Home >Industry >Manufacturing >India’s small firms are staring into the abyss
The interconnected nature of demand dictates that lower demand in one sector would affect related businesses as well. For instance, low demand in real estate not only affects cement and steel makers but makers of taps and electrical equipment too. (Photo: Mint)
The interconnected nature of demand dictates that lower demand in one sector would affect related businesses as well. For instance, low demand in real estate not only affects cement and steel makers but makers of taps and electrical equipment too. (Photo: Mint)

India’s small firms are staring into the abyss

  • A ground report reveals that many MSMEs are fighting a grim battle for survival. What can save the day?
  • If small companies start winding up, it could exacerbate the supply-side issues of corporate India up the value chain. It could also have a big impact on the economy and employment

NEW DELHI : Sitting in rows, 30 men grind and polish the zinc housings for a hands-free toilet flushing system, making the first floor of this factory rather dusty. The housings are then transferred to another section to be dipped in copper, nickel and chrome solutions, a process known as electroplating. These rough-looking casings are transformed into glossy products over time—what is known as a “mirror finish" in the metals industry.

DST Tech Pvt Ltd’s factory in Haryana’s Bahadurgarh is making these components for Sloan, an American manufacturer of commercial plumbing systems. Export orders have saved the day at a time when domestic demand for other architectural hardware such as tap handles have gone down the drain. The half-an-acre factory electroplated 200,000 tap handles pre-covid; demand has now revived to 30% of those levels. One of the plating lines was idle. “The situation is grim. People are not buying. I do not know how I can come out of it," Sandeep Tandon, owner of DST Tech, said. “We sent 40% of our people on leave without pay. When the demand is this low, you cannot keep 100% employment," he added. Worse, his larger customers are delaying payments, leading to a working capital crunch. Payment cycles have doubled from 45 days before the pandemic hit.

DST Tech is a small company with revenues of 15 crore a year. Working capital loans are never easy for such companies, more so in a post-pandemic world when private financial institutions have tightened the loan tap. With revenues taking a severe beating, a cash crunch and low availability of labour, matters are getting serious for India’s small firms.

A fear of closing down is palpable. India has over 60 million micro, small and medium enterprises (MSMEs) and some estimates suggest that between 10-15% of them could wind up during the year. Crisil Ltd, an analytics company, in a recent report titled The Epicentre Of An Existential Crisis painted a gloomy picture. The MSME sector’s revenue growth is seen plunging 17-21% in 2020-21. Operating margins, consequently, will shrink.

“A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front," the firm noted. Construction and real estate, gems and jewellery, textiles, and ceramics are among the sectors that are the worst hit.

If small companies start winding up, it could exacerbate the supply-side issues of corporate India up the value chain. The small are suppliers to original equipment manufacturers. Shut downs could also have a big impact on the economy and employment. The MSME sector employs over 110 million people and makes up for nearly 30% of India’s gross domestic product (GDP); the share of MSME products in India’s overall exports is estimated at nearly 50%.

Vikas Srivastava, a professor at IIM Lucknow, who specializes in large-scale lending, said that recent government schemes are an attempt to strengthen small companies. “For example, the recent change in the definition based on turnover (definition of a medium company has been revised upwards from 5 crore turnover to 250 crore, for instance) would help banks give working capital loans—if I have to sanction working capital loans as a banker, I would see turnover-based ratios," he said.

Yet, questions remain. “If the current situation continues for a year, it would be tough. If there is no demand, how would one survive? Hopefully, the current schemes would help them see through the difficult two-three months," he added.

Anaemic loans

Jagmohan Singh Bhurji, owner of Rishab Industries, a manufacturer of low-voltage transformers in Pune, is lucky. The company had no sales for nearly three months, leading to a funds-flow nightmare. Then came a loan from a public sector bank.

The finance ministry, in May, announced an Emergency Credit Line Guarantee Scheme (ECLGS) to shore up MSMEs where credit up to 20% of the borrower’s total outstanding credit (up to 25 crore) could be availed. “Bank of Baroda gave us the loan under the scheme. I have got around 70 lakh sanctioned. It would go towards taking care of the funds flow," Bhurji said.

The Indian Express recently reported that banks had sanctioned 43% of the targeted 3 trillion under ECLGS as on 23 July. Nevertheless, for a vast majority of the small, access to formal debt channels remains out of reach. International Finance Corporation, in a 2018 study, stated that of the overall MSME debt demand of $1.1 trillion, 84% is financed from informal sources.

New loans from private financial institutions are proving to be particularly tough. Chandrakant Salunkhe, chairman and managing director of Mumbai-based Macro Group of Companies, which manufactures packaging machines, pointed out that banks are taking too much time in deciding. There is little standardization between banks in terms of new loan application formats. Approaching a second bank after being rejected by the first is time consuming—a small company can barely afford that in stressed times.

Data from Crediwatch, a company that provides risk scores to banks and non-banking financial companies (NBFCs), is revealing. The firm analysed 961 MSMEs and 347 large companies. Between April and 19 July 2020, only three micro companies or those up to 5 crore in revenues, managed a new secured loan. Only 25 companies got a new loan in the small company category or those with revenues in the range of 5 crore-50 crore. In the 50-250 crore category, 48 companies secured a loan.

