In this article, I would like to take the opportunity to share my observations about the challenges in MSME funding during my recent field visits to the state of Jharkhand and Odisha. About a couple of months ago, I wrote an article about the challenges in MSME funding – Challenges in MSME Funding: The Ideal Roadmap.
This article regarding my field visits corroborates the challenges I have been talking about. Jharkhand and Odisha are one of the main belts for mines and iron & steel plants.
During my three day visit across these two states, I visited and interacted with small scale mine owner / operators; manufacturers of sponge iron, ingots, billets and TMT bars; and traders of iron ore, manganese ore and coal – to have a more affirmative view across the length and breadth of the small scale steel industry value chain.
During my interaction, it came out that some of these steel plant operators became unviable in the past due to downturn in the steel cycle (because of which they could not fetch a good price) and the lack of funds to finance their working capital. These, together, broke the backbone of their operations rendering the plant unviable. As a result, some of the plants were in an inactive state for more than year-and-a-half for want of funds…
…but the beautiful part of this story is that now things have started to turn around with the downturn in steel cycle at an inflection point of bottoming out and potentially bringing in a decade of a very strong upturn in steel cycle. These plants are all poised to capitalize on this opportunity and deliver rapid growth in sales and profits. The small scale sector in this industry is even witnessing a complete change in management – young & dynamic – who are willing to take the risks and have begin to pump in Equities to make the plant fully operational in time to reap the maximum benefits from the much-awaited upturn in the steel cycle. The ecosystem, now, is very nicely knitted with the raw material suppliers within a 50 km radius and the finished goods market (by type of products) within and up to a 200 km radius. Today they have a realistic turnaround plan – a bootstrapping business model, sourcing strategies revolving around a strong relationship network that will give them the bargaining power to optimize the input cost and utility cost, and marketing strategies to secure the offtake in advance…
…but what’s bothering the plants is the brutal reality that despite having a turnaround plan in place and being certain of the huge profits and cash flows, the plants are struggling to access funds even after the promoters have infused a considerable Equity. This funding gap is coming as a showstopper, and unless it’s bridged, it will be difficult for these small scale plants to reap the benefits from an upturn in steel cycle.
The share of credit to the MSME sector has shrunk in the last three years from 5.9% to 4.5%, and adding to their woes is the over-cautious approach from banks and other financial institutions who are under huge pressure to contain NPAs. While this certainly does open the opportunity for helping such companies tap the right mix of funds, the challenge for that still remains eminent because of them being unviable in the past.
MSMEs account for about 37% of India’s GDP, 45% of the manufactured output, 42% of exports, and has generated employment opportunities to more than 110 million people spanning over 50 million enterprises. Despite this, it remains to be the most neglected category when it comes to seeking investment opportunity. The backbone of any economy – even the developed economies – depends on how rightfully the MSME sector has been nurtured, because that, in turn, brings in the positive ripple effect that ultimately drives all the key catalysts responsible for economic growth. While the banks, as mentioned above, are wary of their loan portfolio in their pursuit of containing their NPAs; I would, after a lot of deliberations, like to attribute the lack of funding to two primary fundamental inhibitors.
- Increasing shift in preference of investors from basic industries to new-age industries that are asset-light, and thus have a faster payback and ROI; and
- Lack of awareness of the MSME promoters on who and how to pitch at the opportune moment for seeking investment
In a Nutshell…
What I think that the MSMEs, today, are in need of an Alternative Investment Platform that is beyond the traditional routes i.e., an investors’ spectrum that is willing to look through and correlate the turnaround vision of these MSMEs with that of the probable cash flows to be generated and who are willing to stick with them for a little longer period than the usual 5-year exit window, which is in the case of most PEs. Today, with the steel cycle poised for a recovery that is likely to stay strong for the next decade, each of these MSMEs in this sector have the capability to transform themselves into a mega integrated steel player, which will be a huge boost to the economy.