Risk management will make MSMEs more resilient against challenges like COVID-19: IRM India CEO

There is no corner in the world that has not felt the grave impact of COVID-19. In India, the Micro, Small and Medium Enterprises (MSMEs), which contribute significantly to India’s growth (about 30 percent) have been struggling to cope with the crisis.

While the government has announced some schemes, including the Rs 3 lakh crore collateral-free loan to provide immediate relief to the sector, the pandemic has made these companies realise that they need to also look at bringing reforms within the organisation to make MSMEs more resilient to business shocks.

Recently, IRM India, the Indian affiliate of the Institute for Risk Management, a professional body for enterprise risk management headquartered in the UK, signed a Memorandum of Understanding (MoU) with the National Institute of Micro, Small and Medium Enterprises (NI-MSMEs) to support and strengthen the MSME sector. 

SMBStory spoke to Hersh Shah, CEO of IRM India, on the next steps and why Indian MSMEs need to take risk management more seriously than before. 

SMBStory (SMBS): What does IRM do? Recently, IRM signed a pact with NI-MSME. What are the next steps?

Hersh Shah (HS): We are the world leader for enterprise risk-management qualifications. Just like any professional body, we have level one to level five examinations, and with 360 exam centres across India. A number of people from the business ecosystem apply for our courses, including entrepreneurs, family business owners, students, young working professionals, among others. 

But through this partnership with NI-MSME, our objective is to really provide that platform to the small and medium enterprises so that they can grow, keeping risk-management in mind. We intend to achieve this through various steps.

One is, we want to launch a joint certified programme, where IRM and NI-MSME will cover entrepreneurial risk management as a programme. This will give SMEs an exemption from IRM level one exam. So, entrepreneurs who want to take their SME businesses to the next level can enrol in an entrepreneurship risk-management programme under this pact. And this will be jointly certified by IRM and NI-MSME. 

Second is to support MSMEs with the right framework through research. Some MSMEs may not have the capital to appoint a chief risk officer or to invest in a risk team, which consists of 10 -15 members.

In such cases, we have a qualified member through the joint certified programme, a junior risk manager placed in an SME business who reports to the CEO or the business owner and then informs him or her, along with the other senior management team, about the risks involved on a quarterly basis. 

And the third thing is, of course, doing a series of masterclasses and webinars as a knowledge-building activity. 

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SMBS: Why is risk management an important subject for MSMEs in India?

HS: Enterprise risk-management is important because you need to safeguard yourself against future disastrous hazards that could potentially impact the business like floods, earthquakes, reputation management, potential cyber attacks or an even more serious situation like COVID-19.

Especially after the Satyam scandal, the 2007-08 financial crisis, we saw a lot of corporate governance failures. That's when organisations started to realise that now they need to look at risk beyond finance and insurance. They need to start looking at risk across the entire enterprise.

Risk management is not an idea, it is a culture.

And we have seen that in our experience across 143 countries. So, we would like to use all that leadership, research, and work to a country like India, where the MSMEs form a significant component of the economy. And there couldn't have been a better time.

SMBS: What are the greatest risks that threaten the existence of MSMEs?

HS: There are various threats. SMEs are vulnerable to a cyber attack because hackers would love to go after organisations that are digitally not ready. 

The second risk that they would face is related to general liquidity and funding. The World Bank has predicted that the MSME segment faces the largest credit gap across countries. And (in) India, it's one of the largest. COVID-19 can make the situation much worse as many MSMEs are on the verge of shutting down or have shut down already.

The third risk is a succession plan. India has about 65 million MSMEs of which 30-40 percent are led by owners who are now moving towards a retirement stage. Do these companies have a legacy plan is an important question to ask. 

Another threat, I would say, is reputation management.

In the wake of the pandemic when everyone is looking only at India, reputation is important from the market and the digital standpoint so as to attract customers from different regions.

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SMBS- MSMEs are known to be traditional organisations. How do you plan to educate them about risk management?

HS: I have been personally teaching risk management since the age of 21. You are right because MSMEs see risk management as an additional burden to their profit and loss account.

The idea of the free masterclasses, free webinars, which we are going to organise jointly with NI-MSME, (is) to achieve the objective of bringing about a shift in their mindset and educating them about the fact that MSMEs need risk management to become resilient. 

The other side of the coin is that there are many MSMEs whom I have interacted with and they have given me (an) excellent feedback on learning about risk management. It's just that there is no platform available. This is the predicament that the NI-MSME and IRM India hope to overcome through collaborative efforts. 

SMBS: Can you give some examples where applying risk management has really helped MSMEs?

HS: I know a few companies who were manufacturing cloth. They started making masks in the wake of the pandemic. And last month, their mass production touched around one lakh units. This is a classic example of risk management where the entrepreneurs kept their plan B or C ready. It's just that they need to do this in a more structured way and at a larger scale. 

Adopting risk management formally will also increase their chances of raising capital. Banks and investors will be easy to convince if MSMEs show a robust enterprise risk framework within the organisation. I think risk management has a great return on investment.

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SMBS: What are some of the important tips you will give to MSMEs when it comes to adopting an effective risk management strategy?

HS: There are five tips that I would recommend.

• Develop a risk culture.

• Develop a strong risk appetite. Measure the quantum of risk you, as an MSME, are willing to take. 

• Develop a risk escalation matrix. From the bottom of your organisation till the top at the board level assess how are the risks going to get escalated. 

• Develop a strong risk identification strategy, which means you bring all your employees into the room, get them equipped with the right knowledge and tools needed to identify the risk across the board. 

• Communication: Risk identification and other reports should be formally presented on a quarterly basis to the board. 

SMBS: Which are the countries that are investing in risk management and spearheading the space? What can India learn from them?

HS: We are seeing a lot of investments from the UAE, the UK, Singapore and the US markets. Companies in these organisations are investing heavily in risk management teams and are recruiting qualified risk professionals from IRM who have cleared the level one to level five exams. 

They are not doing anything different apart from the five points I mentioned in my previous answer. These organisations have a strong risk management culture and they are consistently brainstorming, conducting external workshops, scanning the environment, negative events, and looking for past trends.

Among Indian MSMEs, change is a challenge but our collaboration with NI-MSME aims to boost this sector by improving their preparedness for future business shocks.

(Edited by Apoorva Puranik)