Transcript INDIAN SMEs WHETHER COULD SUSTAIN ?

Global economy melt down & its
continuous impact on Indian SME sector
by Mr. Gopalan, Empanelled Consultant, See Change Consulting
Email: [email protected]
•SMEs with top line of 1 and above crores ,which contributes to overall GDP(Gross
Domestic Product) to the tune of10 % & Above.
•Being the major source of employment provider for the skilled, semi skilled and
unskilled labor population of India, this segment is the most respected segment in
India
•The sector is dominated by all ancillary units in all the segment across India, more
precisely, manufacturing & Service segment.
• The promoter of this companies are predominantly ,the domain experts and they
have very thorough knowledge in their segment of operation.
•SME entrepreneurs are getting developed with their previous
employed experience and well developed contacts.
AN INEVITABLE GDP CONTRIBUTOR TO
INDIAN ECONOMY
•They invest a small amount of money as their seed investment and engage only semi
skilled labor along with their personal involvement in the initial stages of the business.
•During 2009-10, the total volume of business generated all over India in this segment of
companies are ranging between $200 Billion- $250 Billion of business.
•The direct and indirect employment opportunity generated through this industry is
approx 20% of overall population of India.
Pre - Melt down Scenario
•During 2005-2008, The industry was over optimistic as the global demand was
over-shooting.
•Unaware of the risk, the promoter started expanding their capacity without
analyzing the fact that, “in case of failure”.
•They started increasing the manpower strength and started competing with big
giants in terms of salary. (Normally, this industry is not the highly paid industry and
the employees of this segment are more loyal to their promoter)
•Quite apparently, when there was an labor shortage for the Multi-National
Companies, they started looking to hire employees from this segment. Hence the
small entrepreneur was forced to retain the labor by way of increasing the salary
and other perks without foreseeing the negative impact.
•Such potential industry has been taken for the task
in the recent melt down that happened. The entire
industry was in to dark.
Pre - Melt down Scenario
The entrepreneur has been encouraged by the huge order book for his products from
their parent companies, thereby started expanding his capacity in terms of business.
The entrepreneur also started increasing their personal expenditure, expecting huge
profit from the business, which resulted in to huge monthly outflow of funds for his
personal wealth creation in addition to his corporate liability.
Increased facilities for the labor like, lunch, pickup-drop from their houses,
tea/coffee/snacks etc, has been a hurdle for the entrepreneur.
Cascading Effect
•Due to enhanced order book, working capital requirements started mounting.
•Huge raw material requirements made the entrepreneur to turn their eyes towards
high cost borrowing from the private lender, with the assumption of increased
profitability will support for servicing the high cost borrowing.
•Delay in payment and interest rate hike in India has also increased their interest
liability with the bankers by way of excessive out flow of money as interest.
•Shortage of power supply in the last 2-3 years in entire India has resulted in to low
productivity with higher labor cost, as labor will sit ideally during the electricity
failure.
Melt down – Set backs
•The above expectation of the small & medium entrepreneurs has been taken for
the task, when the Sudden melt down took place which resulted in the following
setbacks • The Order books were reduced drastically
• Payment pressure from suppliers due to excess inventories being maintained
• The increased manpower could not be removed from the pay roll, since huge
layoff salary to be paid.
• The commitments created for personal & Business started increasing month on
month, which forced the entrepreneur to go for high cost hand loan
• Since the payment from the buyer has not come in time, banker started applying
pressure for the loan to get adjusted and stopped supporting the entrepreneur for
any genuine payments like electricity, salary for the employees etc.
Melt down – Set backs
•The promoter started adjusting their monthly commitments by borrowing every month from
the private lender at high cost.
. Salary for the employees has not been paid in time, resulted in high employee attrition. Even
the experienced employees were not able to be retained, who are all very important for the
continuous business operation.
. Promoter started losing his attention in the day-to-day business and his daily routine was to
borrow and adjust the liability for that days commitments.
. Bankers started issuing notices for the nonpayment of loans, and went to the level of
classifying the asset class as NPA(non Performing asset), created the fear in the mind of
promoter about their losing their property by way of SARFAESI Act.
. The rent for the building, where they are operating has not been made properly, resulted in
to land lord asking lot of entrepreneurs to vacate their premises.
A Costly Lesson
•It was a learning experience for the entrepreneurs. Though they were very strong in their
domain, they don’t have the knowledge in to other segments like financial management, labor
management, etc,.
•Being a very strong domain expert, they never thought of acquiring the knowledge in other
areas. They felt that, they can manage their show without bothering about all other
parameters.
•They might have been comfortable in the past, but during their crisis, they don’t know how to
act cleverly, since they never had any professional team in place for the crisis management or
they never came across this kind of situation in their past.
•(The only difference between the bigger companies and this SMEs is, bigger companies had
very solid professional team in place, where they could able to take corrective decisions at the
right time, thereby to sustain the business model in the moderate manner, without disturbing
the company running, also, the reputation of the organization has been kept in to control in
the public eyes),
•Quite Importantly, the bankers started supporting bigger companies, since the professional
team could able to convince the banker in much better passion, with their expertise in to crisis
handling, which they have been doing in the past.
Now,
What to do for the
Recovery?
to be continued…