Indian Micro, Small and Medium Enterprises (MSMEs) are facing a number of roadblocks, and one of the most challenging one is difficulty in raising capital both via debt and equity, said Kshitij Singh Yadav, Director, Plutus Business Advisory, in an exclusive interview with SME Times.

Excerpts of the interview…

Please let our readers know about Plutus Business Advisory and its entrepreneurial journey.
Kshitij Singh Yadav: I was working with a global leader in financial consulting when I observed that the majority of the clientele of consulting firms are mid to large size companies. This is not because the SMEs do not require consulting services but it is because of two main reasons- First, they operate as traditional family businesses. Second, the financial constraints make it difficult for them to approach leading consulting services. After identifying this need, we brought together a team which has the competency of the leading consultancy services and can work while keeping in the financial constraints of the SMEs. This team acts as a catalyst for their growth.

What are the products and services you offer?
Kshitij Singh Yadav: After the starting the company, we realized that unlike the big companies, SMEs cannot approach different service providers for different requirements. Thus, we decided to consolidate the services based on the following logic- For any business it is important to understand its target customers, so we provide an industry/market research service. Now, once there is clarity on the market, there is a need to understand the feasibility of the project to cater to the identified customers, so we provide an investment research service. Now, after identifying the project feasibility, there will be a need to execute the project for which funds will be needed. This could be short term or long term and debt based or equity-based- One size fits all approach will not work, thus we provide assistance to businesses in raising funds. Let’s say everything is there in a business- it is making revenue and generating profits, but is it managing its treasure in the best possible manner? Our treasury advisory service can come in handy.

How can SMEs benefit from your services?
Kshitij Singh Yadav: It is often considered that a question may arise- that taking advisory suits big businesses only, not mid to small size businesses. Irrespective of the size, one fact should be always kept in mind that the cost of taking a wrong or no decision is very high and has a long-term impact.

What are the issues faced by the SMEs today?
Kshitij Singh Yadav: According to various reports by the Ministry of Micro, Small and Medium Enterprises (MSME), the SME sector has emerged as one of the most vital parts of the Indian economy- be its contribution to the GDP, or to the exports or for generating employment opportunities. However, they face several roadblocks in realizing their full potential- lack of proper infrastructure, sub skilled workforce, limited access to the latest technology and inadequate government backing. Except for the last one, all other problems stem from weak funding access for SMEs as they face difficulty in raising capital both via debt and equity.

Can you please shed some light on the credit scenario in India as far as SMEs are concerned?
Kshitij Singh Yadav: The poor access to the credit could be attributed to the fact that the banks perceive high credit risk associated with financing SMEs, as they face several internal and external issues including weak management capability, low skilled employees, the concentration of customers and small margins. The banks look for collateral, which many businesses cannot provide either due to their small size or due to the business model. In addition, the bad loan problem with banks (especially the PSBs) has further made it difficult for SMEs to get credit. Of late there has been a rise of several NBFCs including many Fintech companies which have more flexible appraisal processes, however, they charge much higher interest rates in comparison to the banks. Thus, the SMEs are left with two choices- either borrow at a higher cost or grow slowly without external funding.

I would like to further explain why SMEs find it difficult to look at private funds, while the private funds are more inclined to invest in startups. At this stage, it is important to differentiate between startups and SMEs as they have radically different business models and funding arrangements. While startups are pursuing answers to a problem, SMEs already have a proven business model. It is generally observed that many startups are not profitable while SMEs are profitable and intend to secure a financially sustainable spot in a local market for the long run. That means the SMEs should have a higher probability of raising funds. The reason SMEs find it difficult to raise private capital is that the potential upside associated with any private investment in SMEs is lower in comparison to that with startups- When an investor can easily get a return of 10-12% from mutual funds, stocks, why would he invest in a SME for the same return but much higher risk?

Please give some advice to our SMEs on how to handle the above issues.
Kshitij Singh Yadav: Of late, the government has worked upon improving the fund access for SMEs by relaxing the regulations. The most significant being improving access to the public markets. It is often considered that tapping the public money for growth is only for the large companies but with dedicated platforms by BSE and NSE, SMEs can also raise money. The requirements and compliance associated with listing on the SME platforms are much lower in comparison to that on the Main Board of either exchange. This is a funding source the SMEs should definitely look at.

Another exciting avenue for the funds is to tap the foreign capital- The cost of raising capital from an international market is much lower than that in India. Since the cost of raising capital for a foreign investor/lender is lower, the charges are also much lower than what is charged by the Indian banks or the return expected by the private investors in India. While it is true that there are few restrictions and compliance requirement which need to be followed while raising funds from the international market, the low cost and flexibility clearly offset the difficulty. The SMEs must look at it as well.

Please share your future plans with our readers?
Kshitij Singh Yadav: It will be correct to say that the SMEs are the ‘growth engine’ of our economy. We recommend the SMEs to adopt a new approach and look at different avenues for funding to capitalize the numerous available opportunities to fuel their growth, which will not only help your organization to reach its true potential but will also have huge benefits for the overall economy