PRATEEK SRIVASTAVA has created a record of sorts by taking India’s first drone company public. However, 58-year-old Rajiv Chawla is mystified by the record subscription bids for Pune-based greenhorn DroneAcharya Aerial Innovations, whose ₹34 crore issue was oversubscribed a record 243 times, with the retail book being oversubscribed 331 times. The three-year-old Pune-based company’s annual revenue stood at ₹3 crore on a similar-sized asset base with ₹72 lakh in profit. Following a sensational public market debut, the company is now valued at ₹384 crore (February 6), with its stock trading at ₹161, nearly three times the offer price of ₹54. “Investors are more enamoured about the potential of drones rather than the fundamentals of the business,” says Chawla, who runs a ₹100 crore auto component business under the JaiRaj Group.

For someone who ventured out at the age of 21 with a ₹10,000 credit limit from Syndicate Bank, the ease with which new-age companies are raising money prompted Chawla to follow suit. “I recently received an order from an EV maker to supply plastic dashboards. The irony is that despite being a Tier-II supplier with an impeccable track record, I have been asked by my banker to create fresh collateral of ₹15 crore for a capex loan of ₹10 crore. I have not created that many assets that I can pledge with my banker,” rues Chawla.

The only viable alternative left for him is to go public. Even as Chawla is preparing the ground for a listing in 2024, as the founder of IamSMEofIndia Association he has nudged more than a dozen small and micro units to go public. “We held an orientation workshop for our members on the pros and cons of listing. There is a growing acceptance among MSMEs that parting with a fraction of their ownership is a better option for raising growth capital rather than debt,” explains Chawla.

That’s true. For instance, of the recent big offerings on the SME platform, Annapurna Swadhist raised money for a second greenfield plant near Kolkata to manufacture 10 MT per day of rusk and 5 MT per day of cakes, besides a 100 MT flour mill as a backward integration initiative. The capex outlay of ₹17 crore was funded through ₹30 crore IPO. Similarly, DroneAcharya raised money to purchase drones.

In fact, periods of buoyant interest rate have coincided with a higher capital raise on the SME platform. Between 2017 and 2018, when the benchmark prime lending rate was in the range 13.80-14%, the SME IPO market was bustling with activity as a record ₹3,372 crore in fresh capital was raised by 274 companies. However, during the pandemic-hit 2020 and 2021 (See: The safety net?), a concoction of rate cuts, special packages and moratoriums saw only a cumulative ₹794 crore raised as fresh capital by 86 companies even as the BPLR fell to 12.05-12.30%. But with the RBI on a rate hike spree since May 2022, the benchmark rate is back to 14.15% and is expected to firm up higher. Not surprising, the SME market was on the boil last year with 109 companies raising ₹1,703 crore in fresh capital.

The public market rendezvous comes despite credit to micro and small enterprises surging 3x to ₹79,300 crore in the eight months of FY23. State Bank of India, the country’s largest public sector bank, has an SME portfolio of over ₹3.17 lakh crore. Chairman Dinesh Khara told analysts post Q1 FY23 results that, “This year in the first quarter, perhaps, after many, many years we have seen the SME segment witnessing growth.” However, the bank is taking it easy about aggressively courting MSMEs as it is battling with ₹6,984 crore in restructured SME loans. “We are very mindful of the risks inherent and are ensuring that we underwrite the best of SMEs,” said Khara.

The caution is systemic.

Of the ₹1.07 lakh crore restructured accounts (as of September 2022), MSME loans stood at 5.21%. That they are still facing headwinds can be gauged from the fact that of the ₹2.82 lakh crore disbursed to 1.04 crore MSME accounts under the Emergency Credit Line Guarantee Scheme, one-sixth (around 17.72 lakh accounts) are non-performing. The scheme was launched in 2020 as part of Aatmanirbhar Bharat Abhiyaan to support small enterprises and other businesses transition amid the pandemic.

One of the reasons for the ongoing stress is also rising receivables.

According to Ajay Sahai, director-general, Federation of Indian Export Organisation, with payments getting delayed, liquidity has become the biggest pain point for enterprises. “Unfortunately, if you want fresh credit, banks are demanding more collateral. After Covid, in some cases, existing collateral value has deteriorated. So, it’s a Catch 22 situation where if a small enterprise owner approaches a bank for fresh credit, he is not only being asked to bridge the shortfall in the value of the existing collateral but also to furnish fresh collateral,” says Sahai. Instances where collateral value has come down, involve shares of listed companies pledged by borrowers. “The volatility in the markets has impacted valuations, making it all the more difficult for borrowers,” says Sahai.

It’s not just the private sector, even the government is finding it tough to clear its dues. While the exchequer has been pooling purchases from MSMEs through the Government e-Marketplace, in FY22, 31,192 complaints involving ₹7,128 crore were registered by enterprises against central public sector units and departments. Of the delayed amount, only 1,056 applications involving dues worth ₹71 crore was disposed through facilitation councils. In fact, Section 16 of the MSME Development Act, 2006, makes it binding on the buyer to pay compound interest to a supplier on the amount at three times the bank rate if the payment is not made within 45 days.

