SMEs: Trying to Survive and Getting Back to Business

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SMEs: Trying to Survive and Getting Back to Business

Nature Nepal, a beauty care items manufacturing company used to export around 50 percent of its products to international markets. But its major source of revenue dried up quickly after the outbreak of Covid-19 in early 2020 as the company saw all its export orders getting cancelled. Over the past one and a half years, Nature Nepal has incurred a loss of more than 70 percent of its annual income. "The situation forced us to shift the company to a smaller place and slash wages of workers by 50 percent to cope with the slowdown in business," said Darshana Shrestha, founder and CEO of Nature Nepal.

Sindhu Chhala Udhyog, a leather bags producing company, has also been facing similar difficulties. The company has laid off 150 workers since March 2020 and has not been able to recall its workers even though products worth Rs 10 million are in inventory waiting to be shipped to international markets. The company's proprietor Santa Bahadur Bogati is not certain when normalcy will return to his business. The problems faced by Shrestha and Bogati reflect the hardships faced by hundreds of thousands of small and medium enterprises (SMEs) operating across the country.

As SMEs are established with low capital and have little money in their cash reserves to fall back on, the toll of the pandemic has been enormous for such businesses. The sudden halt in economic activities caused by the four-month long lockdown starting from March 2020 led to a sharp drop in product sales and consumer demand. After facing a brutal year and an economic slump, any hopes that the situation would improve for SMEs were sadly dashed after the second wave of the pandemic engulfed Nepal in May this year. From handicraft, cottage industries to restaurants, retail and tourism businesses, SMEs of all sectors have borne the enormous brunt of the global health emergency.

According to Umesh Prasad Singh, senior vice-president of the Federation of Nepal Cottage and Small Industries (FNCSI), managing cash flow is the major problem faced by SMEs at the moment followed by a significant reduction in demand, sporadic supply chain disruption, and a severe shortage of labour. “Given the fact that they are set up with small capital and do not have large-sized working capital, SMEs don’t keep a huge stock of raw materials. Because of the restrictions in vehicular movement, imports of raw materials came to a grinding halt and affected overall demand and the supply chain,” says Singh, adding, "Only 10-12 percent of SMEs were in operation during the peak of the Covid-19 pandemic."

According to a 2020 Nepal Rastra Bank (NRB) report titled ‘Survey report on the effects of Covid-19 on the Economy’, micro, retail and small industries were the most affected compared to the large and medium enterprises and that it will take SMEs considerable time to recover their losses.
Binay Devkota, CEO of Clock b Business Innovations, a business management consulting firm for small businesses and startups, says SMEs largely conduct business through cash-in, cash-out modality, don’t have a culture and lack the capacity to keep cash reserves to hold up for at least six months which makes them more vulnerable to economic shocks.

A Department of Industry report shows that only 8.64 percent of cottage and micro industries with paid-up capital of less than Rs 100 million were fully operational during the lockdowns of 2020 and 2021. Similarly, 33.56 percent of cottage industries and 32.29 micro industries were partially operational. Meanwhile, only 7.64 percent of industries with paid-up capital of Rs 150 million were running at full capacity and 63.69 percent of industries were completely shut down.

SMEs have a crucial role in the socio-economic development of the country contributing through the production of goods and employment generation. The Financial Sector Development Strategy (2016/17 to 2020/21) published by the Ministry of Finance states that the SME sector contributes 22 percent to the country's GDP and employs over 1.7 million people.

While talking about the impact of the pandemic on SMEs, it is important to assess the impact the global health emergency has had on women entrepreneurship in Nepal. It is estimated that 60 percent of SMEs are owned by women and it is disheartening to see the pandemic erasing the hard-earned gains made in women entrepreneurship in the last few decades. “Currently, most SMEs are unable to manage financial resources to keep their business afloat and repay bank loans,” says Reeta Simha, president of FWEAN. "The export-oriented handicraft and tourism businesses are the worst affected."

FNSCI President Singh informs that 33 percent of SMEs have been permanently shut down failing to cope up with the pandemic. "The workforce of the closed businesses has shifted to agriculture and the business of ready-made items trade causing a shortage of workers," he mentions.  

