Helping hand for India’s MSMEs

Micro, small and medium enterprises (MSMEs) account for 28.8% of India’s GDP, 33.4% of its manufacturing output and 45% of its exports. Such businesses create millions of jobs, often in rural areas, so presenting an opportunity to drive inclusive social growth and improve the prospects of economically underserved communities. It’s much the same picture right across the world: 90% of businesses worldwide are MSMEs, generating over 50% of global employment.

The Covid-19 pandemic has increased the challenges faced by such entities. Disrupted supply chains, increased importance of online presence and digital payment facilities, heightened cyber threats and travel restrictions are just some of the problems that have been encountered over the past year.

Even before the crisis, MSMEs in India faced a credit gap estimated at almost US$380bn. A number of factors are to blame for this shortfall, including the risk-averse nature of traditional lending channels, MSMEs’ lack of awareness of funding products and their lack of credit history.

A new ACCA report, MSME: The agent of economic growth and development in India, puts forward a number of solutions to improve the outlook for these businesses. One option open to them is to register for goods and services tax (GST), which could help them to access cashflow financing, as lenders would be able to verify claimed business turnover from the GST data.

Another option is for MSMEs to make use of the Trade Receivables Discounting System (Treds) developed by the Reserve Bank of India. Joining a Treds platform connects businesses with buyers and financiers, and enables the financing of receivables. The ACCA report, which provides a roadmap to recovery for the MSME sector, also explains a wide range of financial products available in India, indicating the types of business that could benefit.

Online lending

New providers are helping to increase the funding options available for smaller businesses. ‘Digital lending channels have further revolutionised the MSME credit landscape in India, with more and more enterprises recognising the potential of fintech players to promote credit flow without compromising security,’ says Dinesh Jangid, audit partner and technology, data and analytics lead at Mumbai-based firm BSR, one of eight ACCA members who collaborated to produce the report.

Ensuring that the MSME sector not only survives but thrives in the post-pandemic era is vital for achieving the Indian government’s goal of a robust, self-reliant economy. The government and its Ministry of Micro, Small and Medium Enterprises have launched various initiatives designed not only to help these businesses access credit, but also to create demand and access to new markets, ease the tax and regulatory burden, encourage businesses to upgrade to more efficient technology and support skills development.

Cluster development

Support for cluster development is one of the government’s infrastructure policies that could also encourage the MSME sector. Businesses producing similar products or services can form a cluster to deal with common business challenges together, potentially sharing some resources and accessing finance more easily, while also developing within an atmosphere of healthy competition that can drive growth.

Other governments around the world are also supporting MSMEs in response to the pandemic, but businesses can do a lot to help themselves. As ACCA’s report highlights, the internet can be a business equaliser: during lockdown, around 30% of MSMEs started a website or joined an e-commerce site. By shifting their businesses online and adopting digital payment facilities, MSMEs could continue creating value for their customers.

MSMEs can also develop successful strategies based on servicing a niche market or using their agility to adapt more quickly than larger enterprises to changing customer needs or business environments. They could consider collaborating with other MSMEs (international as well as domestic) to share research, complement each other’s strengths, and access markets and opportunities otherwise beyond their reach. Businesses can also support future success by continuing to innovate in multiple ways, from developing new products or services to improving processes and efficiency.

Role for accountants

Accountants, including professionals in small and medium-sized practices (SMPs), have a key role to play as trusted advisers to MSMEs. In the post-pandemic era, professional accountants can advise MSMEs on the most appropriate finance for their business and help them to access it. They can give practical support, too, in establishing good governance, legal and ethical practices to create a sound foundation for long-term growth and profitability.

With such support available there is good reason for optimism. ‘The MSME sector, with its inherent agility and dynamism along with the supportive government policies, is all set to overcome the current crisis,’ says Mohammed Sajid Khan, head of international development at ACCA. ‘During these times, the role of an accountant becomes even more important as a trusted adviser that can guide an MSME through this challenge to develop a robust business which acts ethically and responsibly.’