The delay in receivables has translated into higher traffic on the invoice discounting platform. The number of invoices uploaded and financed through the Trade Receivables Discounting System (TReDS) has more than doubled in FY22 to 17.33 lakh (worth ₹44,111.80 crore) against 8.61 lakh (involving ₹19,669.84 crore) in FY21. It’s quite likely that the current year could see a new record on the TReDS.

Whether it’s a good sign or bad depends on the parties sitting on either side of the table. While the interest cost could vary from 9-14%, based on the financier, not all are keen to go through the discounting platform. Many Tier-1 firms run their own reverse factoring programmes for suppliers. “Since the MSME Act mandates 45 days and the usual credit period is for 60 days, my client is willing to pay within 45 days for a slight discount. I prefer using this mechanism rather than bill discounting,” says Chawla.

However, despite challenges, the advent of GST and better compliance of the GST Act is making life better for MSMEs. Though demonetisation and the pandemic led to the closure of several smaller enterprises, the MSME universe has only been growing. As per the MSME ministry, in FY01, there were around 1.01 crore MSMEs, whose count nearly trebled to 2.98 crore in FY10, and has since doubled to 6.33 crore as of March 2022.

Image : Photograph by Sanjay Rawat

The access to digital data including bureau scores is being leveraged by lenders for cash-flow based financing. Bankers, who often rely on financial statements alone, know that when it comes to MSMEs it is perhaps not the best way to assess risk and there is the need to look at different metrics. For instance, Jocata, a subsidiary of Billdesk, is helping banks parse and decipher the quality of their MSME customers through proprietary artificial intelligence and machine learning-based risk and business intelligence scores. The company has beta tested its model on GSTN filings of over 20,000 MSMEs with two of the top Indian private lenders and one of the largest development banks in the country. “With the advent of GST in 2017, for the first time, we can peer into the sales ledger of MSMEs, which otherwise would have probably taken five to 10 people over three to four months to decipher. Now with the click of a button and an OTP-based consent from the unit owner, we can parse the sales ledger within seconds,” says Prashant Muddu, MD and CEO, Jocata.

More importantly, by harnessing the system of nomenclature which denotes the kind of goods being manufactured and sold, Jocata can assess micro-sector level trends as well. “Whether the MSME is into steel (re-rollers) or mobile phones, we can run a sector scan and tell which businesses are doing well, thus helping a banker to be more proactive about lending to enterprises from that sector,” says Muddu.

Even as fintech firms are helping lenders analyse and disperse credit on time, onboarding banks takes time. “It took three years to get our first client to sign up and back test the data with over 5,000 plus clients,” reveals Muddu. Though MSMEs are referred to as the backbone of the economy, banks are not dying to romance the segment as there is enough appetite for retail and corporate credit. As a result, they are often at the mercy of bankers. For instance, the Federation of Indian Micro and Small & Medium Enterprises (FISME), which represents the interest of over 2 million MSMEs through different associations, has around 100 cases — involving ₹500-1,000 crore worth of working capital/credit limits — wherein enterprises have complained of banks charging stiff penalty or prepayment charges. “Charging 2-4% prepayment penalty for a small enterprise on the credit limit is a huge burden. It is unwarranted as the working capital limit is usually for a year and after that it ceases to exist unless the facility is renewed. So, if an enterprise informs a bank about his decision to not continue the facility there is no question of paying any charges,” says Anil Bhardwaj, secretary-general, FISME. While some banks have agreed to the federation’s demands, the bigger private banks are still ambivalent.

With prices of commodities, especially crude, cooling off, there are expectations that 2023 will be a good year for most MSMEs.

Further, Budget 2023 has announced the introduction of an amendment that will ensure buyers can claim income tax deduction only on actual payments made to a MSME supplier. The government will insert a new Clause (H) in Section 43B of the Income Tax Act to mandate that any sum payable by an assessee to MSME beyond the time limit of 45 days shall be allowed as a deduction only on actual payment. The amendment will take effect from April 1, 2024.

Another boost for small enterprises has come from the Credit Guarantee Scheme, whose term has been further extended with an additional infusion of ₹9,000 crore. Finance minister Nirmala Sitharaman has said the infusion will enable collateral-free credit of ₹2 lakh crore to MSMEs. “At a time when interest rates are rising, the infusion will help MSMEs get funds either as working capital or capex without having to offer fresh security. All loans under the scheme will also be cheaper by 1%,” says Chawla.

However, well-run enterprises who don’t want bankers breathing down their neck, the path to public markets is wide open.

Shankar Sharma, co-founder and vice chairman of First Global, who had backed the founders of Annapurna Swadist and DroneAcharya, believes equity is the way to go. “Bank credit is not going to be replaced but it will come down the food chain as more and more SMEs raise equity from the market. With a better net worth, in fact, these enterprises would fetch a better deal from banks,” says Sharma. While sceptics point to the poor quality of SME entrepreneurs courting the IPO market, Sharma is hopeful. “The mainboard was manipulated in the ’90s, but over decades good-quality companies have got listed. The SME platform, which is less than a decade old, will see a similar evolution,” signs off Sharma.

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