In the first follow-up survey report on the economic impacts of Covid-19 published in January 2021, NRB stated that 46.56 percent of cottage industries, 51.55 percent of micro, 38.73 percent of small industries resumed full operation and their overall business increased after the first wave of the pandemic subsided.

Nevertheless, in the second follow-up survey report published in May, NRB said SMEs have been experiencing a decline in market demand, difficulties in receiving refinancing loans, additional loans, problems in paying installments of bank loans, and lack of support from banks and financial institutions.

Government Support
The Monetary Policy for FY 2020/21 has required commercial banks to extend at least 15 percent of total loans to micro, small and medium enterprises (MSMEs) with a loan limit up to Rs 10 million by mid-July 2024. Similarly, development banks and finance companies are required to disburse at least 20 percent and 15 percent loans, respectively, to the sectors such as MSMEs, agriculture, energy and tourism. Likewise, MSME refinancing has been set at an interest rate of two percent. Till mid-July 2021, commercial banks were required to extend 11 percent of concessional loans. They have disbursed 10.1 percent of such loans amounting to Rs 327 billion.

"The government has continued the subsidies and concessional loans programmes this year as well as we had sought. However, due to lack of a favourable environment for industries to operate, concessional loans programmes weren’t utilised last year," says Singh, adding, "The risk of coronavirus appears to be receding so we are hopeful MSMEs will take advantage of the subsidies in the upcoming days.” According to him, only 9 percent of SMEs have benefited from refinancing facilities. Singh argues though the policies are in place, not all branches of BFIs all across the country are well informed about the policies. "Lack of awareness about refinancing facilities both on the part of banks and prospective beneficiaries is preventing wider access to the government’s support programmes," he opines.

FWEAN President Simha also cited the various difficulties faced by women entrepreneurs when accessing concessional loans. “Procedural hassles have put many SMEs at bay from applying for government schemes,” she says.

Devkota of Clock b Business Innovations says relief schemes that have been announced by the government have not been communicated through the right channel. "Even if communicated, the procedure for this purpose is extensively tedious, failing to attract a large number of takers,” he says

Singh informs that FNCSI is preparing to sign a memorandum of understanding (MOU) with various banks to increase understanding among all banks that concessional loans are a necessity of the time and the beneficiaries need not return empty-handed when they reach out to the banks.  

Business Diversification
The pandemic has proven harsher for small businesses because they struggle to navigate through their traditional ways of doing business. When the world economy came to a grinding halt, they lacked the knowledge needed to change how they sold and reached out to their customers. Businesses that were able to pivot and diversify at the right time survived the tough times and saved themselves from a huge loss. Simha shares that many women-run enterprises changed their business by shifting focus to essential items like producing hand sanitizers and masks in view of the need of the market. Shrestha says the Covid-19 crisis has taught SMEs like hers to diversify business models according to the need of the local market utilising local resources.

MSMEs were more vulnerable due to delays in digitisation and lack of digital skills. It was also shown that shifting to digital platforms would increase customer reach, sales volumes and raise capital to overcome financial challenges in a time of crisis. Simha states small businesses require training on online marketing, cash management for their holistic well-being and to cope in a rapidly changing environment. Accordingly, FWEAN also organised a virtual expo for women entrepreneurs to optimise online marketing.

Private Sector Support
Government policies have been accommodative enough to ramp up weak economic activities. Unfortunately, access to government schemes remains uneven. This is where private equity funding and investment companies step in. Clock B Innovations had also organised a programme ‘Entrepreneur Her’ focusing on women-owned SMEs. It screened women entrepreneurs from all over the country and provided extensive mentorships, training to make them investment-ready. Clock B Innovations had partnered with Jyoti Bikash Bank, to extend financing support to the selected women entrepreneurs with the seed capital.

Niraj Khanal, CEO of Antarprerana, a business networking company, says businesses small or large have been affected by political, natural, social, and health crises like earthquakes, blockades, and now lockdowns every five years in Nepal. "So, we are working on a sustainability plan to help Covid-19 affected SMEs to adapt according to changing situations. SMEs are struggling with their business models on pivoting, working capital management and lack the guidance on how to kick start their business post pandemic. Under this programme, we will share resilience plans, networking ideas and capital management skills."

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