Opinion | Increasing the pace of economic recovery for SMEs through Financial distribution holds the key | #riskmanagement | #security | #ceo | #businesssecurity | #

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Increasing the pace of economic recovery for SMEs through Financial distribution holds the key 

As the restrictions are being gradually eased in some zones to bring the economy back on track, the Centre has issued fresh “guidelines for restarting manufacturing industries after lockdown”, advising them not to try to achieve high production targets.


In a communication to all states and union territories, the National Disaster Management Authority (NDMA) in its fresh guidelines said due to several weeks of lockdown and the closure of industrial units, it is possible that some of the operators might not have followed the established standard operating procedures.


In order to minimize the risk and to encourage a successful restart of industrial units, the guidelines advised the industries to consider the first week as the trial or test run period while starting the units and ensure all safety protocols. Companies should not try to achieve high production targets. There should be 24-hour sanitisation of the factory premises, it said.


The guidelines were issued on Saturday to all Chief Secretaries and administrators of Union Territories (UTs) as the 14-day lockdown 3.0 is on and will end on May 17.


The current situation is unique. Nations face a tough call balancing the ‘see-saw’ with corona and economy at its opposite ends; any focus on one, comes at the cost of other. And as unwelcome as it may seem, the situation is here to stay for some time impeding the usual life and business across the globe. 

In the above backdrop, it is however heartening to see that India has been an outlier in restricting the health hazard and is now potentially ready with medical resources to maintain the relative advantage. Hence, unlike other geographies, India is certainly better placed now to partially shift its focus on revving up the economy and gradually pull it out from the COVID disruption. 


As we have witnessed, Govt. and RBI have already started taking steps in this direction with announcement of fiscal packages and regulatory credit adjustments, portion of it aimed at the SME segment. However, this only satisfies the need of ‘Allocation’ whereas, equally important for this stimulus to have its desired effect is presence of an aligned and responsive ‘Distribution’ system.  

Our approach to recovery  


Given the present geo-political and economic situation, it is simple to understand that the economy which regains its momentum before the others will reap the ‘early recovery advantage’ both on the front of domestic demand and export market. On the contrary, those economies which will recover slow will be at the risk of higher imports, low GDP and widening fiscal deficits. 


Hence, our approach to economic recovery should be that of ‘an errand’ and not of ‘a journey’ i.e. focus on speed and effectiveness aiming at faster turnaround. This cannot be brought about by fiscal stimulus alone but has to be accompanied by process reforms as well in the fiscal distribution system. 


Why fiscal distribution system for SME segment in particular 


The primary reason we find ourselves in the middle of economic slowdown is the disruption of cash flow caused by Corona pandemic over the last two months. This can be reversed with cash re-appearing in the economic veins. Since players at all points in the value chain are cash starved at present, it is incidental upon the financial distribution system to re-ignite the economic engine with infusion of currency both in the production and consumption chain. Hence, financial distribution system has a critical role to play in the present recovery drive. 


Speaking of SME, we know that Large corporate and SME are both equally important from the perspective of Indian economy and are also interlinked. However, LCs are better placed to face the current challenge as they have stronger balance sheets and easier access to finance. On the contrary, not all SMEs have balance sheets and financial statements good enough to excite the lenders and investors. Current data of last two months would only add further dent to the documentary strength and hence lesser possibility of attracting additional finance. 


Accepting this reality, on the other hand, it is also a fact that SMEs are the both social and economic pillars of India as they employ more than 40% of the total workforce who are also net consumers in the economy. SMEs contribute in the range of 50% to the country’s GDP and exports and much more. Further, owing to the advantage of size and lean organizational structure, SMEs are also most efficient and nimble entities which can restart and accelerate faster; something which is the need of present times. 


It is therefore extremely important that the SMEs be pulled up from the present state of somber with all possible support and assistance that can be arranged in the present framework. 


Credit process reforms that can be considered  


While Govt & RBI is sensitive about the significance of SME and the role they can play in the targeted recovery, Key challenge is to ensure that money which is allocated for MSMEs through announced allocations, also meets the last mile distribution. But since SMEs have challenges unique to itself, need of the hour is to tweak the present processes and enable maximum release of liquidity in the market through disbursement to this segment.  


Towards this goal, regulators may consider the following reforms, at least for a defined period – 


1. Reliance on Conduct based rating rather than financial rating – since SMEs generally do not have strong balance sheets and present numbers would be no better, FIs may be advised to rely more on past performance and conduct information rather than financial rating while assessing the proposition.


2. Decentralization of financial delegation – Credit decisioning and disbursement up to a reasonable threshold amount should be delegated to the branch rather than the credit hub. This will help save a lot of time otherwise spent in the process and enable timely disbursal of funds. 


3. Funding routine Operational expense – Separate credit line for opex may be considered as this doesn’t form a part of the traditional DP model that goes into funding of only current assets. This arrangement can remain valid for a period of one year with quarterly reset.  


4. Increase in the amount and scope of Credit guarantee scheme– Govt. may actively consider increasing the scheme limit to INR 10 Cr from existing INR 2 Cr along with other enabling modifications in the scheme.  


5. Rationalization of charges & interest – Apart from ensuring that the rate cuts by RBI is passed on by banks and translates in lower cost of fund to the SME units, ancillary charges like credit insurance premium and processing cost is also toned down to encourage genuine & productive investments.  


6. Initiatives to step up morale of dealing staff – An atmosphere of trust, confidence and incentivization always helps better than an atmosphere of fear and future reprimand. The responsibility of transporting the country to other side of the slowdown largely rests with the operating staff at the ground level. They should feel proud and passionate about it. Institutions should create supportive framework and atmosphere for staff dealing in financial distribution so that they don’t harbor any inhibitions and achieve higher productivity. 


We should remember that in this errand, time is of essence. Allocation is as good as a policy statement. But what will set the ball rolling is effective distribution. 


(Rajesh Choudhary is the Founder & Chief consultant of Management Consulting firm “Upanishad Global”. He has 15 years of rich experience in risk management & business roles with premier banks like Standard Chartered Bank, Axis bank and State Bank of India. This is a guest column and views expressed in the article is solely of the author.)

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