modify the
HR policy of firms and make changes in the KRAs and KPIs of each personnel.
·
Put all
information in the public domain and accessible for scrutiny.
·
In the present system of financing businesses, no weightage is given to
the potential of the business or the talent of the entrepreneurs leading to
frustration of the genuine entrepreneurs. Banks have to setup a separate system
for funding talented First Time Entrepreneurs (FTEs) or the start-ups that hold
a promise. The banks must immediately enlist a panel of experts (who are
professionals with successful business) adept in their respective fields.
Most of the above
can be implemented in a short span of 3-6 months.
Government
·
Start with simplifying the process of starting a business in the country.
The nation has to become investor friendly and corruption free.
·
Ease the compliance norms and make it technology driven. Abolish any kind
of inspectors.
·
Reform the number of laws one has to comply with and run a business. Simplify
the taxation system. Reduce the number of forms, periodicity of reporting and
the number of taxes. It will make more sense to keep one or two types of taxes rather
than complicate it for MSEs. Individuals and businesses should just pay one tax
and be free. The onus of allocating funds for different government projects and
bodies should be the job of the government. This will automatically reduce the
interaction with multiple government bodies and people.
·
Government
has to setup a CIBIL like institution to protect the interest of small scale
players. Today companies and people are concerned about defaulting or delaying
paying to the banks. The same should be extended to payment to MSEs. Every
payment default should be noted, flagged and reported earning a blot for the
erring firm or company. And a huge penalty should be put to clear the red flag.
·
Government should start actively coordinating with banks for enlightening
entrepreneurs on the various schemes available for enhancing business.
If the intent is there, things can start
changing in less than a year.
MSEs
·
When banks lend business finance to entrepreneurs, there is no mechanism
for monitoring regularly. Entrepreneurs, more often than not, use business
finance for purposes other than business and end up faltering on repayments.
·
Keep your
financial objective clear. Do you aim for less expenses, more profit, pay more
taxes thus having clear earnings which can be ploughed into the business or more
random expenses, less profit and less taxation thus remaining perpetually weak
and dependent on credit even for operating expenses.
·
Get registered as a firm and also with an industry association, file all
returns on time.
·
Maintain and
organize entire business data using simple software. Establish chain of data
and links to each and every transaction which can be cross-checked. Keep all
data open for scrutiny by banks anytime.
·
Maintain a
status report on how further to go before you become zero debt company.
The crux of the problem can be understood and resolved if all three
parties concentrate on the quote by Chanakya –
Before
you start some work, always ask yourself three questions – Why am I doing it,
What the results might be and Will I be successful. Only when you think deeply
and find satisfactory answers to these questions, go ahead.