Bottomline: the larger firms are better off. Of the 347 analysed, 63 entities bagged a loan.

The fact is that private financial institutions are worried about non-performing assets (NPAs) and have adopted a wait-and-watch policy. “Today, I have to pick and choose who I lend to and the product I lend to. Post-covid, we are not sure of the cash flow of the businesses. We will wait out July and probably start lending to MSMEs from August," Y.S. Chakravarti, MD and CEO of Shriram City Union Finance Ltd, an NBFC, said. In the June quarter, the company did close to 1,300 crore in loans of which only 20 crore went to MSMEs.

The waiting game

The glitter has vanished from Jagdish Jain’s workshop. The Surat-based jeweller has ready-made diamond and gold jewellery lying unsold. “The business is nearly dead," he said. “There are no marriages. Domestic businessmen who bought my jewellery have stopped buying because their businesses are down. It has been this way for five months."

Retail demand for gold, meanwhile, is under pressure because of rising prices. Spot prices of gold in Ahmedabad on 25 March 2020 were at 40,989 per 10 gram, according to data from Multi Commodity Exchange of India Ltd (MCX), a commodity derivatives exchange. As of 24 July, prices shot up to nearly 51,000.

Jain let his workers go. “I had 15 workers who all came from Bengal. They were sitting idle. I let half of the workers go retaining eight—just in case a new order comes up," Jain said, sounding hopeful.

Jewellery is a non-essential purchase. The demand for such products have fallen as consumers tighten purses or hold on to buying decisions. Jain’s customers either run garment businesses or are into real estate. The impact on Jain, a small businessman, points to the interconnected nature of demand.

Lower demand in real estate not only affects cement and steel makers but the business of taps and electrical equipment as well. By extension, people associated with any of these businesses would not make discretionary purchases, like Jain realized.

Vivek Dammani is director of Vibrant Group in Indore, a developer of residential and commercial real estate. He said people are putting off buying decisions hoping residential prices would fall. “People think real estate prices in Indore would slump 20%. We can’t cut prices 20%. Our margins are thin and there is not much over unsold inventory in Indore," he said.

The waiting game holds up recovery. According to real estate analytics platform PropTiger Data Labs, housing sales and launches declined 79% and 81%, respectively, in the June quarter compared to the year-ago period.

The poor demand scenario is made worse by the difficulty of doing business. Project clearances take a long time. More so right now because offices are either closed or the officers are on covid duty. In Indore, Dammani said project clearances can take up to a year. These are tough on small developers since they may have to bear the interest cost for months before starting work.

Real estate apart, there are regulatory nightmares everywhere. Rishi Agrawal, CEO at Avantis Regtech Pvt. Ltd, a regulatory technology solutions company, said that a small manufacturer in Maharashtra with one plant, one office and employing 125 people would have to deal with 364 compliances in a year across labour acts, taxation, secretarial, environment, health and safety-related stuff— nearly one compliance a day! There is a cost of managing this complexity. Companies often engage consultants. For a small company like the one mentioned above, costs add up to 12 lakh a year.

Small firms’ woes

Two weeks ago, Pradumn Dalmia, whose family owns a corrugated box manufacturing business in Kolkata called SR Associates, wrote to a customer with a slogan “Each one kheench one". Everyone got to help each other “pull up" their business, he meant.

SR Associates provides packaging material to auto manufacturers, fast-moving consumer goods (FMCG) companies and jute makers among others. Not all of them are paying on time—a common grumble among MSME companies. SR Associates has a range of customers some of whom took 90 days to pay even in normal times.

“I am still awaiting payments from a customer for a sale made in January," Dalmia said. “Those who paid me in 15 days are paying in 2.5 months now." “Each one kheench one" was a request to make payments as early as possible.

Why are vendor payments being delayed? It is likely large corporates want to sit on cash at the moment. A few companies such as SR Associates are seeing demand for their products. However, the firm is pegged back by supply-side issues. Part of the company’s skilled manpower is back to their villages and the firm is struggling with higher raw material expenses.

Kraft paper manufacturers in India recycle waste paper imported from China (corrugated boxes are made from kraft paper). There is a scarcity of waste paper from China post the pandemic, resulting in a 8-10% rise in the cost of paper. Small manufacturers can’t pass on these costs to customers because the big almost always dictate terms.

“We are treating it as the cost for doing long-term business. Today, if I don’t supply material, someone else will do it. Instead of losing the client, let me make less profit," Dalmia said.

This brings us to the question—what is the way out for small companies stuck in the quagmire of both demand and supply-side headwinds? There is no one answer. Increased government spending on infrastructure is one way to create demand. Second, GST rates may need a relook. The PHD Chamber of Commerce and Industry is asking for a reduction of rates across all the slabs and the merging of the 18% with the 12% slab. That would reduce the cost of doing business. Some are pegging their hopes on Atmanirbhar Bharat.

In sanitary ware, the tap handles are made of zinc. Branded sanitary ware assemblers imported almost all zinc die cast products from China. Sandeep Tandon of DST Tech estimated the imports at three million tap handles every month. “India has a quality issue which needs to be fixed. Branded companies also had their Chinese supply-chains tied up and were reluctant to shift. Now, because of the anti-Chinese sentiment and problems with customs, we are getting better enquiries," he said.

Small firms like this desperately need to turn these enquiries into orders.

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