THE Federation of Indian Micro and Small & Medium Enterprises (FISME) has proposed a study on risks faced by SMEs especially in securing payments from overseas customers.
The study would later be published as a guide to help SMEs export directly their products and services by effectively managing export risks.
FISME is commissioning the study under the SME component of a project titled Strategies and Preparedness for Trade and Globalisation in India. The project is a joint initiative of Ministry of Commerce & Industry, United Nations Conference on Trade and Development (UNCTAD) and UK Department of International Development.
The guide is intended to identify the enormity of risks especially in securing payments for products and services delivered to overseas customers. Many SMEs shy away from exporting directly their products and services in view of difficulties in getting payments from customers. They thus prefer to export through trading houses and other entities.
The latest census on small scale industries (SSIs) shows that only 0.5% of SSIs are actually engaged in exports. SSIs, however, account for more than 7% of gross domestic product and 40% of industrial production.
Similarly, SMEs direct contribution to the countrys total exports is 35%. They also contribute significantly to indirect exports channeled through trading houses, etc.
The proposed study titled Guide for SMEs: Managing Risks and Securing Payments in Exports would be prepared by a consultancy firm to be selected through competitive bidding.
According to study brief, breaking into new markets and supplying to established buyers is extremely difficult. The break to SMEs is generally given by second rung buyers many a times whose credit reports are either not available or not very encouraging. In either case, the export insurance covers for such buyers are not available.
Most overseas buyers do not open letter of credit in favour of a new small supplier. They offer to make payments under mechanisms such as delivery against acceptance (DA), delivery against payment (DP), telegraphic transfer (TT) after receipt of goods, cash against documents through bank, etc.
The brief notes that all such payment terms contain higher risk and unduly favour the buyer. The insurance policies either do not accept these conditions or charge hefty premium. Most SMEs find the insurance policies as too cumbersome and prohibitively expensive.
SMEs find cost of recovering bad debt through standard legal means as too expensive to be employed. Most of them quietly bear the brunt of bad debt and many never return to export again.
The brief says that one bad debt could lead to closure of small firm due to its inability to absorb payment default.