The Ultimate Guide to Indian MSMEs

In her maiden Budget in 2019, India’s Finance Minister Nirmala Sitharaman stated that India is gearing towards becoming a $5 trillion economy by 2024. Debates have further ensued about whether the target is achievable or not. However, one aspect has been clearly established. For India to gain double digit growth figures going forward, its micro, small and medium enterprises (MSMEs) will have a prominent role to play in employment generation, exports, skilling and making the sector more formalised. MSMEs contribute 33% to India’s GDP and employ 11.7 crore people (that is 40% of India’s workforce).

Large global economies thrive on their SME sector; some examples include the Mittelstand in Germany and Zhongxiao qi ye in China. A common thread that helps MSMEs world over succeed is the credit environment and working capital liquidity afforded to them. Globally, large economies have empowered SMEs with the ease-of-raising-capital, uncomplicated financing schemes and tech connectivity. It is India’s turn to now empower our engines of growth and provide them with the necessary tools for success. It is with this background that I hosted a panel discussion with four leading FinTech startup founders who focus on this sector to understand the space a little more. I spoke to Krishnan Parameswaran Cofounder and CTO, Namaste Credit, Ravish Naresh Founder Khatabook, Sumit Agarwal, Founder Vyapar and Yadvendra Tyagi, Founder EnKash.

MICRO AND SMALL BUSINESSMEN STILL DEAL WITH CASH FOR 90% OF THEIR TRANSACTIONS

Contrary to popular opinion about digital wallets and payments, about 90% of micro and small businessmen still deal with cash. “When you visit the street, you realise that businessmen still have no idea about their current transactions. Multiple businesses on the street have the same accountant who visits them once a week and that is when books are tallied. The reality is 90% businesses still deal in cash,” said Sumit Agarwal, Founder Vyapar Tech Solutions, a business accounting software for MSMEs. He continues, “GST has mandated digital traceability and till date many do not even know the %GST applied to the item they are selling. Hence, that has caused a behaviour shift to consider moving accounting practices online.”

While on the one hand a slow digital adoption is taking place, on the other, working capital continues to be a challenge. “Imagine this, ground reality is MSMEs still borrow working capital from friends and family at a 5% rate of interest!” said Yadvendra Tyagi, Founder Enkash. At Namaste Credit, we too have seen that there is a real need for working capital. With a particular bank, not everybody gets credit, or they may not get credit on time. Access to credit is a big challenge, especially when the market/environment is not favourable. Through us, the SMEs get better terms. Many times they are not aware of the loan products they can be eligible to,” sums up Krishnan Parameswaran Cofounder and CTO, Namaste Credit, India’s leading AI-based credit discovery and underwriting platform for MSMEs.

MULTIPLE FORCES HAVE LED TO A BEHAVIOUR OF TECH ADOPTION – PRODUCT SIMPLIFICATION DEFINITELY CREATES STICKINESS

Everyone is talking about cheap Chinese smartphones and Jio. All founders in our discussion agreed that while the tools for adoption exist, the need and simplification are the two key factors that drive MSMEs from 0 to 1. “People have smartphones they keep searching for apps and they download at least 3-4 apps and stick one to the one that works. Their mind set has started changing – it has because of the environment (cheap smartphones and Jio) and force (GST). It is a slow change. We are still seeing only the tip of the iceberg,” said Sumit Agarwal, Founder Vyapar Tech Solutions.

“When it starts working for one, they tend to share it with their friends. We are definitely see a behavioural shift,” agrees Ravish Naresh Founder Khatabook. He further adds, “The product has to be extremely simple to use for a first-time user. We have been able to slowly convert a century old behaviour of balancing ledgers offline to online and have made merchants reap the rewards of software.”

A recently conducted Yes Bank survey reveals that 63% of the MSME surveyed are going digital, only 50% perceive profitability and operational efficiency as benefits of going digital and over 80% of all digitized MSMEs indicated overall positive digital experiences.

IT IS AN EXTREMELY PRICE SENSITIVE MARKET – THEY PAY FOR VALUE, NOT CONVENIENCE

“Nobody is in it for utilitarian purposes. If they get something extra, you (company) might be paid. Convenience fee for a SaaS-like model is miniscule. When you quote a number to an MSME, they would rather hire two accountants. We should be clear of what they want – probably it could be credit. Anything you bring to the market should be aspirational or solving a real need,” said Yadvendra Tyagi, Founder EnKash. EnKash has just launched India’s first corporate credit card for SMBs, called the ‘Freedom Card’. The card allows SMBs to manage liquidity and avail credit for immediate needs.

“We have to figure what is value in their mind, not us. For one and a half years, we ran on revenues off the mobile app. MSMEs calculate everything on a per day basis. They evaluate their profit for a day and then see how much of that they can spend,” adds Sumit Agarwal, Founder Vyapar Tech Solutions.

So, how does Vyapar make money? “You can monetize a desktop product faster than mobile. Market mind-set is that desktop applications are paid and mobile are free. So, at Vyapar, we have more customers on mobile and less on desktop but revenue on desktop is much higher than mobile. Mobile can be used as a channel for acquisition and branding, desktop and web for paid and additional value. We also monetize mobile for multi user features where multiple employees in the same business can work together from anywhere. This is another mechanism that is working for us to make them pay for mobile,” shares Agarwal.

DESIGN FOR THEM, NOT YOURSELF

“We push for an MVP (minimum viable product) and that is built from insights shared by users. We initially only build a maximum of two features. In our case, we talked to businesses and the most common denominator among them was managing credit, which they were already doing through their offline bahi khata (ledger book). It is easier to build on an offline existing behaviour. The journey generally includes launch – > user feedback –> iterate – > launch again (and repeat). We now have a few million active users and have gone through a few iterations,” explained Ravish Naresh, Founder Khata Book.

A few tried and tested design principles include:

1. Keep it simple

2. Show as less as possible on the screen

3. They test a lot before relying on anything to know if it works for them or not

Khata Book today has users from Metros and non-Metros including, Port Blair, Pakistan, Bangladesh, Nepal, Sri Lanka.

Example of an offline behaviour taken online

SCALE COMES WITH PERSISTENCE, ITERATION AND LUCK!

Lastly, founders on the panel shared some advice for those who want to work in this space.

1.      “Don’t centre your pitch on credit, as that is almost everyone's pitch. Focus should be on creating a sticky core use case and credit can be a value-add later.” Ravish Naresh Founder Khatabook

2.      “Never build for this segment without talking to people on-ground.” Sumit Agarwal, Founder Vyapar

3.      “The key is how you innovate, whether it is a product, service or technology.” Krishnan Parameswaran Cofounder and CTO, Namaste Credit

4.      “Chose your cofounders well. S/he should have a complementary skillset.” Yadvendra Tyagi, Founder EnKash

 The opportunities that exist are immense. The market is large too. In conclusion, founders in this space tell me that there is a lot to be done and only can be done when more on-the-ground conversations happen and especially in India/ Bharat two and three. Until then, will continue to track this space and update this blog with new and interesting information. Your feedback is welcome – write to me on [email protected]

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