The clampdown on economic activities imposed due to the Covid-19 crisis has choked a vast number of businesses especially the micro, small and medium enterprises (MSMEs), possibly to the point of perpetual closure. There are an estimated 63.3 million MSMEs engaged in non-agricultural economic activities, employing 110 million people across the country. They contribute nearly 30% of India’s GDP and about 49% exports. Thus, the prudence with which the MSMEs manage themselves during this crisis with the assistance of the government will go on to play a defining role in their story of survival. The government has come up with some relief measures for the MSMEs but it needs to do a lot more in terms of providing appropriate and timely finance.
These are difficult times and require prudent planning on the part of MSMEs to manage their finances and business. Here are ways in which they can plan to tide over the pandemic:
- Be proactive rather than reactive - Map your business cashflows under different scenarios for FY21 and the next two financial years. For example – If business recommences in Sep’20 at 50% of revenue or in Dec’20 at 80% of revenue, then you must account for what the overall cashflows would look like. MSMEs should conserve cash and reduce leverage wherever possible.
- Negotiate fixed expenses with all vendors to cut costs and reduce opex – Re-evaluate all fixed expenses to find any possible savings. Re-negotiate with all vendors for a waiver/discount /deferment of payments. Vendors today are happy to renegotiate than lose a good customer. Renegotiate office rentals; think of sub-letting your bigger office or moving to a smaller space to augment your cashflows.
- Stakeholder management - Keep in regular touch with all your key stakeholders and try to support them as much as possible. Out of sight is out of mind.
- Reinvent yourself – Explore newer ways to serve your customers once the market recovers. Is there any horizontal or vertical diversification opportunity? Are there any new geographies you can serve, products you can launch or strategic tie-ups possible? The current lockdown is the opportunity to strategise and re-invent like no other.
- Develop teams - Build and encourage your teams and use this time to upskill/reskill your teams and prepare them for the new ways of working in the post-corona world. Pay their salaries on time and check on their physical, social, and emotional well-being regularly.
- Make an informed choice in availing the loan moratorium - Though the RBI has announced a 3-month moratorium on term loans and working capital limits, one needs to make an informed choice before availing it. An important aspect is that the moratorium is only a deferment of EMI/Interest dues and not a waiver, which means interest for the moratorium period will continue to accrue leading to an increase in number of EMIs depending upon the type of loan, interest and the remaining tenure.:
- Do not opt for moratorium if you can arrange the EMI. The higher costs involved in terms of moratorium interest isn’t worth the benefit.
- In case of multiple loans, consider factors like: interest charged, number of pending instalments, nature of loan – fixed vs floating, part payment and foreclosure terms into consideration while deciding which loan should be opted for moratorium. Do not opt for moratorium if the remaining loan tenor is very high as that will lead to additional interest cost over the life of the loan.
- Continue paying your old overdues up to 28th Feb’20 as the moratorium is for EMIs falling due between Mar ’20 to May ’20 only. In case you have some overdues pending till 28th Feb ‘20 and not paid till now then first prioritise those payments to avoid any default reporting in your bureau
- In case your balance sheet has instruments like loans from MFs, NCDs, MLDs, AIF etc. which don’t come under the moratorium relief then prioritise payments for these and take moratorium for other loans if required, while keeping your overall cashflow position in mind.
- If you have any fixed or other deposits with lower returns, then you must evaluate a proper tradeoff comparison of additional cost that you will end up paying if moratorium is opted against interest earned on such deposits. It is advisable to pay EMI of your loans by doing a pre-mature withdrawal of your deposits if the net post tax return on your deposits is less compared to your loan interest rate.
These are difficult times but this too shall pass. Economists are forecasting a quick V-shaped recovery once the pandemic is controlled and lockdown lifted. The pandemic will force organisations to rethink supply chain giving an impetus to ‘Make in India’ which is expected to hugely benefit Indian MSMEs.
Views are personal.
The author is national credit manager for SME Lending at Clix Capital.