THE SME IMPERATIVE : What would it take to help SMEs get back on their feet

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 THE SME IMPERATIVE : What would it take to help SMEs get back on their feet

The very importance of SMEs for a country like Nepal lies in their significant contribution to the country’s GDP and employment generation. So, helping SMEs survive the current crisis also means safeguarding the country’s economic future.

BY TAMISH GIRI

Over the past nine months, exports of handicrafts have dipped dramatically as the international demand for merchandise goods has been decimated due to the Covid-19 crisis. The Federation of Handicraft Associations of Nepal (FHAN) reports a 70-80 percent fall in exports and an over 80 percent decline in domestic sales of such goods as a result of the absence of tourists in the country. According to FHAN, the fallout of the Covid-19 pandemic has resulted in the closure of handicraft industries in large numbers, many of which have shut down permanently across the country.

Similarly, people who have businesses in Kathmandu’s New Road, the main commercial hub of the capital , say that never in their history have they faced any slowdown like this with dismal sales even during the year's main festive season. According to the National Trade Association, an association of business owners who have businesses in New Road and adjacent areas, the past nine months have been horrifying for most businesses, except for those trading in essential goods and items like smartphones, ultimately leading to disruptions in cash flow and closure of hundreds of businesses.

Bearing the Brunt
The enormous difficulties encountered by handicraft producers, whose exports constitute a big portion of Nepal’s foreign currency earnings, and New Road-based traders serve as an example of how small and medium enterprises (SMEs) in Nepal are facing the economic headwinds created by the global health emergency.

The Covid-19 crisis has wreaked havoc on businesses from all sectors but it is SMEs that have borne the brunt the most. From handicraft, cottage industries, restaurants to businesses in retail, travel and agriculture, SMEs have been affected enormously. According to Siddhant Raj Pandey, chairman and CEO of Business Oxygen (BO2), Nepal’s first SME sector-focused private equity (PE) fund, the pandemic has had a major impact on SMEs and the entire value chain. “Never had the international and local economies faced all three shocks all at once; supply side shock, demand side shock and then the financial shock,” he says.

For SMEs in the industrial sector, the impact is more pronounced with the sharp fall in outputs due to the lack of imported raw materials, supply disruptions, lack of labour mobility and traffic restrictions. The economic slowdown caused by the four-month long lockdown, and later the prohibitory orders, imposed by the government to curb the spread of coronavirus have had a direct impact on jobs and earnings of a large segment of society and has contributed to the reduction of consumer demand for goods and services leading SMEs to operate below their production capacity.

“This will lead to an increase in industrial waste, thereby reducing operational efficiency and sustainable industrial operations. Additionally, the pandemic has put heavy pressure on the availability of human resource,” shares Umesh Prasad Singh, officiating president of the Federation of Nepali Cottage and Small Industries (FNCSI). According to him, the decline in revenue of micro, small and cottage industries (MCSIs) has been attributed to the direct impact of the lockdown and restrictions on jobs and earnings of a large segment of society which has reduced consumer demand for goods and services.

The situation in the retail sector also paints a bleak picture at the moment despite the lifting of Covid related restrictions by the government about three months ago. “It is not possible to assess our current state of trade and commerce as Nepal-bound containers are stranded at border checkpoints in China and currently there is a huge scarcity of number of goods ranging from imported readymade garments to electronic items to trade in the market. We are also not able to import enough goods from countries such as India, Bangladesh and Thailand at the moment,” says Baikuntha Dahal, president of the National Trade Association. He warns that it may take about two years for retail businesses to fully return to normalcy if this situation continues.  

A Cash Strapped Situation
Business owners and other stakeholders of the SME sector report that the pandemic has directly hit the cash flow of such businesses as market activities remained subdued for a long time as a result of the restrictions imposed by the government. Currently, the lack of working capital has hit the pandemic-affected SMEs the hardest, they say. According to Pandey, there are thousands of SMEs that never took loans to operate and such businesses are out of the banking radar. “This missing middle is enormously impacted by the pandemic,” he observes.  According to Pandey, SMEs in Nepal use traditional management practices and do not have proper processes and financial frameworks to withstand situations such as a pandemic. “If lack of finance is not an issue then they suffer from lack of supply of raw materials and parts from the supply chain that eventually affect their businesses,” he adds.  

Bankers are also closely watching the situation. According to Niraj Kumar Basnet, head of SME and MF Division at Nabil Bank, the Covid-19 pandemic has impacted SMEs in Nepal both on the supply and demand side. According to him, on the supply side, SMEs are coping with the reduction in the supply of labour and drop in capacity utilisation with shortage of raw materials. “On the demand side, a sudden loss of demand and revenue for SMEs affects their ability to function and is causing severe liquidity shortages,” he says.

