GST provided a much required boost to Indian SMEs
Small and medium enterprises (SMEs), considered to be the backbone of the country’s economy, still face a plethora of roadblocks in India.
Small and medium enterprises (SMEs), considered to be the backbone of the country’s economy, still face a plethora of roadblocks in India. In order to help them some of these hurdles, R Narayan started Power2SME in 2012 with the mission to empower SMEs to enable the India growth story. The MSME segment is in dire need of a level playing field that not only requires great policies and campaigns but also proper implementation of those policies, says the Founder & CEO of Power2SME. With Nandan Nilekani as a strategic investor, the company has raised various rounds of funding from Inventus Capital, Kalaari Capital and Accel Partners who have together invested over $ 15.5 million in the company. In conversation with Rakesh Rao of IPF, R Narayan explains the importance of SMEs for India’s overall development and solutions to make this sector more robust and productive.
How did the idea of Power2SME strike you?
After working closely with SME segment for more than a decade, I realised that there is a substantial difference in procurement pricing for large enterprises as compared to SMEs. Starting Denave India Pvt Ltd, which is today India's largest technology powered sales enabling services company, opened my eyes towards the yawning gap present between enterprises and their SME customers. The reality struck me hard enough to understand that there is an urgent need of an action that will provide power to the unorganised SME sector.
An extensive research with IIM Lucknow graduates on the feasibility of an idea like Power2SME and whether its inception can cater to the sector’s raw material procurement and working capital requirements, revealed that SMEs have been continuously contributing to India’s growth story, but the pertinent question was ‘Is India doing the same?’
The SMEs in India face a plethora of roadblocks, even today. Hence, the idea of bringing Power2SME to life stems from the need to identify the issues faced by SMEs, devise solutions to address them and empower the MSMEs, a sector that holds the key for the country’s overall growth and development.
Could you explain us the business model of Power2SME?
Power2SME entered the SME space 6 years ago, as India’s first buying club for MSMEs.
In addition to streamlining the raw material procurement process for SMEs in the manufacturing sector, re-engineering the manufacturing supply chain, Power2SME provides transparent and efficient sourcing by driving economies of scale.
With an endeavour to provide MSMEs easy access to finance and deliver raw materials at competitive prices, Power2SME has integrated various digital platforms for customers, large manufacturers and financial institutions. Power2SME’s mission encompasses making MSMEs in India bankable, creating India’s leading B2B digital ecosystem for SMEs.
Which are the various solutions offered by Power2SMEs to companies?
The company offers various value added services for the SME sector. FinanSME, launched in 2016, is an online lending platform for SMEs for easy access to financial assistance via Power2SME FI partners such as Axis Bank, HeroFin Corp, Capital Float, Amex and many more. SMEShops is an online platform of SMEs to source quality industrial goods.
Power2SME has emerged as a next generation B2B ecommerce firm for MSMEs in India and is the first B2B online platform to turn profitable.
How do you help SMEs enhance their profitability?
Power2SME is India’s only digital ecosystem that drives SME growth by providing ‘enterprise grade’ sourcing benefits and financial solutions. The bouquet of services offered by Power2SME is designed to infuse higher efficiency and profitability across SMEs in India.
Raw material accounts for 70 percent of the recurring costs of manufacturing SMEs every month. They’re disadvantaged due to smaller order sizes and fragmented market structure. Power2SME buys directly from the manufacturer and sells to the SMEs, thus eliminating the intermediary thereby reducing costs for the SMEs.
Power2SME takes complete ownership of the entire order process, providing qualitative raw material at the best price with flexible payment options. By taking on the role of sourcing input raw materials for the SMEs at the most competitive price points across multiple products in categories like chemicals, inks, paints, metals, and polymers etc, we ensures that the customers can focus on their core business of driving growth and expansion.
Nandan Nilekani and companies like Inventus Capital, Kalaari Capital, Accel Partners, etc have invested in Power2SME. Apart from the funding, what has Power2SME gained from them?
By giving wings to Power2SME’s vision, industry luminaries like Inventus Capital, Kalaari Capital, Accel partners, IFC and Nandan Nilekani have not only expressed their belief in brand Power2SME but have also instilled confidence in the entire SME ecosystem.
Their experience, expertise, assistance and guidance have allowed Power2SME to emerge as India’s largest B2B online platform in the sector today.
Most of the online business ventures are struggling to make sustainable profits. How did you manage to become profitable? What are your plans to sustain this?
The key differentiator between Power2SME and its peers in this sector is ‘execution’. The company’s business model has been beneficial to all the stakeholders, from SMEs to suppliers to financial institutions.
The financial health of the SME sector is one factor that could affect Power2SME’s growth. Therefore, the company, since inception, has been committed to contain, minimise or nullify any economic adversity that may arise and hurt the SME sector. For example, during the implementation of GST, the company started educating itself about the new policy much in advance. The company also organised SME transformation camps to apprise SMEs and MSMEs on how to prepare for GST implementation.
