With the current pandemic affecting the global economy, financial institutions and banks have started navigating to the post-COVID- 19 strategy. This is the long-term outlook to improve the bank’s crisis response. All the global banks including the community banks are struggling with their future strategy. This strategy is focused on supporting the small businesses during the crisis and taking the economy to the ultimate salvage.
PwC recently surveyed to understand how small businesses are coping in the United States. It was seen that although the small and medium businesses are coping with the current crisis, they are expecting help from the financial institutions and banks. Small businesses are looking for increased support from their bank as they are worried about how their future will shape.
The ambiguity of lending in the struggling business segment of SMEs has replaced the vigor of financial institutions. Banks and NBFCs are trying to look for policy push to start functioning in their segment. Many technological and operational constraints are blocking their way too. For instance; SMEs are usually considered as a generic pool and this pool is created based on the turnover of these businesses. This might not be appropriate for the determination of their access to the working capital. The risk profiles and source of funding can be understood in a better manner by decoding the buyers and sellers of these SMEs.
The Categories of SMEs that need Bank Support
Below are the 3 categories of SMEs that need support from banks:
- SMEs that serve as vendors to government and large corporates – The category is safe for banks in terms of lending as the regulatory support is in place. The regulatory bodies force buyers to strictly pay back these businesses. NBFCs and Banks can lend through various platforms. The non-payment risk is minimal, and the banks are relieved from the task of KYC, Origination, or Invoice aggregation. The risk is on the government and not on the SMEs.
- SMEs that buy from Corporates and sell to end consumers – There are many dealers or distributors in FMCG sectors and other CPGs, who use traditional channels. They also make use of the Trade finance that is provided by the banks via corporates. This helps them to increase higher credit periods. But dealers do not benefit from this. The corporates use the process of early payments for paying to their lenders. Corporates have to ensure that the payments keep coming into the NDFCs and Banks. And these financial institutions prefer the route to lend to businesses. Also, in determining potential borrowers, challenges related to KYC/documentation, and repayment risks, banks limit collateral-based finance.
- MSMEs that sell their goods to the end-customers – This is the category that doesn’t get good coverage. They are neither anchored by corporates nor by the government. They are the lowest rank when it comes to financial access. The new-age tech NBFCs and FinTech in India are already fast-developing lending options. These are attuned with the cash flows that are determined through digital payments and acceptance.
The Challenges of Small Businesses
As the small and medium businesses work with small margins, they usually do not have a cash cushion. Almost 48% of small businesses showed concern that they might have to suspend operations if the duration of shutdown is increased. About 57% of business owners are concerned about how long they would be able to continue paying salaries to the staff. A significant bunch of these small companies may not survive without help.
About 55% of small business owners who are reeling under financial strain said they would welcome any type of financial relief. This relief could be in the way of waiving fees like overdrafts, late payments, and other charges. Some of them want banks to pause foreclosures, provide low-interest business loans and pause repossessions and evictions.
Small businesses are usually loyal to the relationship with their banks and financial partners. Many of these companies do not switch their primary bank. In these extraordinary times, many small businesses face revenue pressure. The survey shows that 53% of small business owners turn to credit unions and 48% of businesses turn to banks for working capital. Many businesses also expect waivers to save their funds from their current capital. Another turn to donations and about 43% of small businesses look towards disaster loans.
These companies consider swapping providers due to the current crisis as there could be service issues. 65% of businesses want to switch their banks as they have no arrangements. About 64% of these businesses also said that they lack transparency and lack of trust or relationships might lead to picking a new provider.
Many efforts include the Payroll Protection Program and Main Street Lending Program affect the attitude of small businesses towards the lenders. Many small businesses want their banks to deploy large-scale programs with short turnarounds to help them stay afloat. This might help them to the extent that if the borrowers perceive this implementation as flawed, they look at lenders to contribute to the problem and solution.
Recovery of Businesses and Funding Sources
Small companies can’t start exploring their alternative funding sources. Such services include FinTech providers that are used by businesses that are unhappy with the services that they have received from their bank. Although not all small businesses switch their providers, their experience might bring competition in this sector.
Small and medium enterprises in India focus on their recovery post the Covid-19 crisis. The revival of SMEs is beneficial to the economy as it will help in wider employment generation and benefit distribution in the economy. As many businesses struggle with a lack of working capital, this has constrained the surviving or marginally functioning SME. Many financial institutions are being called out by RBI to adopt lending based on cash flow. The industry is welcoming the government’s dynamism in addressing the capital requirements of SMEs. This is crucial as SMEs comprise about 95% of all Indian businesses.
The corporates have benefitted from the revival of banks and financial institutions. The advantages are early cash flows and decreased Daily Sales Outstanding. For SMEs that have faster access to capital, all these factors are important. One example is the Government’s success in tax collection through e-invoicing. Other benefits include simple automation in an end-to-end manner in the case of the invoice lifecycle. This includes payment, reconciliation, and collection which can give transparent and real-time integrated sources of data with a base in cash flow. This empowers the banks and NBFCs to differentiate between risks of lending.
The organizations do not stay away from the technology and are using it a lot in the post-COVID-19 times. This should also be true for financial institutions as they too should embrace technology for fulfilling their goals. Although these circumstances pose a lot of risk for everyone, to find solutions, we need to head on to this risk and find solutions.