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Solutions to the Challenges faced by MSMEs: COVID times and way forward

With a very large number of MSMEs struggling with cash flows, due to delayed payments, reduced customer demand and a general slow-down in the economy, it is important to focus on getting demand back as soon as possible. The best way would be to incentivise accelerated spending over the next 6 months.

  1. Revenue – the cash flow challenges

Over the past few weeks, MSMEs across the world have been facing unprecedented challenges. For MSMEs in consumer businesses such as hotels, restaurants, salons, gyms, movie theatres, distribution firms, and other non-essential retail, revenues are down to near zero.

Firms operating in the B2B space have also seen revenues dip substantially. We have heard of multiple instances of large customers canceling long term contracts and enterprise customers delaying payments. Cash collections have slowed down or completely stopped.

Most of the MSME founders are in a state of shock and there is a total lack of clarity on when customers will return. The rare few who don’t face this problem should consider themselves lucky.

  1. Expenses – how do you pay?

On the other hand, the firms have to continue to pay for certain necessary expenses, such as employee salaries, utility payments, rentals, etc. With the lack of cash collections, many of these payments are being delayed or reduced. Firms are resorting to reduced salaries and asking landlords to delay rental payments. Supplier payments are being delayed.

Firms are looking to mitigate cash flow pressures, through the RBI provided a temporary moratorium on existing borrowings and the set-off benefits on GST and TDS payments provided by the government, though these come at a cost.

  1. Can one turn to the bank for help?

The firms can look to the banks for loans to help with cash flows, but given the uncertainty over the business, banks are also reluctant to lend till there is more clarity. Remember, the bank can lend only if they are confident of collecting the principal and interest. If there is a material risk for the loan to be repaid, it is not in the best interest of the bank to provide the loan – else the bank runs a high risk of default on the loan.

Given the triple pressures of Low or No Cash Collections (Revenues), necessary payments to be made and limited borrowing opportunities, the MSMEs are using whatever little cash cushion to manage, but if the weak demand continues for slightly longer, then the situation looks dire for a large number of MSMEs. The Risk of bankruptcies is very high.

  1. What are MSMEs doing

In this situation, MSMEs are first focussing on evaluating if customers will get back and planning accordingly. Wherever possible, they are reducing costs and new initiatives are being shelved. In conversations, many promoters have mentioned that they have set aside some additional capital to take care of the expenses over the next few months and if the business does not get back to profitable mode, they may have to start taking hard calls.

  1. The challenges for the government

There is much clamor for the government to provide a large stimulus, but this is a complicated path. Already the fiscal deficit has been under strain and the COVID related lockdown has further exacerbated this problem, with tax collections already down and guaranteed to go down even more. Any increase in tax rates will delay an already fragile economic recovery. And just providing increased liquidity, can only help the MSMEs to some extent, as the money will go down the drain if customers don’t return soon.

  1. What support do MSMEs need from the government

For the entire economy, this is a complicated challenge. At the root of the problem is delayed customer demand. Enterprise businesses are going into a cash conservation mode and delaying spending, as they prepare for the uncertain times ahead. Individuals are also conserving their cash as they are uncertain about their future.

In this scenario, it is imperative to get demand back as early as possible. In order to do this, firms and individuals who have sufficient cash reserves and cash flows should be incentivised to start their spending early. This will ensure the MSMEs (and also larger businesses) get back to normalcy sooner. There are precedents on how the government has addressed this in the past:

  • For businesses, allow for say 100% depreciation as an expense on Capex done before September 2020
  • Provide discounted GST rates on consumption done before Sept 2020 for both businesses and individuals. In the past, we have seen reduced excise and service tax for limited periods

This will get the economy back on its feet sooner, save jobs, reduce bankruptcies,  reduce bad loans for banks, and get the MSME engine moving. The government will also benefit, as demand recovers and the tax lost out on the depreciation benefit will just be delayed. Jobs saved will lead to higher income tax collections and the increased consumption will lead to improved GST collections.

As they say, teach a man to fish….

“Work” in the post Covid world

When the Corona led lockdowns started in the middle of March, not only in India but across various parts of the world, the business world was stunned. Most believed the world would not be able to function and work will come to a standstill. 6 weeks later, the on-ground experience has been very different. While many sectors directly affected, such as travel, hospitality, consumer-facing services like salons, malls, etc have completely come to a standstill, various other areas of work like IT Services, FMCG, Banking, etc continue to function smoothly (given the circumstance, smoothly is probably the best word).

Many people, who are part of the functioning world, claim they are actually working far more than they were in the pre-Covid world. Some say, efficiency levels have actually gone up.  A strong data infrastructure, data on the cloud, video conferencing, digital payments, and a host of digital applications have made this a reality. It would be fair to say, the lock-down would have caused far more disruption if it had happened a few years back when such infrastructure was not available.

