By Ram Krishna Sinha
Access to formal MSME credit remains a big hurdle despite mandated lending and policy focus. Capacity building of the entrepreneurs, by way of targeted professional training in tech and finance, will go a long way in enhancing the absorptive capacity of the entrepreneurs to appreciate, assimilate and utilize the supply side opportunities in formalizing business and raising financial resources.
It is now well documented that the credit gap in the MSME sector is estimated at around Rs 20-25 lakh crore. There are a variety of reasons behind the unmet credit needs. But one major hurdle is the poor or inadequate awareness and knowledge on the part of the MSME entrepreneurs, particularly micro and small ones, on technology and finance.
One effective way to address the problem is capacity building of the entrepreneurs by imparting targeted professional training in the domains of tech and finance. It would not only empower them with the necessary information and knowledge on the twin domains but also help them to raise capital or debt from FIs/banks and enable their businesses to professionalize/corporatize.
The MSME entrepreneurs need to be trained in some key dimensions of technology and finance.
Technology
Digital literacy or tech savviness is something that plays a critical role in catalyzing the rise of digital technology and catering for the tech-skill gap. Now, it is well-recognized that digitalization is not a choice but rather a necessity. When MSMEs improve their digital footprint, they become more noticeable to banks and financiers. On the other hand, MSMEs can access credit as finance, credit and monetary institutions employ digital data to assess credit risks precisely.
Also read: RBI launches Public Tech Platform to boost MSMEs’ access to credit
Digital technology not only improves the efficiency and productivity of business but also enhances scale, customer experiences, and helps in getting a competitive edge. This, in turn, helps businesses to enter the market and be part of transnational trade and the global value chain.
In the age of E-Commerce, MSME entrepreneurs need to be trained first on the basic knowledge of the use of digital apps and the internet. The use of social media apps and online marketing affords the entrepreneurs wide geographical reach and reduces marketing and distribution costs. Alongside, a sensitization on the importance of the safety of passwords and data privacy are equally important. They need to be made aware, with the help of case studies, on digital/internet frauds, and how such negative events could severely harm their business financially.
Going forward, a familiarization with cutting-edge technologies like robotics, IoT, sensors, AR/VR, blockchain, cloud technology etc. and their growing role in leapfrogging business can help.
The entrepreneurs also need to be made aware of new government initiatives like DigiSaksham- a digital skilled platform. It provides free of cost training in digital skills including basic skills as well as advanced computing. Open Network for Digital Commerce (ONDC) is yet another pioneering initiative spearheaded by Govt of India. The initiative not only seeks to democratize the e-commerce landscape but also establishes an inter-operable marketplace that seamlessly accommodates sellers of all scales-from small and medium-sized enterprises to larger entities.
Leveraging cloud technology, PSB Alliance (an entity promoted by PSBs), is proactive in bridging MSME funding gaps. Tying up with a technology partner, the Alliance will manage supply chain financing for MSMEs on a cloud-based platform. Here all the necessary products like sales/purchase invoice discounting, factoring, reverse factoring, dynamic discounting, distributor financing, deep tier vendor financing etc. will find support. The platform will thus also provide liquidity to the ecosystem of B2B marketplaces and fintech players.
Finance
The MSME entrepreneurs need to be taught the basic concepts of the working capital cycle, turnover method, cash flow budgeting, bank’s credit appraisal norms etc. A fundamental understanding of Profit & Loss statement, Balance Sheet, and Ratio analysis is important. For medium enterprises, awareness of underwriting, risk management, and rating-based fundraising can be of help. The concepts of invoice financing, factoring, forfeiting etc. need to be learnt early to manage their trade receivables efficiently. It would help them to know how financial instruments like Letter of Credit (LC), and Bank Guarantee (BG) work to their advantage.
It is useful for entrepreneurs to know that new avenues to get quick loans from PSBs have emerged. On such platforms, they are not required to submit any physical document for in-principle approval as the solution uses algorithms to analyze data from sources such as IT returns, Bank Statements, GST data etc.
During the last five years, the entire ecosystem on indirect taxation has witnessed a paradigm change. Knowledge on various aspects of GSTN and Taxation is now a must for an entrepreneur. Alongside, they need to be well-informed on CIBIL Score, Electronic KYC, C-KYC, Udyam Registration portal etc. Such learnings and upskilling would empower them to deal with their stakeholders confidently and also help them to formalize their business fast.
The Government of India has launched several policy initiatives for MSMEs, MUDRA loan being its flagship scheme. TReDS, as an electronic platform, has emerged as an effective mechanism to solve the problem of delayed payments and liquidity issues. Further, GeM, a government e-marketplace where entrepreneurs can trade goods and services with ease with government entities/PSUs is gaining traction.
Also read: Sachetisation of MSME loans: A game-changer for Indian MSMEs?
Vyapar Credit Card Scheme on the lines of Kisan Credit Card has also been launched. RBI has issued guidelines on Co-origination of loans by Banks and Non-Banking Financial Companies (NBFC) for providing credit to priority sector. It is also pushing forward the mechanism of Account Aggregators (AA) which will provide services of retrieving or collecting information of its customers and sharing with banks. An awareness of such schemes and initiatives will help MSMEs to leverage them to augment their financial resources.
Training is Critical
Targeted professional training in tech and finance would go a long way to meet the demand side needs of MSME borrowers. Such training will enhance the absorptive capacity of the entrepreneurs to appreciate, assimilate and utilize the supply side opportunities in accessing formal credit, raising financial resources and professionalizing business.
PSBs, through PSB Alliance, private sector banks, small finance banks, NBFCs, along with SIDBI and industry associations/bodies, should come together to design and roll out suitable learning courses/training modules exclusively for MSMEs and impart them on a mission mode. This can also be accelerated through public/private partnership model. Incentives and subsidies may be provided by the government for such training to ensure increased participation of entrepreneurs.
The writer is a former Bank Executive and is presently on the Boards of Bank of India Trustee Pvt Ltd and UBI Services Ltd. Views are personal.