SME: Getting Into The Groove

By their very nature, small and micro-enterprises defined by the size of their investments, usually ranging from Rs 1 crore to Rs 25 crore, have more often than not transacted business through cash, not by cheque or via the banking system.

 So, for most of them, if there’s little or no availability of the staple mode of transaction, ie, cash, ostensibly it ought to have severely struck at their business prospects.

However, the November 8, 2016 shock demonetisation announcement that pulled out of the system Rs 500 and Rs 1,000 notes worth Rs 15.4 crore, may have generated merely a short-term blip in business. It has, however, hardly affected longer-term operations. Market experts say that if there was any talk that many SMEs were going out of business, it has remained just that — talk.

Says Arun Singh, lead economist, Dun and Bradstreet, “I have not seen micro-and small-enterprises close down due to demonetisation. If there has been any, it’s due to the nature of business, where you see some businesses close down as usual.”

In fact, if you look at non-performing statistics, demonetisation hardly seems to have hit the delinquency ratio of small and medium enterprises. Pre-demonetisation, if the NPA rate for micro-enterprises was 7.5 per cent in the September 2016 quarter, post-demonetisation, delinquencies have barely gone up to 7.8 per cent.

Among SMEs too, the NPA ratio has crawled up from 14.4 per cent to 15.3 per cent, not so significant given that demonetisation did lead to a major blip in transactions. Says Harshala Chandorkar, COO, TransUnion CIBIL, “We have not seen such a sharp increase in NPAs in the micro segment. Delinquencies have not increased. Banks should definitely look at this segment when they are lending. They, too, (the SMEs) are the ones in need of finance.”


Of course, for smaller businesses, demonetisation came as a shock unlike the Goods and Services Tax, which was announced before. Smaller companies, which usually conduct business in cash, were impacted, to the extent that their revenues did flip for the short term, say, two to three months. The production cycle deteriorated, and sales and production slowed down.

However, experts reckon that most SMEs bounced back by April 2017. Conditions in the overall market started to improve after some re-monetisation started. On their part, SMEs moved on to transacting digitally, using online and mobile modes of payment. In fact, many SMEs started to use online mobile apps to send and receive payments.

In fact, transactions through The United Payments Interface jumped from a little over a lakh transactions in October 2016 to 91 lakh in May 2017, post-demonetisation.

Also, most SMEs did not close shop. Of course, according to experts businesses did see a slowdown, but SMEs began to offer longer credit periods to customers, along with moving to digital payments.

Says Singh, “Fortunately, I have not seen any SMEs wiped out, or any SME out of business due to demonetisation. While they were recovering, most SMEs took another hit in the form of the GST. But now not many people are talking about demonetisation. Some problems may persist for companies that are out of the distribution curve, but these would be hardly two to three per cent. Many more companies, though, have recovered notably from demonetisation.”

In some sectors, however, the impact was a bit larger. In textiles and construction, cash is predominantly used to transact business, such as when paying out salaries and other compensation to daily workers in the construction industry. However, some of these segments are now— post-demonetisation — slowly moving into the formal economy.

In the diamond business, for instance, with its many small and medium-sized enterprises, transactions are now increasingly being conducted within the formal economy. The International Commodity Exchange is now routinely seeing transactions worth 300-400 carats online.  

Says Sanjit Prasad, managing director and CEO, The International Commodity Exchange of India, “Initially, there was much scepticism. Now, as things are becoming more formal, there is a premium for people who are honest. Demonetisation has to be read in tandem with the GST. If I am moving into the formal (and well-regulated) system, I am obtaining the advantage of the GST. Earlier, SMEs were dealing fully in cash; now that is not possible.”

Another positive for MSMEs is that the economy is gradually improving. In the last few quarters, the growth in performance is evident, and every quarter has been an improvement on the previous. For example, the July-September quarter is expected to have improved on the April-June quarter, which likewise had improved on the January-March quarter of 2017.

The coming October-December, 2017 quarter is expected to be an improvement too, on the preceding one. Therefore, matters are bound to be brighter for the economy as a whole, including for MSMEs and SMEs. Says Singh, “The structural base in the economy is intact. A real recovery will start in the last quarter of the next financial year.”