SME provides springboard of opportunities for entrepreneurs to test their ideas, technology, and processes in a real time business environment. In this backdrop, the debate on implementing policies and programmes oriented towards fostering entrepreneurship is pertinent and imminent
Small and medium-sized enterprises (SME) provide opportunities for entrepreneurs to test their ideas, technology, and processes in a real time business environment. Moreover, with their potential to generate job creators, the SME sector is a critical piece in the scheme of job creation and poverty alleviation. In this backdrop, the debate on implementing policies and programmes, oriented towards fostering entrepreneurship and enterprise management is pertinent and imminent.
Modern economies that appreciate the contribution of entrepreneurs, should provide for the creation of new enterprises, sustenance, and contraction/exit of inefficient units. Since new enterprises consume resources, create new skill requirements, and provide new revenue streams and jobs to the economy, it is important to provide a business environment which allows young firms to grow rapidly across industries, and also permit the exit of such firms that could not achieve operational or monetary objectives.
Creating such entrepreneur-friendly economies require mutually reinforcing and supportive monetary, fiscal and structural policies to be embedded in the economic framework. These policies comprise of labour markets, tax structure, financial access, bankruptcy code, competition, resource allocation etc, which are critical in deciding penetration and success of entrepreneurs.
In this context, Pahle India Foundation and Yes Global Institute, a practicing think-tank of Yes Bank, conducted a seminar on July 3, which saw overwhelming participation from the industry and academia. Four main issues that were discussed at the seminar were: Recovery of receivables for SMEs, compliance, ease of exit and credit rating of debutant entrepreneurs.
Recovery of receivables for SMEs: SMEs are critically dependent on their trade receivables for the purpose of business continuity. However, delays in receipt of outstanding payments is a chronic problem. On most occasions, promoters infuse funds to meet working capital requirements a poor entrepreneurial practice.
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, Chapter V, articulates the liability of the buyer to make payment to the supplier on or before the agreed date, extending up to 45 days. The Act also mentions about the interest payable in case of delayed payments. Unfortunately, the law is yet to assuage the receivable woes of the sector.
As per CRISIl, formerly known as the Credit Rating Information Services of India limited, “SMEs with large corporate customers have receivables of 90 to 120 days of sales on their balancesheets, as against 45 days stipulated by the MSMED Act”. large-size customers use bargaining power to delay receivables. Average working capital cycle of SMEs in India is around 66 days, compared to 42 days in the US and 40 days in Europe and Asia. There needs to be concerted pressure from policymakers, bankers and rating agencies on corporates to ensure timely payment of dues to SME customers. The credit rating framework currently does not dive into these details.
Compliance: According to a study by the World Bank reguatory, administrative and legal burdens impinge growth of entrepreneurs. Compliance burdens on entrepreneurs should be minimised and those applicable should have greater benefits than associated costs. Multiple orbits of compliance may be explored for SMEs operating within bands of asset size or leverage. The compliance ecosystem shouldn’t deter entrepreneurs from growing beyond a particular size or consume their decisive operational resources, including management bandwidth.
Seamless exit for entrepreneurs: Exit is an inevitable reality for any enterprise, and as a nation committed to providing an ecosystem that would synthesise economic growth and ‘ease of doing business’, it is a matter of concern that there is absence of a systematic roadmap for proprietorships and partnerships to wind business.
SMEs must be encouraged to shut shop than cease operations of the enterprise. Ghost firms/companies have done more damage to the economy than failed enterprises. Failed entrepreneurships should be duly issued ‘no objection certificates’ and clearances within a stipulated time, thereby, facilitate the entrepreneur into future endeavours without legacy baggage.
Credit rating of debutant entrepreneurs: Among the three dimensions used for credit rating of micro small and medium enterprises (MSME), management is critical in determining the rating of the firm/company. On multiple occasions, promoter due diligence is not accurate as first-time entrepreneurs are pitted against well-established businesses. Credit rating agencies need to incorporate assessment of business plan as a key dimension in rating of debutant entrepreneurs. Greenfield projects need to be assessed for continuity of cashflow projection than compared to the existing framework which focuses on tangible securities such as unencumbered land, gold and earmarked fixed deposits.
Relative rating of SMEs needs to be meshed with dimensionless analysis of the proposed entrepreneurship for succinct ratings that are catalysing in nature. The need for ensuring sustainability demands that definition be revised to ensure actual policy implementation is in sync with the requirements of the SMEs. Today MSMEs are classified by the investment in plant and machinery and this definition is governed by MSMED Act, 2006. This is a dated criteria, as since 2006, there has been a rapid development and investment in technology and infrastructure.
Threshold limits of investment in plant and machinery to be classified as MSME should be revisited. There is a demand from various MSME quarters to revise the investments thresholds MSMEs in line with inflation to encourage them to invest and expand. The SME are often reluctant to breach the prescribed threshold investment limits and expand as they lose the incentives of being an MSME.
(The writer is fellow at Pahle India Foundation)