Trade, import, and export for MSMEs: When the world went into lockdown last year in the wake of the coronavirus pandemic, one sector that kept people going is e-commerce. The pandemic gave e-commerce a boost in the US, taking it to levels not expected until 2025. Digital marketing agency ROI Revolution projected that the sector might bring over $ 843 billion in sales this year. Even in India, news reports suggested that 40 per cent of existing online shoppers bought more products online due to the pandemic. A Bain & Company report on how India shops online says: “The Indian e-retail market is primed to reach nearly 300 million to 350 million shoppers over the next five years, propelling the online gross merchandise value from $100 billion to $120 billion by 2025.”
This change in buying trends is a piece of good news for the retail industry for sure. But it’s also good news for manufacturers. Significantly, the report adds this: “Over the past few years, India has experienced a surge in small enterprises and homemakers scaling their businesses by taking them online. E-retail has enabled the creation of millions of jobs and empowered delivery personnel, mom-and-pop Kirana stores, and several small sellers.”
It’s not just small sellers on e-commerce platforms like Amazon and Flipkart in India. Today, MSME manufacturers can leverage the power of e-commerce to sell anywhere in the world. They can set up their platforms or get attached to existing platforms to sell globally. And remember, these platforms are not necessarily only retail-specific. There are B2B e-commerce platforms that can help manufacturers be a part of the global value chain.
Cross-border e-commerce helps Indian MSMEs in many ways. One, of course, is that it expands its market without demanding too much in terms of marketing infrastructure. E-commerce also gives sellers the chance to study the demands of a new market and tweak offerings to suit that market. MSMEs, who choose to piggyback on an existing e-commerce platform, can take advantage of the logistics support offered by these platforms.
Increased demand from a larger customer base means that MSMEs will need to scale up. That could mean greater investment in capacity and also more job creation in India. It looks like an emphatic win for all concerned — customers, e-commerce platforms, MSMEs, and the economy. So, why aren’t more MSMEs flocking to cross-border e-commerce platforms? Or looking at entering e-commerce on their own?
Crying need for credit
Like most things related to MSMEs in India, the answer boils down to funding. MSMEs lack easy access to credit. Because of their small size and because they often don’t have collateral, banks and financial institutions are reluctant to lend to MSMEs. The government has tried to extend help by launching schemes like the 59-minute loan scheme. But these efforts need to be stepped up substantially if the majority of MSMEs are to benefit.
MSME exporters also face the issue of a long payment cycle — and often lose out because of currency fluctuation. These are small players who don’t have a financial cushion to take care of extended payment cycles, and they are too small to even consider currency hedging.
Export finance, which allows a seller to get access to working capital before the buyer pays for the goods, is something MSMEs need but rarely get. Various reports estimate that 56 per cent of MSME applications for trade finance were rejected in 2019 alone. What does this mean to the MSME exporters? For one, they end up scraping the barrel when it comes to working capital. It also means that they cannot expand their capacity even if the demand increases, nor can they improve the quality processes or expand their workforce. They end up being caught in a vicious cycle, which easy credit can help break.
For some time now, business analysts and governments have been talking about the $1.5 trillion finance gap for MSMEs across Asia, with Indian MSMEs accounting for a significant number. Can this gap be bridged? Fintech has been seen as a promising solution. Both established financial players like banks and lending institutions, as well as small fintech players, can take advantage of technology to improve credit access to MSMEs, particularly the MSME exporters.
Fintech companies offer trade finance and other export solutions to MSMEs at a low cost. Because they use technology solutions to identify credit-worthy borrowers, fintech companies are usually less insistent on borrowers providing collateral. Equally, because their due diligence is technology-driven, it is faster and more accurate than the traditional people-driven approach.
Fintech lenders are particularly attractive to MSME exporters who want to take advantage of the e-commerce boom to enter global markets. That’s because fintech makes the process of financing smooth and quick, something exporters need. Equally important is the fact that because these companies are technology-driven, their methods are transparent, and they ensure that all foreign currency made in overseas sales goes directly to Indian banks.
The government is cognizant of the importance of MSMEs to exports and has made provisions in the e-commerce policy to help this sector. Reports say the government aims to set up dedicated e-commerce export promotion cells and specialized export support policies for MSMEs. Why is this important? According to government data, at least half of all the Indian MSMEs are based in rural areas.
This means they lack access to domestic large markets. Integrating such companies into global value chains through e-commerce can ensure that the MSMEs have an assured, and growing, market. It also means they will be able to focus on quality in order to compete with global players. Even if the e-commerce policy does not become a reality soon, MSMEs have the opportunity to enter this space and grow their market — and quality. All they need is a little help from fintech lenders to ensure that they have the capital they need to grow and improve.
Pushkar Mukewar is the Co-Founder and CEO of Drip Capital. Views expressed are the author’s own.