Despite having one of the largest SME bases in the world, the potential of India’s MSME sector remains largely untapped. While the sector’s average contribution to GDP numbers in developing and developed economies, like China, the US and the UK, is around 50 per cent, SMEs’ contribution to India’s GDP is less in comparison.
The government of India has been active in its approach to implementing a plethora of initiatives to help MSMEs grow. However, there remain a few areas where government intervention will help to give a boost to the sector. These issues are of imminent importance to the health of the sector and include issues like easy access to credit at a nominal rate of interest, which can be addressed through initiatives like classifying loans given by NBFCs to various MSMEs as the priority sector lending (PSL), says R Narayan, founder of Power2SME, in an interaction with SME Futures.
What’s the current landscape of SMEs in India and what is the way forward to drive the next level of growth?
According to the annual report of 2017-18 released by the Ministry of MSME, the sector employs over 100 million people, contributing 28.77 per cent to the nation’s GDP, 40 per cent to exports and 45 per cent to industrial inputs. However, despite having one of the largest SME bases in the world, the sector’s potential is still largely untapped. Therefore, it is imperative that the SME sector in India gets a shot in its arm through the implementation of favourable policies and campaigns that would help in boosting the sector.
For India, pushing the growth of the MSME sector would entail
- improving the financial inclusion of the MSMEs through initiatives on behalf of the government and policy implementation on issues like the waterfall mechanism and listing non-banking financial loans to the MSME sector under priority sector lending
- supporting next-gen entrepreneurs and innovation/indigenisation across the urban as well as the rural landscape
MSME growth will also enable further jump in the Ease of Doing Business Index for India, which jumped up by 30 places last year. Working in tandem with the larger goal of pushing for economic growth, the implementation of many reforms made the SME/start-up space relatively optimistic but there is scope for more. Aimed at increasing the growth of the manufacturing sector by 12 to 14 per cent per annum and increase its share of GDP to 25 per cent by 2025, the government plans to make financial and technical support more accessible. A major constraint in the growth of the SME sector has been non-availability of easy finance. While big companies have long started employing new technologies and made rapid moves towards Manufacturing 4.0 to optimise their business processes, MSMEs are still standing on the edge trying to decipher the new technologies. It is time for SMEs to start having conversations revolving around the business value creation and technology upgrades as they start the journey towards improving quality, reducing costs and becoming more competitive globally.
Are Indian SMEs catching up with latest technologies, such as artificial intelligence and augmented reality?
Digital technologies create tremendous opportunities for growth and transformation of manufacturers, but few have taken full advantage of them. The game-changing tools around data analytics, artificial intelligence, advanced robotics, augmented reality and others promise great benefits when they are combined with the connective power of the Internet of Things.
However, one trend which is already proving to be a complete game changer for SMEs has been fintech. A product of technology and innovation, fintech comprises of technology-based businesses that rewriting the rules for corporate access to finance in India. These companies provide flexible options for financing to SMEs and consumers. Technology is being used to create better financial products and speeds up loan approvals. The need for this solution was most strongly felt by the SME sector, which has always struggled with credit support offered by traditional financial institutions. The Indian fintech market is expected to reach $2.4 billion by 2020 and that will have a far-reaching impact for the Indian SME sector.
Are Indian SMEs well positioned to leverage automation and enterprise technology concepts, such as SMAC (social, mobile, analytics and cloud)?
SMEs are also expected to play a leading role in the adoption of social, mobile, analytics and cloud (SMAC) in India. According to an EY and ASSOCHAM report, companies are spending as much as 30 per cent of their IT budget on SMAC technologies. This has led to increased transparency and enhanced efficiency. Moreover, the implementation of GST pushes start-ups and SMEs towards automation and enterprise technology, which will help businesses save money and avoid non-compliance costs.
The introduction of TReDS as a digital platform enables the discounting of both invoices and bills of exchange is a prime example of fusing technology into the daily working of the SME sector.
What are some of the areas that need government intervention for SMEs to move to the next level?
The government has been proactive in its approach to implementing a plethora of initiatives to help MSMEs grow. However, there remain a few areas where government intervention will help to give a boost to the sector. These issues are of imminent importance to the health of the sector and include issues like easy access to credit, especially timely availability of finance for working capital, at a nominal rate of interest, which can be addressed through initiatives like classifying loans given by NBFCs to various MSMEs under the priority sector lending.
Further, delayed payments to SMEs can lead to liquidity constraints, which might turn them into non-performing assets, affecting their sustainability. The government has taken note of this concern and the Ministry of MSME has launched the Samadhan portal for facilitating the MSMEs to report cases of their delayed payment of bills to draw the attention of their buyers, the MSME Facilitation Council and the Ministry of MSME.
In addition to this, under the Insolvency and Bankruptcy Code, SMEs are listed fifth in order of priority for disbursement of funds, putting them at risk of huge losses during bankruptcy proceedings. To address this, the government is moving to amend the Insolvency and Bankruptcy Code, where MSME promoters will be allowed to bid for their companies during the liquidation process, helping at least some of the MSMEs to be saved from liquidation.
