MUMBAI, Nov. 18, 2019 /PRNewswire/ — From low consumer demands to thinner margins for businesses, from delayed payment cycles to lack of lending from banks, from low trust amongst the business community to businesses shutting down. If one hears any of these things, then the slowdown in the economy has already arrived.
Rotation ProblemThe worst-hit during a slowdown is small businesses. As per RBI and MCA data, in 2008 slowdown average credit period rose up to 281 days from 57 days. In the current slowdown, the average credit period is ranging between 180-210 days. Longer credit cycle leads to a higher Gross Working Capital cycle which has currently moved upwards of 400 days. This extended cycle leads to Poor Cash Flow, where there is rising pressure to make payments to vendors & lack of recovery from debtors. This situation is famously known as the ‘Rotation problem’ or ‘cash crunch’. This is the time when SME thinks of adding more working capital in business in the form of enhancing existing bank limits or taking fresh credit.
Slowdown leads to poor cash flow which is a red flag for SME to get Formal Credit. Banks are seeing rising NPAs & have already got cautious in lending. Small businesses hit a roadblock when formal credit gets inaccessible. 6 in 10 SMEs are facing this issue. Many SMEs are even shutting down if this issue gets severe. As per the SME Chamber of India, in the last 18 months, over 9 lakh MSMEs have shut down due to the above-mentioned problem.