Basnet says that the other problems faced by SMEs at present include lack of knowledge in digital transformation, lack of financial skills and absence of a regulatory framework, unfair market practices and most importantly the gap in understanding the banking needs supported by proper documentation.

A survey report published by the International Finance Corporation (IFC), the private sector arm of the World Bank, in late September warned that over 50 percent of Nepal’s micro, small and medium enterprises (MSMEs) face the risk of permanent closure within a month under the current conditions with over 80 percent of businesses suffering from a slump in sales. In the report titled “Covid-19 Nepal Business Pulse Survey,” IFC said that the businesses have resorted to measures such as granting leave without pay and reducing work hours and wages of their employees to offset the losses incurred in their business. “The Covid-19 pandemic has dealt a major blow to Nepal’s economy, with enterprises of all sizes bearing the brunt with little to no revenue. 83 percent of the firms reported a decline in sales compared to the same time last year,” reads the report.

According to IFC, MSMEs contribute 22 percent to Nepal's GDP employing about 1.75 million people. The exact number of SMEs is difficult to know as only 300,000 are registered with the government authorities. An estimate of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) puts the total number of SMEs at three million.

Lackluster Government Response
Governments in developed countries and emerging nations have injected enormous amounts of liquidity to help the pandemic-stricken SMEs avail cheap credit or even free money to run their business. However, this may not be possible for a country like Nepal where resources are limited. However, experts and entrepreneurs suggest that this does not prevent the government from being proactive. “The government support at this stage is moot. Nothing of substance has come forth and when it is announced it is either too little or very complicated to avail through the banking channel," says Pandey, adding, “If the government was serious then working capital to the businesses should be available, and not only to the existing borrowers.” According to him, thousands of SMEs never took out a loan in order to operate and they are out of the banking radar. “This missing middle is enormously impacted by the pandemic. The government should address their needs,” suggests Pandey.

FNCSI Officiating President Singh also stresses on the need to save the MSMEs. “At present governments of all levels are prioritising their budget on health spending to fight Covid-19. Thus, the situation of the micro, cottage and small industries (MCSI) sector in Nepal is very critical and the government has not been able to launch recovery programmes to overcome rising unemployment and economic slump,” he says.

Pandey suggests that the government in the current situation can support the sector by deferring tax collection for, at least, those who have in the past shown their commitment to paying taxes. “Likewise, the government can provide an alternative to farmers by buying their produce, prevent cheaper imports from abroad that displace our local produce,” he adds.

The government in the current fiscal year's budget announced a refinancing fund of Rs 50 billion to help SMEs of different sectors hardest hit by the pandemic. Similarly, the central bank in the Monetary Policy announced to provide the much-needed cash lifeline to small businesses with loan repayment deferrals. However, businesspersons say that only a few have benefitted from the schemes. It is basically due to the lack of information among business owners about the financing processes, they say.  

“Very few businesses in the retail sector have benefited from the refinancing scheme. Looking at how banks are working currently, it seems that banks are only trying to collect interest through the refinancing scheme,” opines Dahal.

While officials at the finance ministry and the central bank say that the measures announced in the budget and monetary policy have strongly supported businesses to face the current challenges, stakeholders refute the claims of the government officials. “Relief measures have been announced for the cottage industry and SME refinancing for businesses of certain sectors including tourism and agriculture. But whether these businesses are actually benefitting from the refinancing remains a big question,” opines Singh, adding, “Some entrepreneurs have benefitted from the measures, but many haven’t also because of the lack of information about the financing procedures.”

The current issues surrounding SMEs have become so serious that even big business bodies have started to ask for the government’s due attention to resolve the problems. A delegation of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) which recently met the finance minister Bishnu Paudel to talk about the economic recovery efforts warned that 50 percent of SMEs in the country could be permanently closed in the next few months if the businesses do not get an immediate financial lifeline to continue their operation.

The Necessity to go Digital
The Covid-19 crisis has also highlighted the need for SMEs to change the ways of doing business. The use of web-based platforms such as social media and e-commerce sites has become essential for businesses to survive and this trend will only grow in the post-Covid world. In Nepal too, businesses have attempted to go digital. IFC in the Covid-19 Nepal Business Pulse Survey said that a fifth of businesses in Nepal surveyed have started to use or have been using the internet, social media, specialised apps or digital platforms for business purposes. But the SMEs are yet to benefit from the opportunities offered by digital platforms. “Businesses need to think out of the box to survive,” opines Pandey. He says that the crisis has presented both opportunities and challenges to SMEs. According to him, many have diversified from their traditional business practices and have embraced e-commerce as a medium to reach their customer base. “Others have downsized and managed their expenses and are waiting for this pandemic to blow away. The ones who can adapt and be innovative will survive and thrive in the future,” says Pandey, adding, “An example of diversification during the pandemic is that restaurants have resorted to home delivery of not only their menu items, but also of frozen food stuffs. The e-commerce business has taken off during the pandemic.”

