Unique problems and unique demand for cash- Impact of demonetization on these typical characteristics of MSMEs

Even though micro, small and medium enterprises (MSMEs) are facing some major problems due to demonetization, the government officials share that in the long run, MSMEs will be the ones getting a better access to capital. The last few days saw the banks flooded with money. Due to this high number of deposits, their lending capacity will increase. MSMEs had requested the government to raise the withdrawal limit to between Rs 3 to Rs 5 lakhs, sharing paying their workers daily wages as a major concern. Many exporters have appreciated the decision and termed it as a move that will bring a cleaner economy and an organized way to  approach transactions. On the same hand, the enterprises that have a higher number of unskilled and migrant laborers like those in handicrafts, metal work, weaving, etc. have requested a greater withdrawal limit as they are still paying their workers in cash. We need to understand that the vision of the Prime Minister with this move is to make India a cashless economy and shift the process of payment in cash to the proper bank accounts of the workers. We are hopeful that as the time will pass, the currency position will ease out. The government is taking into consideration the rural areas, keeping their needs in mind. 

It is true that SMEs have unique problems and unique demand for cash, among other things and so is their nature of credit and turnover. With these typical characteristics’, RBI and other banks will be taking into account the kind of support MSMEs require. MSMEs is among the sectors which suffered drastic fall in trade, commerce and business activities due to demonetization. Concerns have been expressed by MSMEs across the length and breadth of the nation. Owners of small businesses in various states have shared that, their sales have dropped 50 to 60 per cent since the demonetisation and they are not receiving stocks. Grocers saw a great dip as either they don’t have the new currency or there is no change. In fact, in this period the lending increased so much, that many grocers did not have the funds to even order new stock. Customers bring the new Rs 2,000 currency note and buys things only worth Rs 250. The grocers are facing trouble in returning the change. The tourist destinations have also seen a drop in sales as their major business comes from the tourists. Even they do not have the cash to buy products from them. These small businesses who are majorly local traders earlier faced strong competition from the e-commerce portals and now demonetization. From retaining their old customers to now growing their customer base, it is a tough battle for them. Customers are avoiding all such places where they have to pay cash. In such a scenario, adding online payment facilities looks like the only solution. However, customers are avoiding shopping at the local markets now due to insufficient cash in the system and local traders do not have an online payment facility.

In states where the business was mostly agro-based, trade is at a standstill. Farmers have been selling the produce at rates almost less than the actual cost of production. This time of the year being a peak time for locations like Goa, the beginning of the peak season is seeing a crash. Most foreigners are cash-strapped. The business territories are seeing a 50-70 per cent dip. Hawkers, street vendors, roadside shops, eateries, retail outlets, and small traders across the country are badly hit. Due to the shortage of Rs 10 to Rs 100 notes they could not do much business. All the cash in hand was used in the very initial days.

MSMEs are now realizing that the biggest mistake they made was not using swiping machine. They never felt the need for it and due to this there has been a reduction in the business. Most of the customers are now looking for options where payment can be made through cards. Nobody wants to stand in long queue in the ATMs and banks. Even the cash that they have in their pocket, they want to save it for the extreme situations. As a result, middlemen, suppliers as well as traders are facing troubles and is giving rising loan defaults and non-payments. Thus, there is widespread distress as demonetization hits small, medium businesses hard, but we are keeping our fingers crossed for the long-term impact!