Trade finance: What's holding back the Indian MSMEs?
Unlocking India’s export potential in the coming years will be key, and the big push will have to come from MSMEs
Micro, Small and Medium Enterprises (MSMEs) play a key role in the industrialisation of the hinterlands as well as in generating employment in these regions. They drive the economy from below by establishing their own enterprises, enabling higher exports, and helping foster innovation. However, these enterprises also face a multitude of hurdles on their path to progress.
They have to procure regulatory and administrative approvals, attract the right customers as well as workforce and gain immediate access to affordable finance. Looking back a few years, most of the incremental credit to MSMEs was coming from NBFCs (Non-Bank Financial Companies). With the collapse of IL&FS making liquidity tighter, there is a resource crunch in NBFCs, which is being passed on to the MSMEs. The rise in compliance costs and a lack of credit inputs leads to a reduction of the enterprise’s working capital. Exim-focused enterprises’ trade suffered with RBI’s ban of Letters of Undertaking (LoU).
When MSMEs are left to plan out and work in their own capacities, they fall into the ‘rinse-repeat’ cycle. To put things into perspective, the process an Indian exporter has to go through before they make their commission is quite tedious. Let’s take a quick look:
- Identify prospective customer
- Agree on quality of goods, quantity, price of goods to be shipped
- Obtain quotation from shipping company or forwarder on cost of transportation, share this with importer
- Receive letter of credit from his customer
- Scrutinising L/C along with their advising bank
- Use L/C to secure pre-shipment financing from their bank
- Manufacturing of the goods
- Negotiating final access to shipping space and agree rates
- Securing certificate of origin
- Securing export license
- Arranging for transportation to Container Freight Station or main port
- Awaiting issuance of Bill of Lading (B/L) by shipping line
- Using the B/L to discount their invoice to customer and obtain cash
- 20-30 percent of submitted documents are found to contain discrepancies, requiring corrections by the exporter and/or their importer
- Receiving payment 10-15 days after first submission of documents
Even visually, without actually going through each of the points listed above, you’ll agree that this is an exhausting and not just an exhaustive list. MSMEs need help in a number of areas in order to become more export-ready:
- Finding prospective buyers
- Ensuring their products meet international quality requirements
- Arranging for pre-and-post shipment financing
- Arranging for their goods to be transported, often from interior locations
- Obtaining Certificates of Origin and Bills of Lading
Only the most determined people therefore end up exporting, as the hassle almost doesn’t seem worth it. While we all look at the monthly export figures and wish for the balance of payments gap to be closed, the process described above is not encouraging, or in VC terms, ‘not scalable’.
To build on their capabilities as well as competencies, they must interact with and by extension, be a part of the international supply chain. However, due to the fact that they are engrossed and detained to back-end procedures, their focus on building up their brand takes the back seat.
Unlocking India’s export potential in the coming years will be key, and the big push will have to come from SMEs and MSMEs. Innovative finance solutions that streamline the workload and help introduce them to new customers in far-flung corners of the world are key, and will hopefully play a large and positive role.
The author is the Commercial Head for Maersk Trade Finance.