Why small businesses are important for Corporate India?

Mr. S. Vishvanathan (Ravi) highlights several reasons why small businesses are key to Corporate India’s survival and growth.

Medium and large enterprises have several advantages such as a large pool of capital, easy access to credit, a huge marketing reach, access to the best of human resources and the ability to withstand economic downturns. But does this mean that over time the role of small and medium enterprises (SME) in the economy would diminish to a point that they become marginalized as a sector?

Civilizations that thrived in the past had one thing in common. A strong base of entrepreneurs who were willing to take risks, identify opportunities, provide employment and generally drive consumption. Through its history, civilization in the Indian subcontinent thrived due to its large pool of small entrepreneurs who had trade and commerce in their DNA and spread their wings to other regions of the world such as Sumatra, Indonesia, South Korea etc. That entrepreneurial tradition has been passed on through generations of Indians and, to a large extent still, drives the country’s economy from an employment and consumption perspective.

India’s growth story is largely fuelled by internal consumption and this is one of the primary reasons why a large economy like ours can be relatively immune to global shocks compared to export driven economies. With the balance of trade between countries becoming a major factor in their commercial relationships in the medium to long-term, large internally driven economies are likely to be better placed than export driven economies.

Also, with technology now disrupting business models all the time, any country that thrives only on large businesses and has an insignificant SME sector runs the risk of seeing a decline in job opportunities in the medium to long-term.

In the current scenario, large enterprises derive their consumption demand from the masses who in turn are often employed in the SMB sector. Corporate India no longer has the capacity to employ the large number of engineers, accountants and other skilled and semi-skilled personnel who come out of our universities year after year. The large SME sector encourages many of these youngsters to don the entrepreneurial cap quite early in their lives. This reduces the burden on the economy from a jobs perspective and also opens up a window of employment in these small businesses.

Small Business Entrepreneurs–How they can be supported and encouraged

The two most important conditions that any small entrepreneur requires for conducting business are: –

1. Availability of finance
2. A conducive regulatory and business environment

Easy availability of small ticket loans and innovative working capital finance at a reasonably competitive rate is extremely important for small businesses. Banks have been not been able to devise many suitable products to finance the SME sector. Where the banking sector has provided finance, it has been accompanied by a lot of paperwork and the requirement of collateral security. SMEs are weak in both areas and asking a small entrepreneur who is just commencing his or her journey to provide collateral security is discouraging for entrepreneurship.

The government has recognized this issue and has devised schemes to address the financial needs of SMEs. However, such schemes have their own limitations. For example, they often work top-down, which has its own challenges. The Working Capital Gap in the SME sector, as per a report by the Reserve Bank of India, is a whopping 365 billion USD. The existing banking setup is ill equipped to address this need. The mushrooming Fintech sector is coming out with innovative finance products for SMEs and would be able to address this gap to a large extent. It is important not to over-regulate Fintech lending as technology-based digital lending is still evolving and needs to go through several rounds of successes and failures before it matures.

The interesting thing is that the fintech lending space tries to address the finance requirement of SMEs and at the same time it is largely a part of the SME sector itself. Thus, it plays the dual role of generating employment and also simultaneously helping SMEs to grow and provide further employment. While Fintech lenders may be regulated from a funding perspective to ensure that gullible small savers are not caught in any devious schemes, it is important that such fintech are actively encouraged through less interference by the government and its tax and inspection agencies. And most importantly, through a tax regime that is transparent and just.

S. Vishvanathan (Ravi) is CFO & Director, Paymate. Prior to PayMate, Ravi built his own consultancy practice that focused on helping technology and financial services companies. He has also served A F Ferguson & Co, a leading accounting firm, and offered consultancy on corporate, strategic, financial and legal issues to some of the biggest businesses in India. Ravi is a sports buff who loves distance running and playing soccer.