Building a Firewall of Digitized MSMEs to Ward Off Recession
[Blog by: By Harshil Mathur, CEO & Co-founder, Razorpay]
Amidst a slowdown in the global economy, the IMF has cut the global economic growth to 4.2% in 2022. Despite this, India’s economy is projected to grow at a rate of 8.2% in 2022, almost double that of the global average, making India one of the fastest-growing economies in the world. Time and again, as the global economy has faltered, the Indian economy has remained resilient, largely owing to the large base of MSMEs in the country.
There are more than 63 million MSMEs in India which contribute to 31% of India’s GDP and have created more than 111 million jobs. To put that into perspective, India’s MSME contribution is higher than the GDP of Sri Lanka, and the sector has employed more people than the entire population of Egypt!
MSMEs in India were at the receiving end of the pandemic’s chaos but despite that, they still remain to be future-proofed. According to a survey conducted by the All India Manufacturers’ Organization (AIMO) during the pandemic, 71% of MSMEs weren’t able to pay salaries in March 2020 and they stated that if the same situation as the pandemic persisted or repeated itself, a whopping 43% will have to shut their operations. It is clear to see the grave repercussions this will have on the Indian economy as a whole.
The scale of their impact and their role in stabilizing economies have long been undermined in the shadows of large corporations. However, to recession-proof an economy, it becomes essential to recession-proof a country’s MSMEs and digitization is playing a key role in this process.
Recession-proofing MSMEs by building a digital financial backbone
Access to digital tools and specifically, digital financial services is one of the major growth enablers for Indian MSMEs today. It saves time, manpower, and millions in losses due to possible gaps in efficient financial management. According to a survey we conducted, by failing to digitize their business financial operations, SMEs on average lose as much as Rs. 6.7 million every year and waste over 1689 hours in manual tasks.
With the digital infrastructure built by the NPCI, India has one of the most robust digital financial infrastructures in the world which has provided fintech with the perfect groundwork to build the digital financial backbone for MSMEs. This backbone must focus on enabling business growth for MSMEs and creating an ecosystem where they can thrive. This could be done by simplifying and automating the three main pain points of payments, payroll, and credit.
Payments
Since MSMEs in India have limited manpower, finance operations are the most time-intensive and challenging. According to our estimates, small businesses lose a total of 1,192 man-hours doing these tasks manually and lose on an average Rs. 4.6 million every year. Fintech startups are not only automating payment processes for MSMEs but also helping them with customized payment options which they can provide to their customers for greater revenue gains. For example, through payment options like UPI Autopay and subscriptions, businesses were able to reduce churn rates by 8-15% which had a big impact on their overall revenue growth.
Payroll
Payroll is another constraint for small and medium enterprises. MSMEs usually have to spend too much time on input collection, which results in extended business hours; have to switch between multiple systems and processes; and face major issues tracking, calculating, and complying. On average, an MSME wastes 113 hours in payroll-related activity and loses Rs. 450,000 every year. As the business grows, this becomes a major operational cost for MSMEs, hampering their ability to conduct their business operations during month-ends. By automating payroll, while at the same time giving value adds like automating insurance, compliance, and tax deductions, more businesses would be willing to adopt such digital solutions to save on time and money.
Credit
Access to credit has been a major concern for MSMEs to the extent of being underserved. The International Finance Corporation’s (IFC) 2018 Financing India’s MSMEs report estimated that the overall debt demand by Indian MSMEs is Rs 69.3 trillion. However, the formal financing sector caters to only 16% of this overall debt demand, while the rest is financed from informal sources or not at all. While this has improved considerably in recent years, according to our own estimates, small businesses waste 120 hours and Rs. 480,000 every year in processes leading up to getting the loan. This leads to inefficient loan disbursals since the MSME gets the loan when they least need it and face a liquidity crunch when they can’t get the loan at the time when it is most needed. With the help of technology and alternate risk assessment models, MSMEs can get access to credit at the perfect time and the credit could be customized to meet the specific needs of the MSME. This guarantees the business’ success and growth.
One big step forward: Impact of a future-proof MSME
The pandemic provided an impetus to the digitization of MSMEs in India. In a span of just a year of the pandemic, Razorpay was able to onboard 1.5 million new MSMEs to get them started off on their digital transformation journey. The compounding impact of these MSMEs being formalized is tremendous.
On our own platform, digitized small businesses saw a 200% growth in transaction volumes. With these 1.5 million MSMEs on-boarded onto the platform, they could also be provided with working capital and cash advances based on their payment information. If each of these MSMEs received a working capital of Rs. 100,000, then the total credit disbursed would be close to Rs. 150 billion. Extrapolate the impact of this to the larger MSME cohort and the scale of the impact is unfathomable. Moreover, by providing timely credit we enable these MSMEs to grow and thrive, and as they do they will create more employment opportunities, more income for families, and greater success for the country as a whole.
With millions of MSMEs already having digitized their operations, India is steadily progressing towards proofing itself from a recession to a large extent. Unhinged digitization of small businesses would enable India to grow faster even during times of recession, putting us well within reach of our $5 trillion economy goals.
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