New regulatory landscape- Great time ahead for SMEs in India
Recent reforms that were undertaken by Govt. of India such as Introduction of GST, Demonetisation
Since the formation of new Govt. at the centre since May 2014, the structural inadequacies or hindrance for doing business have come under intense scrutiny. Govt. has been focusing on the regulatory challenges faced by the entrepreneurs and evolving the remedies to make entrepreneurs life easier.Read more
DEMONETISATION- A GAME CHANGER FOR SMEs IN INDIA
Demonetisation is a great opportunity for SMEs in India to break away from cash-based transactions to the more efficient digital platform.
On November 8, 2016, our Honourable Prime Minister announced cancellation or demonetization of Rs 600 and Rs 1000 notes. The decision was welcomed by citizens by and large. However, as the reality sets in, many people started feeling the pinch of total absence for cash for continuing the business. Many businesses have post-phoned the supply of goods and services for want of cash which is the major means of settlement of the transaction. The present circumstances may be hurting the cash flow of the business in many ways- paying creditors, salary and other miscellaneous experiences. Many of them are at the mercy of their buyers who themselves are experiencing the choking financial chain of the business. However new drive is going to rewrite the ways the business is conducted in India.Read more
LAP- A simple loan product but a risky proposition for SMEs in India
LAP has been positioned as a simple loan product among SMEs in India. However, it can endanger the sustainability of business if not applied properly.
Among a host of loan products provided by banks, a relatively popular product is the Loan against property (LAP) or mortgage. The product clicks with borrowers because it generally allows them to borrow a relatively large sum of money for any need. It has easy documentation, speedy approvals and flexible repayment options.
On the other hand, lower operating cost, larger ticket size and higher profitability attract the lenders.Read more
Succession pain in Partnership Firms – A challenge among SMEs in India
Succession planning is a very complex challenge for partnership firms. It requires all partners should work together like the way they established the firm to make the transition a successful one.
I would like to narrate disastrous failure of a corporate entity, having significant influence of two founding partners, due to their inability to agree on a mutually acceptable succession plan. The company was set up as partnership firm about 35 years before its disintegration. One partner was high on intellectual capability and carry strong business acumen. He was the majority stakeholder and head of operations & technology development. Another partner technically qualified, was a major financial investor and taking care of finance & corporate affairs. There was an amazing understanding and they were passionately involved in the development of their business. The entry to that business was so well timed that industry was opening up to the products they were producing. Govt was keenly promoting adoption of new practice such that this company was a major beneficiary. The business expanded consistently so is the reputation and country wide presence. They established a major centre with the large track of land in the heart of the city. The R&D set was so well developed that it could make the competitors feel envy as R&D was considered key strength to stay competitive in the industry. Their management standing is so well established that they could attract fantastic professionals to work for the company.Read more
Under-financing: A menace among SMEs in India
Non-availability of sufficient funding or under- financing of businesses has abruptly ended the entrepreneurial journey of many in India. Meticulous preparation of DPR, Financial closure and executing the same accordingly will eliminate this risk to
I recollect an incident happened many years ago. A businessman had approached the bank seeking term loan for the new project and concomitant working capital for the same. The project has a gestation period of one year and bank found its wisdom to postpone sanctioning of working capital till the completion of the project. Upon receipt of sanction, the businessman sought a meeting with the senior official. He requested the bank to sanction working capital along with term loan. His contention is that in the event bank goes back on its promise to fund working capital, his project will be rendered non-viable and hence he did not find it is worthwhile to pursue the project without full working capital facility being sanctioned. He is not well educated and he cannot speak in any language other than his mother tongue. All his viewpoints were translated into English by his financial advisor. But he carried an amazing level of wisdom which has touched the right nail. The executive appreciated his concerns and immediately asked the officials to process and sanction working capital limits.Read more
How to achieve successful turnaround post debt- restructuring?
It is commonly observed that, among the SMEs in India, restructuring of bank debt is not resulting in turnaround rather perceived by many as a futile exercise. However methodical approach post restructuring of debts can make the turnaround successful.
