In times of recession, micro , small and medium enterprises are the most vulnerable. Their situation is made worse by the fact that they usually give credit to customers. The credit period to customers extends beyond the credit period these units receive from suppliers.
This is one of the findings of a study done in 11 clusters involving 3,000 micro, small and medium enterprises in four states. The study was conducted by Milagrow, a venture catalyst firm focused on micro small & medium enterprises and was released last week. The study suggests that the delayed payment protection provided for in the MSME Act, 2006, is vital for the health of the sector.
In the auto component cluster, 75 per cent of the sales were done on credit, it notes. Most of the firms depended on 4-5 large customers. These firms used purchasing power to delay payments. The fact that finance is also hard to come by, makes it a double whammy for the cash flows of the company, the Milagrow study says.
The study also found that most units in the clusters studied were unable to any acquire quality certification. For instance, the study reported that in Ludhiana’s hosiery cluster, most units had not acquired any quality certifications. Even in the National Capital Region’s Information Technology cluster, only 22 per cent firms had any quality certification.
The availability of funds to the firms in the clusters bears a relationship to the export orientation of the business. Funding for export-oriented clusters was easier to come by , while for domestic businesses access to bank funding was much lower. It says that this trend is expected to change in the current scenario with the increased focus in domestic businesses. The clusters are also yet to begin taking advantage of information technology to gain access to markets.
The study found that in the Ludhiana Hosiery Cluster, 83 per cent of the units did not have their own website and hence did not engage in e-commerce. The picture was similar in the Firozabad Glass Cluster where 91 per cent of the units did not have websites and 97 per cent had never used e-commerce. Only 35 per cent of the firms in the auto component cluster reported having a sales department, while in the bicycle cluster this number was at 25 per cent. When recession has fuelled worries of job losses in the small scale industries, the study reports a 25 per cent attrition rate in the MSMEs.
According to the study, 76 per cent of the firms in the Ludhiana Hosiery cluster reported an attrition rate of over 25 per cent. These numbers were at 34 per cent for the Ludhiana bicycle cluster and only 15 per cent in the auto component cluster. The study draws the following inference about the auto cluster: “The respondents found shortage of skilled labour to be the root cause for the prevailing labour problems and of it being expensive and difficult to control.”
Although most firms reported their labour strength to be less than 200, there were many firms who informally admitted to having more that 8-10 times this number. The firms were reluctant to admit to these numbers on paper due to compliance issues with ESI and PF, the study says. Although 93 per cent of the firms surveyed in the Ludhiana Auto Component Cluster were aware of the apex industry associations such as CII, Ficci, Assocham and PHDCCI, all of them felt that these industry associations did not represent the interests of the SMEs in the cluster.
