Jan 20, 2017 03:55 PM IST IST | Source: Moneycontrol.com

Cash crunch cripples SMEs; fillip after one quarter

In wake of the government's move to demonetise Rs 500 and Rs 1,000 currency notes, small and medium enterprises (SMEs) are facing temporary difficulties for making payments but are coping with the fall out of demonetisation.

Moneycontrol Bureau

In wake of the government's move to demonetise Rs 500 and Rs 1,000 currency notes, small and medium enterprises (SMEs) are facing temporary difficulties for making payments but are coping with the fall out of demonetisation.

The SMEs and micro and small enterprises which by their very nature deal largely in cash purchases as well as other transactions are finding it extremely difficult to cope in the absence of availability of ready cash in carrying their operations.

Generally, these enterprises run on thin budgets and often suffer long delays in recovering dues for supplies already made. With a liquidity crunch all over the country, these enterprises are having a hard time.

Industry experts admit to some difficulty here and there, but nothing that they cannot tide over.

India’s small and medium-sized enterprises (SMEs) sector is among the strongest in the Asia Pacific region. The estimated 51 million SMEs in India constitute the country’s biggest employer after agriculture.

SME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. SMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural areas. SMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

The sector consisting of 36 million units, as of today, provides employment to over 80 million people. The sector through more than 6,000 products contributes about 8% to GDP besides 45% to the total manufacturing output and 40% to the exports from the country.

Saikat Roy, Head-SME at CARE Ratings says, “There is a huge liquidity mis-match in the industry as it is largely cash oriented. They are having issues in servicing the customer. “

He further adds that SMEs are having a major problem in adjusting production schedules as both payments and receipts flow are in cash given their structures and as of now there are no substantial downgrades on the back of demonetisation.

Concurring with Roy’s view, Sankar Chakraborti, Chief Executive Officer at a credit rating agency, SMERA Ratings adds, “SMEs, and more importantly micro SMEs are going through considerable hardship. The action of demonetization itself may not have impacted them as much as the ensuing scarcity of currency note. This segment wasn't big hoarders of unaccounted for income, but their dependence on physical cash transaction was high.”

Many enterprises which buy raw materials on cash payments are feeling the pinch for not having liquid money to run the operations but those who procure input materials by paying through cheques or RTGS are not facing such problems, SME experts said.

"There are not much problems in making payments to suppliers because one can issue cheque and make payments through RTGS. But some tiny units which used to make payments and where cash is king have been facing the challenge," said Deepak Premnarayen, President, IMC Chamber of Commerce & Industry who has over 86% SME membership.

Despite the odds, entrepreneurs and traders are hopeful that demonstration will turn out to be beneficial in the long run, encouraging people to adopt online payments and curbing unorganised trade, which has traditionally stayed outside the reported numbers.

Over the last few years, this sector has seen rapid growth, especially with the adoption of ecommerce and new technologies which are making it easier to reach their customers more efficiently.

Most experts envisage the pain in the sector to last for little over a quarter before coming back to normalcy.

“Most SMEs are accepting payments via alternate means of payments so their businesses are running smoothly. We expect the business to pick up by mid of December as holiday season starts as there will be more circulation of notes. It will take at least 4 more months for a total turn around in the sector,” Permnarayen said.
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