In my previous blog (Micro Small and Medium Enterprises (MSMEs)), I offered a brief overview of the MSME sector. In India, almost 99% of the MSME units belong to the micro-segment (with annual turnover less than INR 5 Cr.) and the remaining 1% belong to small and medium segments. In this blog, I explore some of the reasons impeding the growth of MSMEs, especially the micro-segment
Lack of access to formal credit
The overall credit gap in the MSME sector is estimated to be approximately Rs. 25.8 trillion. 96% of this unmet credit demand comes from the micro and small enterprises which still remain the most underserved segments.
Source – MSME AR 16-17, Intellecap Analysis
There are multiple reasons because of which the formal credit institutions are unable to lend to this segment some of which include:
1. Lack of credit information which primarily includes audited financial statements and bureau data. The problem further compounds with the New To Credit (NTC) businesses
2. Unclear segregation of personal and business income
3. Risk of diversion of funds and lack of disclosure standards
The micro segment mainly relies on the informal sources such as chit funds, borrowings from friends/family and moneylenders that account for an estimated 85% of the total financing to the segment.
Difficulty in attracting and retaining talent
High attrition rates and inability to attract the ‘right’ talent are the top 2 problems that almost every small business faces. Limited talent pool (especially in tier2 cities), fierce competition from branded large corporates and inability to pay competitive salaries are often some of the reasons cited by small business owners. However, the employees often quote feeling under-valued and limited growth and learning opportunities as the top reasons. Also, with large corporates offering the option of remote working, the location constraint (often cited by employees as reason to stick with small businesses) is also disappearing adding to challenges of attracting/retaining talent.
Lack of investment in technology
Most of the MSMEs are slow at adopting the new-age technologies because of lack of technology talent pool (most of them have a small IT team working on maintenance of basic accounting and taxation systems) and general aversion to spending on technology coming from a lack of clarity on the technology ROI (The tendency to put more people on the task than investing on technology). The slow adoption of technology results in suboptimal process efficiencies and greater reliance on skilled manpower (which is always in short supply) leading to inability in achieving sustainable business growth.
Lack of marketing capabilities
Only a few small businesses have a dedicated marketing department with the right experience and a clearly outlined marketing strategy covering offline and online channels. Most of the times, the marketing activities are carried out by the sales managers in the form of campaigns with distributors. This lack of focus on developing marketing capabilities also limits the opportunities for businesses to promote their products/services on wider ecommerce platforms and access larger domestic & international markets.
While the above listed are the key challenges (among the other challenges) that the MSMEs face, in the upcoming blogs we will explore some of the solutions to these challenges.
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