How SMEs Can Manage Their Finances Post-COVID in India

How SMEs Can Manage Their Finances Post-COVID in India

Before the Covid crisis hit India, the economic scene was already challenging, and it went from bad to worse after that. The pandemic proved to be a major economic disruptor around the world, not just in India, where several nations, including India, succumbed and entered into a technical recession. During this period, the SME sector faced the biggest financial onslaught due to depleting resources and drying up of orders. Many couldn’t survive while others were gasping for fresh funds and orders.

Though the crisis is over, depleting capital and sluggish economic growth have become a new standard in the post-Covid scenario. The precarious situation has thrown open many challenges for SMEs to innovate and emerge stronger. Let us underline a few ways for the SME sector to help manage their finances in a post-Covid scene.

SME sector can emphasize on different ways to strengthen its balance sheet and work successfully in the markets. Some of the ways are:

Realign and Refinance

For long, RBI is criticized by financial gurus for keeping interest rates higher. In its efforts to rein down on inflation, RBI maintained high-interest rates that severely impacted the economic condition of SMEs. The steep rates impacted the financial health of SMEs who were at the receiving end of competition from cheap imported goods. As the RBI, reduced the rates, the banking sector played spoilsport and refused to pass on the benefit to the SME. This is so because the banks were themselves under tremendous stress due to issues of high NPAs and more.

But the recent directive of RBI has made it mandatory for the banking industry to link interest rates with the external benchmark. Taking benefit of the changed scenario, SMEs should adjust to the ‘new regime’. SME loans must be reflective of the rate cuts initiated by the central bank.

Restructure

The policies pursued by a company should be reflective of the emerging market trends, capital available, and achievable targets. The post-Covid strategies are different and more in a sink with low sales and demand. Under such conditions, it becomes necessary to take immediate measures and cut down on expenses while pursuing sales. Manufacturing shouldn’t be hampered and necessary commodities must be procured. The inventory, however, should be based on the demand and not on the pre-Covid strategy. It is necessary to maintain sufficient funds to meet any unforeseen events. A company can apply for SME loans from financial institutions to build enough cushion for the working capital requirement.

Flexibility in approach

The pandemic has once again underlined the significance of the ‘survival of the fittest’ theory in our world. Whether it is humans or economy, only the one that adapts to the changing scenario survives. It is therefore necessary for the management of a company to be flexible in their approach to the markets.

More funds should be allocated for manufacturing goods that are in demand, while reducing the production of products of the pre-Covid times. It is necessary for the management to make amendments (1)in manufacturing and fund allocation.

Go digital

One silver lining of the painful lockdown period due to pandemic was the extensive usage of the online platform by increasing number of entrepreneurs to boost sales and deliver goods at the doorstep. The trend is likely to increase going ahead with more number of companies opting for digital presence to lure customers.

SMEs should grasp the opportunity and increase their digital footprint to increase sales and retain customers or add new. Digital presence ensures that even with small business, your reach can be global. Digital promotion and sales on the social medium can be empowering for the SME sector that is struggling with depleting sale.

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Benefiting from Chinese exodus

There is a growing chorus among the world community to penalize China for spreading the Covid pandemic. The result could be a large exodus of companies operating in China to other shores. The economic backlash against China may force the companies to look for alternative avenues in back-chain manufacturing. India can be a major beneficiary in attracting the companies and be part of the global manufacturing supply chain.

SME sectors can develop a strategy to gain a major share of small-scale manufacturing that is currently dominated by China. Small scale industries can apply for supply-chain financing backed by MNCs. SME loans for supply-chain financing is offered by financial institutions at attractive interest rates. This will ensure cheap credit and ready market for finished goods for SMEs.

Cash-flow based finance

Banks have now started realizing the need to change the credit flow for the SME sector from asset-based financing to cash-flow based financing. The traditional model of extending loans to large corporates do not work for SMEs and the change in credit flow can be a major game-changer. It will lead to an easy flow of SME loan to the sector that is parched of funds.

Reshape business strategy

It is vital for any business to reshape and realign the business strategy with the changed market scenario. Restricted market conditions should not act as an impediment in generating constant cash flow, a primary requirement for any business. It is sometimes necessary to make difficult decisions like reducing the workforce or cutting down on inventory or other expenses. The difficult market conditions and economic downturn can continue for much longer than expected.

Thus, SME should work relentlessly in reducing the debt burden and increasing revenues. Companies should plan short-term strategy and evaluate after three, six, and nine months. This will be beneficial in sailing through easily during challenging times.

Restructure credit

Funds are the life-line of any business and credit restructuring is a step in the right direction. Government has come to the rescue of SME sector and has allowed restructuring of SME loans till 31st March 2021. The SMEs should take benefit from the government’s initiative and work with lenders. Banks categorize the SMEs into three categories for restructuring of loans as under.

SMA Sub-Categories Basis for classification
SMA-0 Principal/Interest payment not overdue – for more than 30-days but account showing Signs of incipient stress
SMA-1 Principal/Interest payment overdue between – 31-60 days
SMA-2 Principal/Interest payment overdue between – 61-90 days

The economic condition of the SME sector was very precarious during the pandemic. As the country is emerging out of the crisis, the SMEs should evaluate its business plans and restructure themselves to align with the changed market conditions. The new normal emerged in post-Covid is tough but with systematic planning and adequate funding from financial institutions in terms of SME loans can prove beneficial in the long run.

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