Can you provide us with an estimate of the total number of SMEs and how many of these are unbanked as yet?
There are about 63.3 million MSMEs in the country. Despite efforts to offer MSMEs various sources of funds for capital and operating expenses, most MSMEs still remain credit starved. According to an article cited by McKinsey, by 2020, an estimated 50 million SMEs would enter the formal banking space as the government policies encourage a shift from informal to a formal economy.
A report by International Financial Corporation cites a “funding gap of more than $2 trillion that exists for small businesses in emerging markets alone”. Despite a favourable regulatory environment, direct government lending, supportive SME banks as well as credit bureaus, the credit gap is huge. This is where fintech steps in. Mutually beneficial, the burgeoning relationship between SMEs and fintechs augurs well for both sectors. At present, less than five million MSMEs have access to formal credit.
The B2B market mostly operates offline. Do you see the online pie of SME buying and selling growing?
The B2B market is witnessing a shift as the constantly evolving internet ecosystem is providing Indian SMEs with a range of opportunities to connect with customers, optimise supply chains, reduce costs and drive higher productivity. Though the majority of the transaction takes place offline, a considerable number of businesses have realised the potential of online presence, seeing the plethora of opportunities they offer. This has been substantiated by a 2017 Forrester Research report, which states that B2B e-commerce transactions will reach $1.2 trillion by 2021.
With online transactions offering improved transparency, along with the possibility of tapping customers more efficiently, the businesses are able to operate with improved effectiveness. The SMEs, more often than not operating on a limited budget, are able to expand their businesses and customise strategies for sales as well as customer acquisition through the automated tools that are available. Further, they are able to reach more customers nationally as well as internationally, helping them enhance operations.
How does your firm aid the manufacturing SMEs? What’s your value proposition?
Power2SME is India’s only digital ecosystem that is enhancing SME growth by providing “enterprise grade” sourcing benefits and financial solutions.
Raw material accounts for 70 per cent of the recurring costs of manufacturing SMEs every month. However, due to smaller order sizes and a disorganised market structure, SMEs face issues in timely procurements. Power2SME buys directly from the manufacturer and sells to SMEs, eliminating the presence of an intermediary in the transactional process and efficiently reducing costs for the SMEs.
To strengthen the MSME framework, we conceived FinanSME to improve access to finance for our SME customers. FinanSME helps SMEs with easy access to financial institutes for various types of loan requirements. It has tied up with a number of financial institutions to enable SMEs procuring from them to get working capital loans.
Do you have a plan to broaden your portfolio moving forward?
Power2SME offers solutions that have helped establish the company as a preferred option for customers and become a trusted name in the sector that it operates in, offering a Next Gen B2B e-commerce platform for SMEs. In addition to this, we have identified opportunities in allied sectors which we plan to capitalise on, while simultaneously allowing SMEs to enhance their growth potential. With an aim to become a one-stop shop for all financial needs of any SME, Power2SME has plans to:
- broaden its product portfolio in construction, metals, polymers, chemicals and yarns
- consolidate and expand vendor relationships and access international markets to source material
- deepen engagement with SMEs pan-India by developing deeper routes for new products for SMEs
How has your journey been so far as an entrepreneur? What are your leanings?
I am a cost accountant by training, sales and marketing professional by choice and entrepreneur by spirit. After working closely in the SME segment for more than a decade, I realised that there is a substantial difference in procurement pricing for large enterprises as compared to SMEs. I started Denave India Pvt. Ltd, which is today India’s largest technology powered sales enabling services company, a company where I am still a board member. My experience at Denave further opened my eyes towards the yawning gap present between enterprises and their SME customers. What I felt before had been reiterated here and it was then that the reality struck me hard enough to understand that there is an urgent need of an action that will provide power to the unorganised SME sector.
An extensive research with the Indian Institute of Management, Lucknow, graduates on the feasibility of an idea like Power2SME and whether its inception can cater to the sector’s raw material procurement and working capital requirements revealed that SMEs have been continuously contributing to India’s growth story, but the pertinent question was “Is India doing the same?”.
The Indian SME sector is called the backbone of the Indian economy and given the right boost, will be the trailblazer in boosting the GDP growth of the nation. The journey so far has been inspiring, going forward our focus will remain on discovering ways to continue to serve SMEs and make them grow.
Where do you see your venture five years from now?
By 2020, Power2SME aims to be a $1 billion company by creating a digital ecosystem for SMEs and make manufacturing in India a very easy process.
Having said that, the intended life expectancy of my company is 200 years. I intend to build an enterprise that outlasts me, while constantly innovating our business.
We also have a very important mission, that of contributing to India’s growth story. India is expected to have the youngest demographic in the world by 2020 with 64 per cent of its population in the working age group. Contribution from the manufacturing sector to India’s GDP has remained stagnant at 16 per cent for the past 25 years. There is an urgent need to enhance this contribution and to provide gainful employment for the young population for the overall growth of the Indian economy if India is to become a $5 trillion economy by 2025, as envisioned by Prime Minister Narendra Modi at the World Economic Forum 2018. The manufacturing sector needs to be made more vibrant to accommodate the masses who will push this growth.