Global economy melt down & its continuous Global economy melt down & its continuous impact on Indian SME sectorimpact on Indian SME sector

by Mr. Gopalan, Empanelled Consultant, See Change ConsultingEmail: gvs@seechangeworld.com

•SMEs with top line of 1 and above crores ,which contributes to overall GDP(Gross Domestic Product) to the tune of10 % & Above.

•Being the major source of employment provider for the skilled, semi skilled and unskilled labor population of India, this segment is the most respected segment in India

•The sector is dominated by all ancillary units in all the segment across India, more precisely, manufacturing & Service segment.

• The promoter of this companies are predominantly ,the domain experts and they have very thorough knowledge in their segment of operation.

•SME entrepreneurs are getting developed with their previousemployed experience and well developed contacts.

•They invest a small amount of money as their seed investment and engage only semi skilled labor along with their personal involvement in the initial stages of the business.

•During 2009-10, the total volume of business generated all over India in this segment of companies are ranging between $200 Billion- $250 Billion of business.

•The direct and indirect employment opportunity generated through this industry is approx 20% of overall population of India.

•During 2005-2008, The industry was over optimistic as the global demand was over-shooting.

•Unaware of the risk, the promoter started expanding their capacity without analyzing the fact that, “in case of failure”.

•They started increasing the manpower strength and started competing with big giants in terms of salary. (Normally, this industry is not the highly paid industry and the employees of this segment are more loyal to their promoter)

•Quite apparently, when there was an labor shortage for the Multi-National Companies, they started looking to hire employees from this segment. Hence the small entrepreneur was forced to retain the labor by way of increasing the salary and other perks without foreseeing the negative impact.

•Such potential industry has been taken for the task in the recent melt down that happened. The entire industry was in to dark.

The entrepreneur has been encouraged by the huge order book for his products from their parent companies, thereby started expanding his capacity in terms of business.

The entrepreneur also started increasing their personal expenditure, expecting huge profit from the business, which resulted in to huge monthly outflow of funds for his personal wealth creation in addition to his corporate liability.

Increased facilities for the labor like, lunch, pickup-drop from their houses, tea/coffee/snacks etc, has been a hurdle for the entrepreneur.

•Due to enhanced order book, working capital requirements started mounting.

•Huge raw material requirements made the entrepreneur to turn their eyes towards high cost borrowing from the private lender, with the assumption of increased profitability will support for servicing the high cost borrowing.

•Delay in payment and interest rate hike in India has also increased their interest liability with the bankers by way of excessive out flow of money as interest.

•Shortage of power supply in the last 2-3 years in entire India has resulted in to low productivity with higher labor cost, as labor will sit ideally during the electricity failure.

•The above expectation of the small & medium entrepreneurs has been taken for the task, when the Sudden melt down took place which resulted in the following setbacks -

• The Order books were reduced drastically

• Payment pressure from suppliers due to excess inventories being maintained

• The increased manpower could not be removed from the pay roll, since huge layoff salary to be paid.

• The commitments created for personal & Business started increasing month on month, which forced the entrepreneur to go for high cost hand loan

• Since the payment from the buyer has not come in time, banker started applying pressure for the loan to get adjusted and stopped supporting the entrepreneur for any genuine payments like electricity, salary for the employees etc.

•The promoter started adjusting their monthly commitments by borrowing every month from the private lender at high cost.

. Salary for the employees has not been paid in time, resulted in high employee attrition. Even the experienced employees were not able to be retained, who are all very important for the continuous business operation.

. Promoter started losing his attention in the day-to-day business and his daily routine was to borrow and adjust the liability for that days commitments.

. Bankers started issuing notices for the nonpayment of loans, and went to the level of classifying the asset class as NPA(non Performing asset), created the fear in the mind of promoter about their losing their property by way of SARFAESI Act.

. The rent for the building, where they are operating has not been made properly, resulted in to land lord asking lot of entrepreneurs to vacate their premises.

•It was a learning experience for the entrepreneurs. Though they were very strong in their domain, they don’t have the knowledge in to other segments like financial management, labor management, etc,.

•Being a very strong domain expert, they never thought of acquiring the knowledge in other areas. They felt that, they can manage their show without bothering about all other parameters.

•They might have been comfortable in the past, but during their crisis, they don’t know how to act cleverly, since they never had any professional team in place for the crisis management or they never came across this kind of situation in their past.

•(The only difference between the bigger companies and this SMEs is, bigger companies had very solid professional team in place, where they could able to take corrective decisions at the right time, thereby to sustain the business model in the moderate manner, without disturbing the company running, also, the reputation of the organization has been kept in to control in the public eyes),

•Quite Importantly, the bankers started supporting bigger companies, since the professional team could able to convince the banker in much better passion, with their expertise in to crisis handling, which they have been doing in the past.

Now,

What to do for the Recovery?

to be continued…