Given the rapid spread of Covid, the importance of flattening the curve, and no real cure in sight, it is quite likely the world will never return to the old ways of working. Many offices will have to (or choose to) be prepared for ‘social distancing’ as a norm, but at a reduced level of severity than what we have seen so far.

Companies that adapt to the new world will survive and thrive in the post-Covid world. Companies that resist change will struggle a lot. We believe the following trends are firmly in place.

  1. Work-From-Home :

Firms will look to mix employees into 3 buckets (WFO: Work full time from the office. WPT: Work part-time from office. WFH: Work from home full time). All work roles could be bucketed into one of these categories. This will bring down overall administrative costs for firms. The cost savings can be directly transferred to customers leading to significant competitive advantage in the market place. Some firms may need to create distributed work environments, so that some employees who don’t have an option to work from their homes, can use these work environments close to their homes. Over time, one can reasonably expect the WPT and WFH employees to move away from the large cities to smaller towns, where lifestyle will be much better and with options to work effectively from home.

  1. Data and communication infrastructure :

With efficient video conferencing, VPN, digital work processes, etc, the post-COVID world will see a far more efficient set of work processes. One does not have to wait for a week to get a senior management meeting. More meetings can be scheduled and completed in a week, a far more efficient process than in the physical world. Firms need to invest in Data infrastructure, Data Security,  Measuring productivity.

  1. Dismantle well-entrenched processes :

What surprised many people, over the past 6 weeks, is that many processes which historically needed a physical employee presence, would be managed remotely as people figured ways to find workarounds. Firms that focus on dismantling these processes and reducing the need for physical presence should be able to work far more effectively in the new world. The lawyers, accountants, etc will have to find way around in the new world. Imagine a day when the courts, doctors, etc can work digitally.

  1. 9-5 working :

The idea of the 8 hour a day work culture, which is nearly 135 years old, is based on employees coming into office. Once you take this requirement out of the equation and define work packets for the flexible work environment, it allows companies to hire people for the work required. It will also allow many part-timers to come into the mainstream workforce – women who need to balance time between work & home, retired folks who have specialized skills, other part-timers, etc. It will land up unleashing a massive amount of talent leading to huge productivity improvements.

  1. Business Travel :

Many businesses have figured a way to work without having to travel during this lockdown. Conferences have been happening in the digital world quite seamlessly – with the same level of effectiveness, but far more efficiently. With travel and hotels facing some uncertain times, many business travelers will get used to the new world doing of business with their clients without having to travel. Once this culture is firmly entrenched, it will be difficult to change. Next time when you ask a client for a meeting, chances are the client would prefer a video-call.

  1. Digital Culture :

Finally, every organization has a culture and it is easier to create a common culture in the physical world. Employee level engagement is possible and the coffee machine conversations really make the firm. In the new world, many of these need to shift to the digital world. I already see several firms taking huge strides in this direction. Keep an eye open in this direction and you will see a plethora of options available for you to create a common culture.

All the best in your endeavor to re-engineer your firm in the new world. Stay safe. The world on the other side will most likely be a far more beautiful world.


How Data is Transforming Corporate Relationships for Banks and NBFCs

Data has changed the way retail lending is done

Data on retail clients has made a significant impact on the way banks lend to retail customers. Various information sources such as PAN, Aadhar, and Credit Bureau scores have significantly transformed the way banks lend to individuals. Cycle times to identify, qualify, verify, and do credit checks on individuals have significantly come down too. As a result of the lower cycle times and related costs, there has been a rapid proliferation of retail loans. The current boom that we see in retail lending has its origins in ‘good data’, the story of which goes back well over a decade.

A similar transformation has started to happen in corporate lending

Very similar to the way retail lending has been transformed in India, we are beginning to see a rapid transformation in the way lending is happening to businesses, especially to the mid-sized and smaller companies. Note that currently there are over 10 lakh active companies, of which nearly 3 lakh companies have existing borrowing relationships with banks and other institutions. These figures will double over the next 5-6 years, as the economy continues to expand. The challenges to tap into this opportunity are massive for the banking industry as the stakes are quite enormous. However, the winners have much to gain. Firms that leverage data, and do it well, will have a significant head start on this journey.

How can Banks and NBFCs benefit through use of data?

Early adopters are showing the way

Sales Identification and Qualification

Today, there are over 10 lakh active companies and nearly 3 lakh existing companies with borrowing relationships in India. As this number continues to grow, it is essential for banks to use data to identify and qualify potential customers very early in the sales cycle. In today’s information-rich, digital world, unlike say five years back, it is possible to qualify prospects very early in the sales cycle. The cost of converting potential customers has dropped by nearly 90% over the past five years. Pre-qualifying the sales funnel will increase the productivity of the sales teams nearly twofold.

Also, by using data to identify the right customers, the sales teams can significantly expand their qualified target markets, at pace.

That said, transforming the sales team’s existing processes, which in many cases are still based on Rolodex-based approaches, to a more data-oriented approach is a key challenge and opportunity.

