MSMEs: Biz Environment & Challenges

Marketing challenges include lack of promotional strategies, lack of market channels, lack of networking, lack of organized distribution channels, lack of delivery time etc. Financial challenges include lack of credit from banks, lack of awareness on schemes and services, delayed process in bank, lack of working capital etc. Human resources development challenges include lack of training, lack of motivation among employees, lack of skilled employees, lack of technical and managerial training, improper way of recruiting etc

Whatever be the size and nature of an enterprise, it has to find a business fit in the industrial eco-system. Proprietor-led enterprises and small family partnerships still find difficulty in finding such a business fit. The complex regulations that govern their technologies, processes and products detailed in the above chart are the first challenge they face in their journey. And the most complex among them is access to ‘finance’.

MSMEs consequently are facing many challenges due to internal and external factors that impact

In considering both internal and external factors SMEs can manage and control internal factors, but external factors can disappear by government involvement through implementing some specific schemes and programs for respective sector wise and also by category of industry wise. Internal challenges are production, marketing, financial, human resource development and infrastructure etc. Production challenges include lack of power, lack of resources, lack of scarcity, lack of high cost raw materials, poor quality of raw materials, lack of machinery etc. Marketing challenges include lack of promotional strategies, lack of market channels, lack of networking, lack of organized distribution channels, lack of delivery time etc. Financial challenges include lack of credit from banks, lack of awareness on schemes and services, delayed process in bank, lack of working capital etc.

Human resources development challenges include lack of training, lack of motivation among employees, lack of skilled employees, lack of technical and managerial training, improper way of recruiting etc. Infrastructure challenges include lack of water facilities, lack of storage facilities, lack of industrial facilities, lack of drainage facilities etc. Hence from the above discussion it is clear that there are many challenges influencing SMEs. Among them major are production, marketing, financial, human resource development and infrastructure etc. External challenges arising out of the emerging environment need periodical strategic interventions from the entrepreneur, but internal challenges and issues can be overcome and avoidable through certain safety measures and also through better management.

Most micro and small enterprises (MSEs) miscalculate the demand and create excess capacities due to which they tend to become NPAs , while the case study of cold storages relates to 2003 such miscalculations of demand occur even now.

Government of India has commenced the exercise of re-defining the SMEs to provide for vertical growth of the enterprise and lateral integration with the industrial eco-system in view of the changes in the climate for growth and ecological balance shifting to globalization.

Predicting MSME Risks- Models/ Financials

Two of the principle reasons for unexpected closures are insufficient capitalization and lack of planning. Several studies in India (Tewari Committee, 1985; Raju 1995, 2004) point to the following principal reasons for failure: unrealistic projected turnovers; reduction in capacity utilisation; excessive inventory pile up; erosion in margins; return of bills and cheques; lack of branding, poor marketing skills, lack of succession planning; absence of exit route; poor human relations management, improper maintenance of books of accounts; and casual approach to piling up arrears of loan instalments.

Policy Areas:

The following policy areas deserve consideration in order that MSME sector becomes an effective instrument of inclusive growth:

(i) Merging the SFCs with SIDBI.

(ii) Merging the TCOs with State level Entrepreneurship Development Institutions (EDIs).

(iii) Making SLBC into a professional body with greater authority.

(iv) Creation of a state level SME Factoring Fund, to which banks can contribute.

(v) Setting up of a SME financial Inclusion cum Growth Fund.

(vi) Setting up of local economic Development Councils, with major role of banks, as in the UK.

(vii) State level Small Business Finance Hubs-each hub to be managed by a bank.

(viii) Starting SME Insurance, on lines of ECGC.

(ix) Setting up MSME Labour Bank.

Growth of the Manufacturing sector is critical for achieving higher growth and human development. The younger generation looks for innovation and promising opportunities in manufacturing sector. The services sector that is close to peaking looks to the manufacturing sector for its sustained growth. MSMEs continue to influence the growth of the manufacturing sector.

No doubt any business entity needs robust risk management systems, but the SMEs need much more than that as they may not have the wherewithal to manage and control risks due to their very size and other limitations. This is not true in the case of large corporate entities where professional personnel take care of many aspects pertaining to risk. All risk-taking units must operate within approved procedures, limits and controls. Certain misconceptions such as SMEs may get low rating, provide unreliable information, may not afford the fees for getting them rated, etc. will have to be dispelled first. However, rating agencies with specialised teams with analytical tools customised to SME sector will go a long way in putting in place the proper mechanism in this regard.

Union Budget 2014-15 gave much needed attention for promoting entrepreneurship, providing equity and maintaining the eco-system of MSMEs as key to industrial development and sustained growth of the manufacturing sector, as could be noticed from the following proposals:

1. Creation of a corpus of Rs. 10,000 crore for providing equity through Angel funds, Patient Capital, quasi-equity, soft loans and other risk capital will facilitate start-up companies.

2. Initial sum of Rs. 100 crore for “Start-up Village Entrepreneurship Programme” at the State level for encouraging rural youth to take up local entrepreneurship programmes.

3. Corpus of Rs. 2000 crore to be set up to establish Technology Centre Network.

4. Development of an entrepreneur-friendly legal bankruptcy framework for SMEs that will enable easy exit.

5. To incentivize small entrepreneurs in the manufacturing sector, the government has also proposed to provide investment allowance at the rate of 15% to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery for investments up to 2016-17.

6. A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new ideas and necessary support for accelerating entrepreneurship.

The Government would do well to establish RIPs with all amenities required for the micro and small enterprises and give land out on long term lease with the facility to mortgage leasehold rights to access institutional credit. Under Public Procurement Programme(PPP) mode, the Rural Industrial Parks(RIPs) should also have primary health centres, schools up to class X and residential complex for workers. The entrepreneurs can have the option of owning the industrial site as and when they can afford it by paying the initial price of occupation. These RIPs would help to prevent migration of rural labour; provide social security and economic empowerment and growth of manufacturing sector.

The constitution of a High-Level Committee by the RBI at the instance of Government of India gave the hope that the key issue of easing credit markets would also move in tandem so that domestic firms would be able to access credit competitively and also be in a position to tap international markets or foreign firms that have better access to capital in their home country. The skill sets are already on the radar for improvement with industries partnering the high-end technical and management education institutions. The hopes are high, and the efforts are at the beginning.

(This represents part of Chapter-III of MSME Business Environment and Challenges of “The Story Of Indian MSMEs by the author; author is an economist and risk management specialist, and former Dean of Studies, ASCI, Hyderabad)