Recently I got a call from one businessman went for bank loan restructuring three years back. Then his banker initiated recovery proceedings upon his business started showing signs of sickness and the accounts were on the verge to slipping into NPA. He was very perturbed, angry at bankers and cursing his fate; obvious symptoms among SMEs under stress in India. This is mainly because business is an inseparable part of their life as it is not uncommon to find that entrepreneurs pledge all their hard-earned wealth- both business and personal- for such loans of their business. Then I suggested him to seek to restructure of debts as the provision was already in the RBI guidelines. Upon making a request to the bank, bank readily considered the proposal and permitted debt restructuring given his long-standing relationship and potential opportunity exists in his business.Read more
Credit Rating- Not a burden, rather tests the endurance of your firm
ecently I met a third generation businessman who has been very successful in his business and has been highly reputed for his prompt repayment of obligations including bank loans. He is a very prudent borrower and practices zero tolerance for any financial indiscipline. He has given a significant amount of collateral security for his loans. He expressed his anguish at the bank for insisting or rating by external rating agencies (like CRISIL) otherwise called in banking parlance as ECAI rating. His contention is- having been such a prompt borrower and given so much of collateral securities for bank loans, insisting for a rating of loans is a mere burden and having no tangible benefits.Read more
Financial Control- Key to achieve Financial Prudence for SMEs in India
Robust financial controls can improve the sustainability of organisation as well as support the growth ambitions among SMEs in India
Recently I had an interaction with one first generation entrepreneur who is undergoing financial distress. He explained his growth story and his own take on reasons for his distress. He has been undertaking much specialised custom made solution for very large companies in different verticals. He started without any capital, leaning solely on his intellectual capital. The growth was very good. He did not take any loans from formal sources like banks till recently. He was by and large dependent upon private money lenders for meeting the financing needs. Every time when he decided to borrow from banks, the proposal was not receiving good review as he did not have proper financial and other documents required to make banker accept his proposal. However he had been restless and went on to borrow from private sources. He used to decide to borrow instantly on ad-hoc basis. As macro- economic situation turned bad in last two years, large companies started delaying their capital investment plan. This had affected him badly. In turn his cost of private borrowing complicated the situation and slipped to distress.Read more
What is the level of Sustainable Debt for my business?
SMEs should borrow loan amount just enough to meet the need of the business and it should be guided by the cash flow projected. It is the core of
Recently Reserve Bank of India came out with guidelines on S4A (Scheme for Sustainable Structuring of Stressed Assets). The scheme involves identifying an appropriate level of debt that can be sustained by the firm in distress and carving out the balance which unsustainable, as equity capital. Though S4A is not applicable to SMEs, we would like to dwell upon the subject of sustainable debt level as excessive borrowing among the SMEs is becoming a serious problem in India and many of the long-standing businesses are nearing collapse or collapsed under the unsustainable debt load. Among large corporate also, we have seen the failure of many highly successful entities due to unsustainable debt despite having best professionals to advise and having survived for decades.Read more
Planning for growth: How Prepared you are?
Successful growth strategy requires one to analyse the opportunities and challenges critically and prepare a strategic plan methodically. It is commonly observed that majority of SMEs in India do not give due attention to nuances of growth as much as start-up stage.
I would like to narrate a case of one entrepreneur in Pharmaceuticals business who suffered losses in the late 2000s. He was very successful in his first venture. He grew business from scratch and it became a successful. He felt the need for second unit. At the same time large reputed brands in pharma space started outsourcing manufacturing to small scale industrial units. This opened new opportunities for him. He set up new unit about 20 kms from the first one. The production started. However the work pressure multiplied as he was alone handling end-to-end of the business in two locations. There was lot of attrition at all levels. The productivity declined so is profitability. The cash flow was not enough. Bank loan started becoming stressed. The business started sliding. Interest burden and repayment of installments became burdensome. The firm eventually failed and bank started recovery proceedings.Read more