The Ants Underfoot

Small Firm Inc…

• Employ as much as 90% of India’s workforce in 29 mn units
• Make 6,000 products, from generators to garments, create a million jobs a year

Face Big Problems

• Get a fraction, maybe 10%, of overall bank loans
• Late payments by clients, climbing interest rates impact small business harshly
• Chinese imports have hit small players the hardest
• Despite schemes, tough finding one-size-fits-all formula for fragmented sector

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But this case is an exception, a feel-good story from within an army of small, fledgling entrepreneurs. Small companies are India’s biggest employers: 90 per cent of the workforce gets its paycheck from them. They make up nearly 18 per cent of the economy, and will hit 22 per cent soon. They are also a major contributor to exports (40 per cent). Still, the fragmented small industry struggles to shake off its mantle of insignificance.

In Ludhiana, an apparel hub, delayed payments by clients and slow-moving government finances nearly put paid to the plans of 105 small apparel makers, says Sanjeev Gupta of the city-based Apparel Exporters Association. The local textile industry tried to organise into an 85-acre apparel ‘park’ in 2004, but the government’s Rs 17 crore grant trickled in so slowly that local businessmen started funding the project themselves, later seeking reimbursement—which trickles in again, slowly.

“Many units we thought would want to be part of the project have given up due to the delays,” rues Gupta. Not just governments, most clients of small businesses (including big brands) delay payments, sometimes by months. Most often, the lag in payment after receiving goods or services is expected and built into contracts. The terms normally require smaller companies to wait for anything from 15-180 days. But payments can, and do, take longer, leaving the smallest firms squeezed for cash or, in extreme cases, unable to start fresh manufacturing. That, says Gupta, is Ludhiana’s small-business story: “Small players are being squeezed out by cash constraints, exacerbated by their numerous other woes: inflation, over-dependence on a few clients, lack of working capital loans and an inability to develop well-known small-industry brands.”

Of course, there are many schemes to support small businesses but that hasn’t mitigated the harsh reality. In fact, there’s even one for the payment delay situation. In 2006, a law (the SME Development Act) was passed to ensure payment by large companies to small enterprises within 45 days, else the matter could be taken to specialised state-level centres who would then resolve matters within 90 days. “Few companies know that there is such an Act...there needs to be more awareness,” says CRISIL’s head of sme ratings, Yogesh Dixit.

Being paid late is not a new thing—in fact, it’s the norm. Yet, a CRISIL study of 20,000 small businesses over the past few years shows that timely payments can make all the difference, improving net profit by 15 per cent (on average). “That’s why,” says Dixit, “smaller players must pursue clients for payments vigorously, and somehow build the cost of late payment into business plans.”

Anil Bhardwaj, secretary general, FISME, a lobby group of small and medium enterprises, says delayed payments aside, India’s small entrepreneurs face a credibility crisis of sorts with banks and financial institutions. A business of modest means will find banks rarely interested in giving loans, either as start-up capital or as working capital to run day-to-day operations. “But once you touch the Rs 5-crore mark, they assume your robustness is established, and start extending loans. It’s like they want to sponsor companies who have been appraised at someone else’s cost,” Bhardwaj says. In India, that someone else is usually the owner’s family or a high-interest loan from an unregistered source.

For companies turning over less than Rs 1 crore, there’s always government credit. But according to Bhardwaj, this only makes the situation worse, as a bulk of India’s small business is in the Rs 1-5 crore turnover range. “A first-time loan is very hard within this range, and that’s where a majority of companies are clustered,” he says.

Small businesses in India have gathered around a limited number of large industries—for instance, a third are linked to the housing industry. A fifth have rallied around the auto boom, and another large group supplies to the electronics sector. This exposes smaller players to every risk that befalls the larger industry, and turns many unattractive to institutional credit. Some of this plays out in the numbers. In 2008-09, as per RBI figures, only around 11 per cent of net bank credit went to small businesses, which was actually lower by 1 per cent since 2001-02. Chinese imports have, in turn, attacked traditional products of the really small enterprises, the toy, rakhi, decorative light and silk garment-makers.

Hemant Kanoria, CMD, Srei Infrastructure Finance, which has worked with smaller businesses, says there are delays and other issues with funding in India but it’s not to the extent that he has witnessed closure. “It depends on your line of work. We work with infrastructure companies and government bodies—payments are beyond question, even if there are delays,” he says.

It’s a scenario many would love to be in, but only a handful (though growing in number) are. Like T. Gautam of Inar Profiles in Vizag, a Rs 30-crore company that started manufacturing for the power sector in 2006. When payments are delayed, they look at other funding options, including bill discounting schemes or factoring—where the client sells an invoice to a third party, which pays the small company a portion of its dues, at a set interest rate.

But FISME’s Bhardwaj feels both options are often too costly for the really small players. Schemes, committees and ‘provisions’ have multiplied, but factors like financing, credit-worthiness—that lead to new brands and markets—still remain elusive. In the end, small business is Darwinian in nature. It appears the sector has been left to professionalise at its own peril.