The New Year began for the SMEs and the Micro, Small and Medium Enterprises (MSMEs), with Prime Minister Modi playing late Santa and showering them with sops. Addressing the key constraint of availability of finance, it is assumed, would help harness the employment generating potential of this key sector. Given the current mood with regard to employment generation, as also the business sentiments among the small businesses, Budget 2018 may see further bounties coming the way of the MSME sector. However, the problems ailing the institutional credit mechanism pertaining to the MSME sector, which we call “variabilities”, need to be seen from a holistic perspective. One, these gaps have been in existence for several years, with both policy makers and business actors being equally responsible for the malaise in the sector. Two, we may not be incorrect in our surmise that the business actors are “more equal” in terms of their accountability towards causing these variabilities.
Institutional credit and the demand side
On the demand side, the MSME sector is plagued by several problems, which prevents them from becoming the ‘preferred players’ for the organised sector for disbursement of institutional credit.
l Market making: The MSME sector is plagued by a highly distorted view of the domestic market. Essentially, the view of MSME owners is opportunistic and consistently transactional in nature. This can be borne out by the fact that very few of them have seriously invested in Research & Development, product design and quality beyond statutory requirements. Why does this happen? Strangely, there is a massive myth going around that Indian customers are “cost conscious” leading to the MSME sector producing products and delivering services purely with a low cost focus. What they don’t realise is that operating cost is an outcome of choice of business models and specific market segments. Marketing and Business Development as a central function is never addressed and all the focus is on the Sales function.
l Governance: The standards are abysmal and decision making does not follow a process. Risk is not clearly understood. Therefore risk mitigation mechanisms are at best knee jerk reactions and at worst those that lead to long term damage to employees and suppliers, and more importantly to creditors. There is very little depth at the managerial level and most are merely performing a clerical role with little empowerment in decision making.
l Metric that matters: The MSME sector gives undue importance to top line over bottom line. Perhaps this is a cultural issue where we glorify revenue over profitability and long term growth. Such an attitude smacks of a “poverty mindset” that is yet to shake off our long history of famine and shortages. Business owners from MSMEs who speak of profitability and return on capital employed – metrics that really matter- as measures of success are few.
l Capital for the business vs capital for the owner: This is a critical distinction that significantly impacts the ability of the sector to attract low cost capital. Capital is available, but there are not enough meaty business plans that can be funded with institutional money. Bankers are averse to lending to MSMEs when there is a lurking fear that money will be deployed in non-business activities.
Weakness of Data-We seem to be a country that constantly grapples with inadequate data. This is all the more true of MSME sector where data integrity and documentation is very poor.
Supply Side Issues
The Prime Minister Mudra Yojana (PMMY) announced in Budget 2015 and the MUDRA loans disbursed under the scheme since 2015-16 were aimed at addressing the challenge of ‘Funding the unfunded’ micro and small enterprises and integrating them with the formal financial system. Credit as part of the Mudra scheme, has been disbursed largely by Public Sector Banks in the form of micro and small loans, which constitute part of their mandatory priority sector lending. The government guarantees enjoyed by such credit disbursed by public sector banks (PSBs), as also the goal-oriented nature of priority sector lending increase the risks of creation of non performing assets for the banks. Further, they compromise the objectives of fiscal consolidation. Budgets in the past have merely increased allocation, without ascertaining whether such higher spends are being utilised in the first place.
(Tulsi Jayakumar is Professor, Economics, and Program Head, PGP-Family Managed Business at SPJIMR, Mumbai. Shivkumar Mani is an Independent Consultant and Chief Creator of EAVUM. Views are personal.)
