Demonetisation Survival Guide for SMEs/ By Praveen Kutty (Head – Retail banking & SME’s, DCB Bank)

The demonetisation initiative has had an impact on every segment of our economy. When a largely cash dependent large economy makes a sudden transition to being a near cashless society, tremors are bound to felt all across. Obviously some sectors are more impacted than the others – SME segment being one of them. SMEs that are in the wholesale and retail trade of consumer goods, producers and dealers of perishable products, commercial vehicle business and real estate developers, in particular will need to quickly adapt to the changed environment to survive and succeed.

The new currency will take some time to replace a meaningful chunk of the withdrawn currency. The immediate impact resulting from lower cash supply is a moderation of demand. Let us take the example of a retailer of consumer goods. Despite having money in a bank account, consumers may not have the means to make a purchase. This could be because of low awareness on the use of the debit card and possibly the lack of infrastructure at the merchant establishment to accept funds electronically. Interestingly, with over 25 crore Jan Dhan accounts being opened, 60% of our population have a bank account. The retailer can now educate and provide strong alternatives to cash. Arming the retailers with low cost smart phone linked point of sale terminals is a significant step to improving their sales while getting the nation closer to the goal of cash less economy.

Many of these sectors also employ unorganised or casual labour who is paid wages in cash. Productive hours are wasted in standing in queues to obtain cash. Take the example of a commercial vehicle fleet owner whose business is predominantly cash based. The owner gives lump sum cash amount to the truck driver which covers his wages, the fuel for the truck and the incidentals for the trip. The shortage of usable currency puts the brake on his business. In such situations use of mobile wallets and prepaid cards are quick, easy to procure and easy to use. More importantly, acceptance of electronic funds has become ubiquitous and is no longer the preserve of high end merchants.

The SME segment has both the formal and informal segment. They are inextricably intertwined to form a seamless value chain. The move to a near cashless economy will bring more and more of the informal segment into the formal segment. This will result in higher degree of transparency. Add to this mix the higher liquidity the banking industry is enjoying and the result would be a larger base of lendable SMEs and lower cost of borrowing.

Lastly, the demonetisation should be seen along with the new regulations which have been brought about, in particular the Real Estate Regulation and Development Act (RERA), the Benami Transaction Act and the GST. The transition to a more formal segment will incur cost and discomfort in the short run, however the benefits brought about on account of greater efficiency and transparency will be much higher in the long term, if adopted early and adopted well.

Date: 
Friday, December 30, 2016