“Fund raising is a constant issue for MSME sector while key concerns such as information asymmetries, lack of collateral, low risk appetite of lenders and lack of knowledge of players also act as road blocks,” it said.
MSMEs also experience cash-flow problems due to slow moving or excessive stock, which gives rise to poor stock or inventory management, too generous credit terms, cash watered on unprofitable products or services, and unnecessary expenditure (money spent on buildings, houses, luxury cars) as well as drawings.
“Cash-flow management of MSMEs which mainly includes actions concerned with cash payment, collection management and liquidity management will help MSMEs maintain an optimal cash balance that is neither excessive nor deficient,” suggested the ASSOCHAM-Crisil study.
“Ability of MSMEs to convert trade receivables into liquid funds can also play a key role in managing funds,” it added.
The study also noted that MSMEs continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert trade receivables into liquid funds.
The MSMEs’ receivables have been increasing due to lack of bargaining power with large corporate customers. And the compulsion to deal with large corporates to avail of bulk orders and to increase scalability has meant many MSMEs face difficulty in managing their working capital. This constraints them from increasing scale of operations, profitability and working capital intensity.
“Easy access to credit for new businesses is an imperative, and better implementation of various government schemes under financial assistance can help here,” said the study.
Promoting use of technology to cut costs, encouraging banks and financial institutions to take up financial literacy programmes for micro entrepreneurs, adoption of best global practices by lenders, infrastructure development, robust marketing system, using alternative financing options, degree of decentralisation of credit-approval processes are certain key recommendations of the ASSOCHAM-Crisil study to perk up MSME sector across India.