How Indian MSMEs are Leveraging Technology for Business Growth

We spoke to Sunil Kanoria, president, ASSOCHAM about the various impediments faced by Indian MSMEs and how they can be countered through the use of technology

The MSME sector, which constitutes the backbone of the India growth story, is often the primary source of employment for new job seekers, be it in the form of start-ups or small and medium units which are into manufacturing or services. These entities happen to be the cradle of entrepreneurship and innovation. According to the recent survey of ASSOCHAM, the Indian MSME sector, spanning more than 6,000 products, consists of around 36 million units and employs over 80 million people. The sector contributes about 8 per cent to GDP besides accounting for 45 per cent of total manufacturing output and 40 per cent of exports.

“MSMEs in India are presently going through a very difficult phase. Despite their contribution to the nation, MSMEs’ access to institutional credit remains limited. Because of their inaccurate accounting systems and the weak balance sheets that they maintain, there is risk averseness on part of the institutional lenders to take exposure on MSMEs,” said Sunil Kanoria, President ASSOCHAM. In addition, the problems of the large corporates and their impact on banks in terms of stressed assets have a cumulative adverse effect on the MSMEs. Also, the high cost of funds from informal sources is a major roadblock for MSMEs.

It has to be kept in mind that the fate of many MSMEs is intertwined with that of many big players, both private and public, because many of the activities of these bigger entities are usually outsourced to the MSMEs. Thus, when a big corporate fails, it invariably takes down with it several MSMEs. On many occasions, if the bigger entity is a government agency, the payments get delayed inordinately. Thus, the MSMEs suffer for no fault of their own. Any form of delay in receivables puts them in a very tight spot as they then find it difficult to service their loans. It is double jeopardy for them. As it is, MSMEs start with very little capital and that capital gets wiped out very fast. Chances of a revival become extremely remote. Once an MSME defaults in its payment, the defaulter tag becomes a permanent stigma and the MSME entity is then treated virtually as untouchable.

In case of any systemic failure, the focus is always on how to address the concerns of the larger distressed players. Hardly any attention is paid to the MSMEs who are struggling – as if they are some kind of a ‘collateral damage’. “There is hardly any appropriate redressal mechanism. The Bankruptcy Code, which has been mooted, does look promising but there is no clear idea when it will finally get implemented,” added Kanoria.

Tackling the challenges

“Majority of ASSOCHAM’s members are MSMEs. This year our theme of ‘Employment Through Entrepreneurship’ has a very strong MSME focus,” begins Kanoria. In this backdrop, ASSOCHAM is actualizing the vision and has decided to launch an electronic platform with the aim to facilitate financial help for micro and small enterprises to grow their business, making life easier for entrepreneurs and turn them into strong instruments for GDP growth and employment. The prime objective of the portal is to connect respective banks/financial institutions and borrowers in a seamless manner. The portal has various modules to enable lending activity online and sanctioning of loans well in time to entrepreneurs. I believe this portal would be vital to fulfill the financing needs for this sector.

“In addition to this, ASSOCHAM organized a Bankers Borrowers Meet with the theme “Empowering MSMEs through Innovative Financing” in the month of April 2016 in Mumbai, which was a huge success. Apart from these, MSMEs also need support in terms of creation of capital assets. In this backdrop, it is extremely important to revise leasing in India. Leasing, the most cost effective tool for capital creation the world over, has not developed in India due to a lack of understanding about its nature amongst our policy-makers. The tool has been treated both as a good and as a service and thus been subjected to multiple taxation thus virtually destroying its efficacy. It is high time we make leasing an effective financial tool in India too, he added.”

Lending Hand from the Ministry of MSMEs

There are a number of schemes and programs to help and assist entrepreneurs, especially small businesses. Besides this, several other Ministries have also been supporting the cause of MSME sector. A major scheme for providing financial assistance for performance and credit rating under PCR Scheme, the Prime Minister’s Employment Generation Program (PMEGP) Scheme of Fund for Regeneration of Traditional Industries (SFURTI) etc definitely empower the industry.

To facilitate the promotion and development of MSMEs, the Ministry of Micro, Small and Medium Enterprises, Government of India, has notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’. These changes have been carried out in consultation with the Government of India, Ministry of MSMEs in order to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’ issued to banks by RBI.

Micro Units Development and Refinance Agency Pvt Ltd. (MUDRA) is a welcome move by the Govt. to provide refinance to banks, MFIs and NBFCs for onward lending to MSMEs at competitive rates. “We in ASSOCHAM believe that these changes would certainly bring empowerment to the MSME Sector and I can assure you that our chamber is definitely keen on the development of the MSME sector and we will try to do whatever possible, whatever is the doable for the development of the MSME sector,” added Kanoria.

Leveraging IT

​“Our financing business is heavily dependent on IT. Today we cannot think of running that business without the IT applications that perform major business functions. In the last 2-3 years we have spent significant amount of time and resources in implementing various applications that fulfil our transactional processing requirements,” said Kanoria. ASSOCHAM has also spent significant efforts on improving the security of IT infrastructure along with improving the performance of their applications. Since the last few years they have been focusing on Mobility and Cloud strategy.

There are no readymade solutions that can meet our requirements. Most of the applications need to be customized or built from scratch by ourselves. However, we have made conscious efforts in rolling out the existing products without much customization but integrating various solutions to meet our needs. Asset tracking technology is yet to mature to meet our special requirements as our assets that are financed work in remote areas without network coverage. But we are constantly innovating to improve our ability to track and monitor these assets to mitigate our risks.

Technologies for future

​“SREI has been an early adopter of technology and is consistently investing in virtualization & cloud computing with adoption of auto billing in our Power Distribution Company. We would be focusing on RFID for vehicle and Cargo tracking. The key to our business is how well we can leverage the use of sensors in tracking and monitoring of our assets and resources. This will be the key to improve efficiencies of our operations that increases productivity significantly. All our efforts are focused in creating better value to our customers and enhance the service levels. ​​​Going forward, we would be focusing on Analytics and IOT strategies that can provide competitive advantage to our business leveraging the efforts that have gone in the past few years. In the long term we would like to connect our vendors, partners, assets, employees and stakeholders seamlessly through the efficient use of IT minimizing the cost of operations with high levels of efficiency and cost reduction trough better management of our risks, concluded Kanoria.”