Faster Credit Analysis and Disbursement

Gone are the days where your ability to analyze a case better gave you a competitive edge. With information on prospects now widely available, speed is the only factor that will provide you with a competitive advantage. (We remember a personal loan used to take 15 days in the mid-90s, whereas we take about 30 seconds now.)

The availability of high quality, reliable information can significantly enhance the speed of decision making, thereby giving the lender a competitive edge in the marketplace. More than 50% of the information that is being collected from the borrower today is already available in the public domain.

Use of information also significantly reduces cycle time, therefore improving employee productivity. We have already seen several hours being cut out of the business credit analysis process thanks to the introduction of data.

Effective Monitoring

Scale and growth are often accompanied by their own challenges. The number of companies that have relationships with banks is rapidly increasing. Many of these companies leave a long trail of digital footprints. Regulatory requirements are also becoming stringent, making more reliable data available in the public domain, hence dependence on data is increasingly important. Active monitoring of these companies on an ongoing basis needs to be supported by data and analysis.

Amongst the significant challenges bankers face is the multiplicity of data sources, lack of standard identifiers across sources, and credibility of data sources. Given the above, it is not an easy position to be a banker in today’s world. In such a situation, technology and organized data can play a significant role in helping support the banker through the journey of monitoring.


Overall, including employee productivity, payback on the investment in data is significant. In nearly all situations, gains from using it effectively are far ahead of the cost of the data.

We see early, but strong trends, on how data availability is transforming the way business lending is done in India. Quickly and rapidly, precious minutes and hours are getting chipped away from the entire credit qualification, disbursement, and monitoring process. We are rapidly moving towards the day when a business, as long as it is good, has credit available on tap – very similar to the way retail lending operates.

Using Data for Corporate Lending

The retail lending space has changed rapidly over the past two decades, thanks to the use of data and technology. We are starting to see a similar transformation in the business lending space, through use of public data and automation. Based on the trends we have seen over the past six years, we believe that keeping the following in mind will help you get maximum mileage out of using data.

1) Measure the benefits

In most cases, there is an existing lending process. This process is done using an ‘old way’ (for want of a better term) of doing things. With the availability of data and with technology, the same process can be done more efficiently. The right way to approach the problem is to:

  • Measure the overall cost of the existing process (end-to-end cost)
  • See how the process can be changed using public data that was not available earlier
  • Gauge what the material change will be, in the overall cost of the process
  • Run a controlled prototype of the new process
  • Roll out the new process, if it makes sense

One of the challenges we see is that the approach to using ‘data’ is done tactically, without taking an integrated view of the whole process and the more significant implications.

2) SaaS model

In the new disruptive world (which, one has to admit, has made a significant change to the way we live our lives, all in just the past few years), you can use SaaS-based solutions to solve most pain points. The advantages of this model include:

  • Quicker trial and implementation: See benefits rapidly or move on if it doesn’t work out
  • Easy implementation: Does not require any significant upfront technological or financial commitments
  • Pay-as-you-go model

In a world where managers are used to conceptualizing large projects that consume a lot of time and require significant upfront investments, this approach is both critical and effective.

3) Structured vs unstructured data

There is much talk these days about AI, NLP, Machine Learning, etc. With social media and various other sources of information, the potential of unstructured data is enormous. By mining and using unstructured data mining to its potential, your process can go a long way in terms of efficiency and intuitiveness. In the process however, don’t lose sight of ‘good old structured’ information. After all, only a strong foundation of structured information can form the basis of unstructured information and analytics. Note that you can’t analyze without having good clean data in hand. Analysis without data is just an opinion.

4) Good data costs, but pays back quickly

In today’s world, led by the Internet and Google, one gets a lot of information freely. As a result, we do see a strong underlying mindset that all data is of ‘low value’. In reality, good quality data takes a lot of time to develop and money to build up. More importantly, having a foundation of useful quality data saves significant costs down the road. One would be surprised at the number of processes that exist out there, where the sole purpose is to capture and cleanse data. Instead, if good clean data had been available at the source, much of the downstream costs could have been saved. Build on a foundation of high-quality data, and the downstream benefits can be massive.

5) Keep an eye open for strategic advantages

In an industry that has been around and regulated for several decades, there are several outdated processes that have been adopted by too many people. Fear of questioning the status quo is high. Technology and data are changing things rapidly. What is even more interesting is that the regulatory system is also learning to question some of these outdated ‘requirements’, and is willing to adapt to things that benefit the end borrower (in this case, a business).

In 1995, who would have thought an individual borrower could get a loan in 30 seconds? This would not have been possible until the day someone believed ‘it can be done’.

Similarly, data and technology have started to throw up several options which question the status quo. If you understand the tools available (read data and technology), and approach it with the intent of benefiting end borrower — while bringing down overall costs, improving credit quality, and reducing cycle time – bold thinking can take you places.

The Uber, Swiggy, Paytm kind of disruptive ideas are not limited to just the B2C world. Lots can be done in the B2B world too.