For many decades, Indian MSMEs have implemented their business transactions in a traditional manner.
This has extended to all avenues of their business, whether it be marketing, daily operations or using cash as the mode of financial transactions, including receiving payments from their clients and paying their suppliers and buyers. Cash has not only been the favoured medium of transaction, but sometimes the only mode utilised by these MSMEs.
One must, however, keep in mind that this system is, by no means, perfect. It is extremely time-consuming and there is a lot of bookkeeping involved. Other besetting issues include human errors due to manual work as well as a dearth of transparency in the processes. Moreover, cash takes time for physical movement and therefore, cash inflow is often adversely affected. This remains a pain point for small businesses.
Demonetisation was introduced in India on 8 November, 2016. This policy was praised by Richard Thaler, winner of the Noble Prize in Economics in 2017. He had stated that it was the first step toward a cashless economy. However, most consumers in India still prefer to use cash as the main mode of transaction. The Government of India had launched several initiatives so that consumers are encouraged to go cashless and digital. However, a report prepared by the Boston Consulting Group (BCG), which included a survey of more than 1700 consumers, concluded that only 22 percent of the consumer surveyed showed an inclination toward a digital mode of payment. According to a forecast by BCG, the initiatives undertaken by the government would have a greater impact if, instead of consumers, it made MSMEs its target.
Why MSMEs are reluctant to go cashless
It is an unfortunate reality that many MSME companies and workers are not willing to obtain payments from banks. The Government should, therefore, comprehend the challenges associated with its moves, the fears of the MSME workers and their employers and make an effort to mitigate these fears. Such a change,if implemented – from monetary wages to wages through bank accounts – can be effective if the Government makes it mandatory that wages must be paid through banks. However, one can expect considerable resistance to such a mandate. The primary reason, of course, would be that many wage earners do not have bank accounts. However, there are other reasons that can be attributed to this resistance.
- First of all, employers would be required to pay the standard minimum wages and also make contributions to Provident Fund (PF) and Employees’ State Insurance (ESI). Even if they are ready to follow the rules now, they are afraid that past non-compliance would come to haunt them.
- Secondly, a poverty-stricken worker would not prefer his meagre take-home wages to further lessen due to PF and ESI contributions. Most of these workers are in heavy debt and must pay high interest on their borrowings. So, it is not appealing to such workers to keep 20 percent of his or her wages in a PF account and get charged 8.65 percent interest rate.
- Thirdly, most employees in MSMEs do not get much service in the majority of the ESI hospitals. Such benefits are usually of an advantage to workers in larger companies due to the support that they have from their unions.
Why MSMEs Should Go Cashless
MSMEs, like other businesses, must aim for further development at every point of time. New innovations, especially technological ones, are especially important at enabling this kind of growth. The latest innovations help businesses to stay in shape and surge ahead, while those who are reluctant to implement technology remain left behind. Keeping this in mind, let us consider some benefits in store for MSMEs if they decide to go cashless.
- There could be legal issues with businesses that deal only in cash, mostly related to the question of transparency. Physical account books have to be maintained, which could imply a lot of hard work when one is trying to gain access to old records. If there is any unaccounted cash, the tax department can also regard the business owner with particular interest, with unpleasant consequences.
- Businesses become more efficient in the face of going cashless. Small businesses can opt to use Enterprise Resource Planning (ERP) software that enhances the Return on Investment (ROI) without burning a hole in the business owner’s pocket.
- Going digital can also mean better online marketing. Small businesses can reach out to customers beyond geographical limitations and thus become more successful.
- As a result of digitalisation, the payment cycles become quicker and more secure. This is in sharp contrast to transactions with cash, which results in delay due to required approvals at different levels, high reconciliation time and high levels of human error. Safety could be an issue during physical movement of cash. It also takes a lot of time to deposit or withdraw cash in banks.
Going cashless and digital is therefore, beneficial for MSMEs. The Indian SME sector holds 8 percent share of India’s GDP, contributing 40 percent to exports and 45 percent to manufacturing. Thus, that which is beneficial for MSMEs will prove to be an advantage to the Indian Economy in the long run.
– Jagari Mukherjee