Today, Power2SME operates out of 9 offices and more than 20 states in India and has employee strength of over 300. Power2SME will continue to offer seamless solutions to its registered SME base of 100,000 SMEs along with striving to extend its support to others in the ecosystem.
What is the current status of SME sector?
Employing over 100 million people, the SME sector in India contributes 28.77 per cent to the national GDP, 40 per cent to exports & 45 per cent to industrial inputs.
India has one of the largest SME bases in the world and the sector still has tremendous potential to be tapped. Despite having large base of SMEs, the sector’s contribution to the nation’s GDP is quite less in comparison to the world average of 49 per cent contribution by SMEs in countries like China, US, UK.
The MSME segment is in dire need of a level playing field that not only requires great policies and campaigns but also proper implementation of those policies.
For India, pushing growth of the MSME sector would mean improvement in financial inclusion of the nation; generation of significant level of employment, especially in the manufacturing space; support to next-gen entrepreneur and innovation/indigenisation; and discouraging urban-rural mitigation.
What are key challenges before Indian SMEs? How we can overcome them?
One of the major challenges that Indian SMEs continuously face is the struggle to raise finance for working capital requirements. If SMEs manage to get loans and working capital from banks, it is at a higher interest rate compared with large enterprises. Also, their ratings are degraded on minor defaults and interest rates are increased.
MSMEs have long been facing a problem of delayed realisation of their bills and receivables, leading to financial hardships and liquidity constraints; a key reason for many of them turning into ‘Non Performing Assets’ (NPAs), affecting their sustainability. With the introduction of Insolvency and Bankruptcy Code and the strict measures recommended by RBI for taking stringent action against NPA accounts, MSMEs face twofold pressure: delayed payments of their bills and the looming threat of turning into an NPA (for defaults in honouring bank commitments).
Another challenge that stands in their way is their fifth position in order of priority for disbursement of funds under the IBC code. As per the Waterfall mechanism, SMEs are treated as operational creditors, thereby, facing huge losses during bankruptcy proceedings. In case of a collapse, they are allocated whatever is left after secured creditors, employees and resolutions are paid. Also, because of no bargaining power against large corporate buyers and government organisations, SMEs face the issue of delayed payments.
Is increased usage of modern manufacturing technology and automation creating a challenge for SMEs? Are they investing in new technologies?
Manufacturing in India is undergoing a rapid transformation because of government initiatives like Make in India that aims to increase contribution of this sector from 15 per cent to 25 per cent of India’s GDP, by 2022. Also, with the incoming of Industry 4.0, the focus will shift towards ‘Smart manufacturing’, automating every possible facet of manufacturing. In order to survive in this automated environment, it will become imperative for Indian SMEs to adapt as well as adopt the technological platforms and tools.
Indian SMEs are still a long way from completely embracing these modern manufacturing technologies. What they need is more capital infusion since adapting to such technological platforms would require capital that is currently not available to them.
While services industry and tech industry have a plethora of VC funds and PE funds investing in them, the manufacturing segment doesn’t attract too many investors. That is something that needs to change.
Are SMEs able to enjoy the benefit of GST?
The GST reform was a landmark move that provided a much required boost to Indian SMEs. It has increased the ‘ease of doing business’ for SMEs by bringing uniformity in the centralised registration process. This reform has led to a formalisation of business at grass root levels. Along with GST implementation, the decision to increase repayment period from 90 to 180 days and the change in asset classification has brought some relief to the flailing SME sector.
Implementation of the GST has also led to data collection which is building up a credit history. This should hopefully make financial inclusion for SMEs easier.
What is your outlook for SMEs in India?
The worldwide average contribution by SMEs to Gross Domestic Product (GDP) is 49 per cent. The contribution of SMEs in India to GDP is about 16-18 per cent while on the manufacturing side, it contributes only 8 per cent. For India, pushing growth of the MSME sector would mean improvement in financial inclusion of the segment; job creation at a significant level by 2020 when India will have largest base of eligible workers in the world; support to next-gen entrepreneur and innovation; and help mitigate the need of urban-rural mitigation.
Access to finance has been identified as a key element for MSMEs to succeed, compete, create jobs and contribute to poverty alleviation in India. To strengthen the MSME framework, it was critical for Power2SME to devise a strategy focused on financial innovation. FinanSME a Power2SME brand was conceived to improve access to finance for our SME customers. Financial innovations that deliver capital (both debt and equity) to MSMEs and Growing Businesses in India will drive financial inclusion, a key to growth of entrepreneurship. We hope to drive social change and increase current MSME contribution from 16 per cent towards the world average of 49 per cent.
What are your future plans for Power2SME?
Power2SME is planning to broaden its product portfolio (starting with construction, it has expanded to metal, polymers, chemicals and yarns); strengthen & expand vendor relationships (Power2SME is looking at international markets to source material from. This is still at an
initial stage); and deepen engagement with SMEs pan India by developing deeper routes for new products for SMEs.