By Vivek Bindra
Credit and Finance for MSMEs: The rationality of the 90-day limit imposed on micro, small, and medium enterprises (MSMEs) is being questioned by critics who assert that it fails to account for the extended working cycles commonly observed in these businesses. This limitation, they argue, poses significant challenges and may hinder the growth and stability of MSMEs.
MSMEs are known for their unique operational dynamics, with many engaging in extended working cycles that surpass the proposed 90-day limit. While this limit may have been conceived with the intention of regulating cash flow and preventing potential financial risks, critics argue that it overlooks the practical realities faced by MSMEs.
Proponents of the criticism highlight that MSMEs often require a longer duration to complete the production process, from sourcing raw materials to manufacturing and delivering finished products. This extended cycle is particularly noticeable in industries such as manufacturing, construction, and agriculture, where various factors, including seasonality and supply chain complexities, impact the time required for completing a business cycle.
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Moreover, the 90-day limit fails to acknowledge the diverse range of MSMEs and their corresponding working cycles. Different sectors and industries have varying demands and operational requirements, necessitating flexibility in payment terms. Imposing a fixed timeframe disregards the nuanced dynamics of MSMEs and could result in adverse consequences for their overall viability.
Advocates for MSMEs argue that instead of a one-size-fits-all approach, a more nuanced understanding of the unique challenges faced by these businesses should be considered. They suggest that financial institutions and regulators should adopt a more tailored approach, allowing for individualised assessment of cash flow cycles and risk mitigation strategies. This approach would foster an environment where MSMEs can flourish and contribute to the economy sustainably.
However, it remains to be seen how policymakers and financial institutions will respond. Balancing the need for financial prudence with the recognition of MSMEs’ diverse working cycles presents a complex challenge. As discussions continue, stakeholders are encouraged to engage in meaningful dialogue to reach a consensus that supports the growth and sustainability of MSMEs while addressing legitimate concerns regarding financial risk management.
Addressing the issue of extended working cycles in most MSMEs that surpass the 90-day limit requires thoughtful solutions that balance financial prudence with the operational realities of these businesses. Here are some potential solutions:
Flexible Payment Terms: Financial institutions and regulators can consider offering more flexible payment terms tailored to the specific needs of MSMEs. This could involve extending the repayment period beyond 90 days, taking into account the industry, seasonal variations, and supply chain dynamics.
Cash Flow Management Support: Providing MSMEs with access to financial management tools and resources can help them better plan and manage their cash flow. This includes assisting them in implementing effective inventory management systems, optimising production cycles, and streamlining payment processes to minimise cash flow gaps.
Industry-Specific Regulations: Recognising the diversity of MSMEs, policymakers could introduce industry-specific regulations that consider the unique working cycles of different sectors. By adopting a more nuanced approach, regulations can accommodate longer working cycles in industries such as manufacturing, construction, and agriculture.
Collaborative Partnerships: Encouraging collaboration between MSMEs, financial institutions, and other stakeholders can lead to innovative solutions. Partnerships can involve providing working capital loans, supply chain financing, or trade credit options specifically designed to address the extended working cycles of MSMEs.
Government Support Programmes: Governments can develop targeted support programmes for MSMEs, such as low-interest loans, grants, or subsidies that help bridge the financial gaps caused by extended working cycles. These programmes can provide temporary relief during peak production periods or times of increased operational demands.
Education and Capacity Building: Enhancing financial literacy among MSME owners and managers can contribute to better cash flow management. Training programmes and workshops focusing on financial planning, budgeting, and risk management can empower MSMEs to navigate their extended working cycles more effectively.
Digitalisation and Technology Adoption: Encouraging MSMEs to embrace digital tools and technologies can optimise their operations and streamline processes. This includes adopting inventory management systems, e-commerce platforms, and digital payment solutions that facilitate quicker and more efficient transactions.
Consultative Approach: Regulators and policymakers can engage in dialogue with representatives from MSMEs, industry associations, and financial institutions to understand the challenges posed by extended working cycles. This collaborative approach can lead to more comprehensive and balanced solutions.
It is important to note that implementing these solutions requires a multi-stakeholder effort involving governments, financial institutions, industry associations, and MSMEs themselves. By acknowledging the unique working cycles of MSMEs and working together to address them, a more supportive and conducive environment can be created for these vital contributors to the economy.
Vivek Bindra is the Founder and CEO of Bada Business. Views expressed are the author’s own.