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Despite the challenges faced in recent years, India has emerged as the fastest growing large economy in the world. With a projected 7.8% rise in GDP for the coming year, the nation is at a critical stage of its development. In order to leverage this momentum, the government has repeatedly highlighted the importance of Micro, Small, and Medium sized enterprises to the overall growth objectives of the nation.
In particular, mid-market enterprises (MMEs) have been observed to hold the greatest promise for growth including job creation across all segments. Although the definition of MMEs varies, they are broadly categorized as having an average annual revenue of USD 25 to USD 250 million and typically employ anywhere from 100 to 1000 people each. In India, reports estimate that there are over 115,000 such mid-market enterprises which contribute over USD 350 billion in Gross Value Add every year, and employ over 51 million people.
MMEs directly or indirectly contribute in excess of 42% of India’s GDP and are a major growth driver of the Indian economy. In fact, the RBI analysis of government databases has shown that the Gross Value Added by MMEs has increased at staggering rates – with a 17.3% share in 2013-14 and 16.2% share in 2014-15, far out pacing the 10-12% rise recorded by larger companies. One can say that MMEs form the backbone of our entire economic system.
Lack of Support for Indian MMEs
Indian MMEs have the potential to be the growth engines of the economy but we find that they several times they are void of sufficient financing support from the system in general. And while the government has made certain improvements, such as a simplified tax regime and opening up of markets, they haven’t been able to keep up with the need for growth capital.
The key challenge faced by MMEs is lack of access to capital at the opportune time. As a consequence, many MME firms are unable to leverage regulatory and global geopolitical changes in time and end up missing critical opportunities to grow. And while traditional capital providers such as banks and large NBFCs open their doors wide open for large scale companies, they remain hesitant and conservative with MMEs.
Breaking Free of Traditional Systems
Traditional capital providers still view businesses through the lens of last audited financials and the availability of collateral security. While these providers are happy to lend funds to established brands and business leaders, they are unwilling to change their financial products for MMEs. This isn’t surprising when we consider that most of these providers are largely Public Sector Units (PSUs), who are mired with issues of their own such as bloated balance sheets and NPAs.
Given the fast-growing nature of the economy, filled with startups, young entrepreneurs, and newer innovations – the entire equation of capital financing for MMEs needs to be reconsidered. In the modern scenario, MMEs need a forward looking approach wherein the recognition of a company’s growth potential and cash flow availability should dominate the allocation of capital.
New Solutions for a New Era
The role of the MME capital provider needs to move beyond traditional modes of operation. Capital providers need to work closely with businesses in niche industries and understand the nuances of their customer’s financial needs and requirements. For instance, lenders must acknowledge that most MMEs today tend to be asset light businesses that can’t conform to traditional lending parameters.
Instead, lenders need to adapt, and learn to partner with their customers under this new paradigm. Lenders can increase their own potential for growth by adapting to the needs of their clients. By offering services such as quick turnaround with flexible terms such as coupon payments, principal repayments, security package, subordination et., lenders can foster growth in MMEs, while also ensuring success for themselves.
The Avendus Advantage
The world is changing, and MMEs are a part of this global, dynamic and evolving paradigm shift, which is unforgiving in the face of hesitance and fear. As experienced players in the Indian capital market, we at Avendus understand the risks of various niche segments and offer expertise to our customers that propels them towards high growth outcomes. We recognize a basic reality of today’s business environment - that growth potential and cash-flow are intrinsically linked. And mid-market businesses need modern solutions to win this new era of business.
Our key parameters for providing capital are multi-pronged; considering the equity value of the business, implementing a cash flow evaluation, projecting growth potential based on current operations and business visibility, and considering multiple take out sources. In this way, we don’t burden the potential of rising MMEs with the worry of available hard collateral and insufficient historical financials. Our goal is to revitalize the mid-market enterprises of India and to help them grow beyond traditional constraints. Not only will this unleash the entrepreneurial spirit prevalent across the country, but also unleash the nation to its fullest potential as an enterprise world leader.