Micro firms, comprising majority of firms, need to scale up their size

Mumbai, Jul 03 In India, for every 100 firms there are over 95 micro firms, four small and medium firms, and less than one large firm. However, in developed countries, around 50-55 firms out of 100 are micro, while 40 are small and medium firms. The preponderance of micro firms in the optics of India distribution has major socio-economic consequences.

"Micro firms are generally less productive and pay less wages compared to large firms. To achieve rapid economic growth and a more equitable distribution of income, we need to help micro firms scale up in size," says Dr Arun Singh, chief economist, D&B. Dun & Bradstreet has been engaged with MSMEs over the last two decades and our library of response covers thousands of MSMEs.

The problems faced by MSMEs in scaling up have unfortunately remained the same. Dun & Bradstreet's survey conducted in Oct 2020 found that 59 per cent of the surveyed MSMEs sought better credit facilities and 48% of the surveyed MSMEs sought marketing support to help them scale up. The credit gap in the MSME sector is three times the current flow of credit from the banking sector, according to data from the International Finance Corporation. This whitespace in MSME financing can only be filled up when we foster relationships between Fintechs and traditional financial institutions to offer innovative solutions. Over the last couple of years, we have laid a solid foundation to promote democratization of credit.

According to Singh, "A strong public digital infrastructure comprising of Unified Payments Interface (UPI), Bharat Bill Payment System (BBPS), Goods and Services Tax Network (GSTN), Electronic Know Your Customer (eKYC), Aadhaar, eSign, DigiLocker, etc. opens up huge opportunities for innovation in the retail lending space. However, we now also need to fastrack other initiatives such as scaling up the account aggregator framework, promoting Open Credit Enablement Network (OCEN), establishing a public credit registry, popularizing the Trade Receivables Discounting System (TReDS), and strengthening the insolvency and bankruptcy code. These initiatives will reduce the cost of capital and improve access to finance."

The core reason inhibiting new market access for MSMEs is information asymmetry.

Export promotion agencies need to play a facilitating role by encouraging the use of business information portals. This will reduce the sunk cost of entering new markets. Many researchers have found that the probability of a firm exporting to new markets increases by around 0.1 per cent with each additional day of time spent on a business information portal. Further, MSMEs should consider getting their business vetted by a neutral 3rd party to establish their credibility, he said.

This 'signaling' mechanism helps resolve information asymmetry and establish trust among potential business partners.