Explained | How the container crisis poses major liquidity challenges to SME exporters

An international shortage of shipping containers is affecting the exporters globally.

Moneycontrol examines what led to the shipping container shortage, how is it posing liquidity challenges to exporters, particularly those in the SME (small  medium enterprise) sector.

What led to a global shortage of containers?

Restrictions on international trade because of the COVID-19 pandemic led to a reduction in the number of active vessels in operation. This has reduced the number of containers being picked up and used, leaving many stuck at ports and inland depots.

What are the problems that have emerged as a result of the shortage of containers ? 

Due to lesser containers available, their turnaround time has increased which is delaying shipments and elongating the business cycle. Further, this has sharply increased freight rates.

Due to the skewed demand-supply situation, with high demand and low availability of containers, freight rates have shot up significantly by 500 percent compared to previous year.

How is this posing a liquidity challenge to exporters, particularly the SME exporters ? 

The global shortage of containers is causing liquidity problems for exporters, particularly the smaller ones. The scarcity of containers has caused a delay in shipments which has resulted in delayed payments to the exporters. Adding a blow to the same is the stark rise in freight rates. Hence, exporters have been forced to pay a high price for containers to complete the shipment of goods. The delay in payments is disrupting the cash-flow cycle.

As a result of the consecutive lockdowns in 2020 and 2021, the SME sector has been facing a wide range of issues like massive liquidity and supply crunch, shortage of labour and non-payment of dues.

One of the biggest challenges that SMEs face is the lack of finance and financial literacy among small-business owners. As per CRISIL's SME tracker, the credit gap between the available and required working capital has been widening since 2015. It has now further worsened due to disruptions in the cash flow cycles as a result of the pandemic.

SMEs continue to face liquidity crunch as there is a reluctance on the part of banks to lend to them as doubts about their repayment capabilities has created a fear loans becoming non-performing assets (NPAs).

As most SMEs are out of the ambit of the GST network, and the resultant lack of documentation, they are forced to borrow outside the formal banking system with high interest rates. This dries up their savings and credit, making it difficult to sustain operations.