Why MSMEs In India Need To Focus On Capacity Utilization?

For a company, under-utilised capacity creates cash flow issue, leads to tax defaults, disturbs production planning and control, disturbs the flow of inventory; develop inconsistency in debt repayment and delays salary payments. It seriously hampers investment capability of the company for expansion of its business. Thus, industrial capacity utilisation is an important indicator of economic growth.

Jayesh Desai, Founder & Chairman of Shareconomy told BW Businessworld, “Reserve Bank of India keeps quarterly records of capacity utilisation. The utilisation of built industrial capacities of key 900 companies as per the quarterly reports published remained around 70 per cent. This is most likely to go down when it comes to small and medium scale businesses (SMBs). There are approximately 45 million registered MSME in the country. They contribute 38 per cent of the gross domestic product (GDP).” Thus, unleashing the potential of SMBs can bring significant positive changes to the economy.

The MSMEs have been going through a turbulent phase. As per a RBI report, there were 5,37,286 sick MSMEs in the country in 2015, up from 2,48,890 in 2013. As per an ASSOCHAM report, 79 small business units are turning financially unviable in India every day.

“If information and insight into total capacities available, their utilisation, historical trend of their utilisation, characteristics of capacities and their relation with utilization, etc. is not available, it would tend to duplicate the investment in new capacities. We would see the existing capacities under-utilised on the one hand and on the other, new capacities are built. The economy would loose its productivity in this case,” added Desai.

The country is witnessing a healthy momentum of start-ups. Many who aspire for a start-up face constraints due to lack of capital. Therefore, a way to approach the capacity owners for kick-start, would unleash various new business possibilities. Similarly, there are many companies that look to upscale their business in distant geographies. However, the transportation inefficiency and cost doesn’t permit them to do so.

“Starting something new is not difficult, but capital support is a must to create that ecosystem where people can come and get incorporated into it. Therefore, at Shareconomy we ask a basic question, do you need to build your own capacity, if there are many capacities waiting for business? Should you not only think of your idea and business and leave the manufacturing to one who already has built a factory similar to your requirement? Would it not have the capital, which anyway would build a capacity, which may not be fully utilized?” added Desai.

The MSME usually turn to cooperative banks and NBFCs for funding but the cost of serving these loans (interest rate) is to be very high. On the other hand, many MSMEs look out for venture capitalists. The venture capitalist invests in the MSMEs only if he sees an assurance over business, opportunity of scale, and expansion of revenue.

“In the current context where the industry is struggling with utilisation of the capacities it builds, Shareconomy would try to bridge this gap. Apart from helping improve utilisation of capacities on a continuous basis,” said Desai.