SMEs and startups play a vital role in every country’s economy. In developing countries, SMEs contributes around 40% of the total GDP and 60% of the total employment[i]. The increasing number of positive cases of Covid-19 across the world is creating widespread economic concerns globally and Nepal is no exception. While some of us might be working from home, there are many businesses, more likely SMEs and startups, that had to stop their business activity unwillingly. The continued lockdown in the country has brought significant retrenchments in businesses across all sectors and industries with cash flow and earnings under threat. As a result of the crisis, businesses of every size are struggling to make the ends meet. The large-scale businesses might still be able to survive and adjust with the situation after the lockdown, however, the SMEs and startups are the ones that will face continued challenges and the lockdown may never be over for them.
In Nepal, there were 275,433 SMEs registered by the end of fiscal year 2074/75 and has supported the country by generating employment, increasing exports, and contributing to GDP growth. The SMEs contributed around 22% of the GDP and generated around 17 lakh employment in Nepal[ii]. However, in the coming days, many challenges await for SMEs and startups. It will be difficult to raise funds for venture capital firms and fund managers as this market shock might dry up possible funding due to losses that institutional investors may have accumulated on the capital markets and losses of limited partners. Moreover, the banks might also hesitate to provide additional credit because of the poor financial performance of SMEs as a result of the crisis.
Many exportable items of Nepal such as handicrafts, floricultural products, tea, coffee, etc. are produced by the SMEs and are labour intensive. Thus, the impact of crisis might also be seen on the export scenario of the country for a longer time than expected. The closure of SMEs will also mean that the rate of unemployment in the country will increase.
Start-ups, on the other hand, bring technological advancement and innovation in the economy along with creating new type of jobs. In case of Start-ups, survival is their biggest challenge. With the prevailing uncertainty in the economy and the fear that it may turn into recession will suppress markets for months to come. It will be difficult for start-ups to raise investment, as investors will have a weak appetite for risky spending[iii].
However, for investors, times like these create opportunities for them to choose investments in companies that have weathered the crisis. Moreover, it also offers a series of mergers and acquisition for investors to snatch distressed assets on the market. Reflecting back on the past two recessions i.e. Dot-com bubble burst 2000/01 and the 2007/09 financial crisis, fewer dollars were invested and more companies got funded during that time. This suggests that businesses that are cash efficient might become even more likely to raise funds following a recession albeit at lower valuations and lower total funds raised. History is evidence that half of the fortune 500 companies were formed during the recession and over 50 tech unicorn with a collective valuation of USD 145.2 billion were founded during the 2007/09 recession years[iv].
Surviving the Covid-19 pandemic
On 29 March 2020, Nepal Rastra Bank announced a few measures to support businesses during this crisis. The central bank has extended the deadline for paying the loan installment for borrowers from all sectors and banks and financial institutions will also be approving loans within seven days to start a business in the country for people who were unable to go for foreign employment. Along with this, NRB will also be prioritizing refinance facilities for small-and medium-scale industries[v]. However, these are short-term measures and may not yield the desired results. The NRB should relax the stringent bad loan guideline on the classification of Non-Performing Assets for at least a year to let SMEs recover. Relaxing the bad loan guideline will help reduce the repo rate and cash reserve ratio to increase the liquidity in the market.
Businesses cannot rely only on the government to find a solution to overcome this situation. Many of the SME/Startups will need hand holding to implement cost reduction measures for sustainability. It is expected that with limited funds SME’s/startups will focus on core operational needs and cut down on marketing expenses to sustain itself. This is a time when companies need to join hands and support one another to stay ahead and afloat by sharing knowledge and resources. For instance, customers inside Kathmandu valley can order goods from Big Mart through Daraz. These companies were able to combine their resources to create an opportunity for both during the lockdown.
Moreover, This lockdown is a great opportunity for businesses to develop digital literacy among employees to bring technological advancement in their services and in day-to-day business activities. The bright side is that the pandemic may actually accelerate changes in consumer habit that were taking time to materialize. Digital Financial Services and e-commerce companies are expected to benefit as consumers are introduced towards digital payment systems. Many of the E-commerce sites are expected to add new merchants as companies search for alternate and effective ways to grow their business. Even the government is working to develop an online platform to sell essential food items online.
Companies can analyse their past transactions and activities during this lockdown and draft a concrete plan to move forward after the lockdown. This is the right time for stakeholders to bring structural and policy level changes in the company to prepare them for a crisis like this in the future. Additionally, companies can provide online resources to their employees to enhance their existing skills and develop new skills. This way companies can appoint employees from one department to another at a time of need. For instance, people on the sales team could perhaps also help out the marketing team. Lastly, SMEs and Start-ups should make themselves flexible and adjust their business operation as per the need of the situation to find a new normal for operating under government-imposed health and safety restrictions.
[i] SMEs Financing in Nepal 2076, Nepal Rastra Bank
[ii] SMEs Financing in Nepal 2076, Nepal Rastra Bank
[iii] Jake Slatnik, “3 things startups can do to survive the economic fallout of Covid-19”, 1 April 2020 https://www.fastcompany.com/90484533/3-things-startups-can-do-to-survive-the-economic-fallout-of-covid-19
[iv] Dane Stangler, “The economic future just happened”, Ewing Marion, Kauffman Foundation, June 2009.
[v] Prithvi Man Shrestha, “Central bank announces relief measures for businesses affected by Covid-19”, 29 March 2020