‘Regulatory intervention a must for building risk management capabilities in small businesses’

By Gopal Krishnan KS Ease of Doing Business for MSMEs: In India, micro, small and medium enterprises (MSMEs) account for more than 80 per cent of the industrial enterprises with the largest employment potential. They contribute more than 30 per cent to the nation’s GDP and more than 40 per cent to the manufacturing output and exports from the country. Despite the critically important role they play within India’s economy and the world’s supply chain, many lack the professional support to identify, navigate and leverage today’s business risks.

As primarily family-owned businesses, they are often governed by a small group of owners or managers. That small group can be tasked with making enormous business decisions, especially in recent years as they continue to recover from the COVID-19 pandemic. Also Read ‘MSMEs will have to embrace lean digital thinking to acquire digital mindset for better ROI’ ‘High-tech with ‘Phygital’ model changes credit journey for nano entrepreneurs’ Can modifications in GSTR-3B format put an end to fake invoicing menace? RBI’s new NPA norms: ‘Bringing NBFCs at par with banks to be shot in the arm for MSMEs’ Without the access to the full range of resources, data and professional support that many larger organizations have at their disposal, MSMEs are forced to address uncertainty without the capacity to fully assess the severity and implications of their decisions.

The weight of these decisions for MSMEs is amplified as even the slightest change in sales, cash flow, exports, and other areas can lead to an unstoppable downward spiral. Additionally, MSMEs possess certain structural bottlenecks, which inadvertently may lead to unforeseen challenges. These can include difficulties in fundraising and attaining credit and loans, issues related to outdated machinery and accounting processes, limited insurance, the inability to sell at remunerative prices, unskilled labour, and budget constraints for marketing, R&D and technology.

When you add stiff competition from large firms to that list the challenge to sustain a business can seem insurmountable. MSME operators must be resourceful because they are subject to the same risks as some of the world’s largest organizations. MSMEs must be ready to address strategic and operational risks, financial risks, insurance risks, project risks, engineering risks, supply chain risks, disaster risks, and healthcare/clinical risks.

However, a good risk management program could be a great equalizer for MSMEs. Lately, and for good reason, there has been a call for the government to enforce stronger risk management practises as a means to keep the country’s economy resilient. While regulators have remained silent, leading organizations and government agencies are pushing for new risk management requirements including: The SEBI has proposed to extend the requirement of constituting a risk management committee (RMC) to the top 1,000 listed entities by market capitalisation.

The RBI has mandated that non-banking financial companies (NBFC) beyond a certain market exposure appoint a chief risk officer. While it doesn’t warrant a risk management structure, the Companies Act does mention that companies have a risk management policy and that the audit committee periodically reviews the risk management systems. Risk management offers MSMEs the ability to identify and manage uncertainty, avoid (or lessen) sudden disruptions and, in some cases, highlights a path to revenue generation, supports innovation, strengthens resiliency and fosters growth.

Most importantly for MSMEs, risk management gives operators a better understanding of their business priorities, as well as their existing current resources. This information is crucial to helping them devise a strategic plan to more efficiently allocate resources and, ultimately, achieve their immediate and long-term objectives. Subscribe to Financial Express SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises At present, risk management capability is not widely adopted among the MSME business community.

And, for the few MSMEs that do have risk management in place, the practices tend to be informal, with no accountability for its implementation or effectiveness and each business function (i. e. , finance, human resources, IT) often manages risks in an isolated way that does not align with the overall business strategy.

Risk management creates formal, repeatable processes for organizations to identify risks and opportunities. It creates channels for more effective communication and can provide businesses with key indicators about changes within their internal and external environments. Risk management can help MSMEs proactively plan for adverse scenarios far in advance before the crisis manifests and it is too late.

Organizations – big or small, in India and around the world – continue to benefit from these practices. And, because they are prepared, they are more nimble and ready to respond to adversity. With risk management in place, they are not just in a position to survive, they are ready to leverage risk and turn them into a competitive advantage.

So how can regulators help? Regulators can and should play a more prominent role in promoting and advancing risk management practices. They can start with education. A first step could include imploring MSMEs to seek out risk management expert firms to deliver training or require MSME owners-managers to earn and hold a risk management certification.

Regulatory bodies such as SEBI, RBI, and IRDAI have the power to make a difference, strengthen resiliency and create greater opportunities for MSMEs by setting standards for monitoring, reporting and addressing risks. Regulators can also recommend or offer educational programming for MSMEs to enhance risk management, establish networks for peer-to-peer learning or partner with leaders in this space to offer MSMEs greater access to risk management benchmarking tools and relevant certifications. With so much riding on the success of MSMEs and with limited resources available, it is incumbent upon government officials to take action and create greater opportunities for MSMEs to elevate their risk management capabilities so that they are ready for whatever comes next.

Gopal Krishnan KS is the Director-Global Development: South Asia at Risk and Insurance Management Society (RIMS). Views expressed are the author’s own. .