Experts opine that the low level of tech literacy is hinderering the digital transformation of SMEs. According to Singh, while using all the new techniques like data-driven marketing, influencer marketing, content automation may not be feasible for Nepali SMEs given the cost and other associated factors at present, the importance of digital adaptation has become more necessary now than ever for small businesses in Nepal too. “The government and other stakeholders should provide training and organise awareness campaigns in this regard,” he suggests.  

Private Sector Financing and Support
While the government’s support has been inadequate, investment companies and banks have come ahead to help the SMEs revive. Investment companies such as BO2 and One to Watch (OTW) have come up with programmes so that SMEs can continue their operation and to face the pandemic-induced challenges. On October 2020, OTW with the support from Swiss Agency for Development and Cooperation launched the Covid-19 MSME Fund Nepal. “The main objective of this Fund is to support businesses that possess the potential to sustain, pivot and return to positive cash flow by providing them interest and collateral free loans to meet their short- term working capital needs,” informs Subrina Shrestha, programme manager at OTW.  

For the purpose, according to Shrestha, OTW has partnered with NMB Bank, Laxmi Bank and Nabil Bank. Under this arrangement, the fund will be supporting upto100 MSMEs who will in turn support the retention of 1,000 jobs. Furthermore, selected MSMEs will also be provided with technical assistance in the form of tailored business advisory services to help them improve, sustain and scale their business operation.    

The SME-focused private equity fund Bo2 has been assisting SMEs through the pandemic. “Right from the outset of the pandemic, we had a business continuity plan for each of our investee companies. Majority of our SMEs have had to change their business strategy, which we have assisted,” mentions Pandey.  He says that BO2 signed commitments to invest in half a dozen businesses in the time of the pandemic to help the economy.

In the meantime, collaborations of commercial banks with investment companies and e-commerce platforms have raised hopes that the country’s banking sector is making meaningful attempts to support struggling SMEs. Nabil, which is one of three banks to have partnered with OTW for MSME Fund Nepal, has also joined hands with the e-commerce giant Daraz for the Sarathi Program. The Sarathi Program aims to support SMEs that are selling their products through Daraz. “One of our top priorities is to support such SMEs to enhance their business through value chain financing. With the low-cost funds made available to the vendors of Daraz, it will help them to boost their business and enhance the digital economy which is the ultimate requirement of the country,” says Basnet.  

Nabil Bank has been working to change its business modality focusing on SME banking. In the last few years, the bank has introduced a number of banking products including Nabil Sajilo Karja, Nabil Nari Karja and Nabil Sajilo Express Karja targeting SME clients. “In designing these products, we have taken into account the need to streamline and simplify our internal processes along with offering sensible pricing to the SME segment. We have also signed an agreement with UKaid Sakchyam- Access to Finance for ‘Designing and Implementing a SME focused strategy to enhance banking services for SME segment in Nepal’,” informs Basnet.

According to him, the bank has shifted its focus from corporate to SME banking exponentially increasing lending in the SME and retail portfolio. In this fiscal year alone, Nabil has disbursed more than Rs 10 billion in loans to retail and SME borrowers. As per Nabil, the share of retail and SMEs is about 50 percent in the overall lending portfolio of the bank.

 Necessity of Technical Assistance
The problems created by the unprecedented economic slowdown can only be faced properly when the problems and requirements of businesses are identified correctly. “Besides the pandemic, problems faced by SMEs include lack of knowledge in digital transformation, lack of financial skills and absence of a regulatory framework, unfair market practices and most importantly understanding the banking needs supported by proper documentation,” says Basnet.

Here, the role of investment companies, banks and private sector bodies become vital in terms of training business owners during trying times and getting ready for the post-crisis world.

While the government and private sector bodies are yet to take any step in this regard, investment companies are providing other forms of assistance to the affected businesses besides financing. “Selected MSMEs will be provided with technical assistance in the form of tailored business advisory services to help them improve, sustain and scale their business operations,” informs OTW Program Manager Shrestha.

Highlighting on the need for technical assistance to SMEs, Pandey says that it is essential for Nepali SMEs to be aware of the benefits and value addition of digital platforms in their businesses. “Therefore, PE investors such as Bo2 not only inject capital in the SMEs but provide knowledge transfer and technical assistance for these businesses to scale,” he mentions.

Because of the Covid-19 pandemic there are dark clouds of uncertainty hovering over the business sector and SMEs are in the thick of it. Experts agree that helping SMEs to strengthen the two key factors of adaptability and linkages should be the current focus of the stakeholders in order to achieve a sustainable recovery. The survival of SMEs rests on their ability to use market information to pivot, maneuver systems, processes and accessibility to get products to their consumers as well as their ability to understand the market and adapt their production to new realities, they say. 

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