Dr. Rajib Bhattacharya, teaches Finance at Globsyn Business School – one of Kolkata’s best colleges for MBA in international business. Dr. Bhattacharya has over 14 years of experience in middle and senior level positions in various industries including the banking sector. In his academic career extending over 11 years, he has been associated with reputed business schools as faculty member, paper setter and examiner. He had also been a guest faculty at Universitas Pelita Harapan, Jakarta, Indonesia. He has provided corporate training to middle and senior level executives of many MNCs. He has many research papers (including a best-paper award winning paper) to his credit, published in peer-reviewed indexed journals and presented in national & international conferences including some at IITs and IIMs. He is a member of The Institute of Cost Accountants of India, All India Management Association, Operational Research Society of India and Analytics Society of India.
Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in the Indian economy, as these units contribute significantly to employment generation, economic growth, foreign exchange earnings, poverty reduction and reduction in imbalance in regional development.
Moreover, MSMEs are the natural habitat of entrepreneurs and the cradle of innovation. Another distinguished benefit provided by the MSME units in India is that this sector has the potential to promote inclusive development by providing opportunities to marginalized sections of society, such as women, rural communities, and economically weaker sections.
Risk Management is Crucial for MSMEs in India
Risk management is crucial for Micro, Small, and Medium Enterprises (MSMEs) due to their unique characteristics and vulnerabilities. MSME units often face numerous risks that can impact their survival and growth. MSMEs are characterized by their limited resources and capacity to absorb losses. They typically have limited access to capital, technology, and skilled labor, making them more vulnerable to risks such as financial losses, operational disruptions, and market uncertainties.
Additionally, MSMEs in the current scenario, have to operate in increasingly dynamic and competitive environments, where risks can arise from various sources, including market changes, regulatory compliance, supply chain disruptions, and changing customer preferences. Proactive risk management enables MSMEs to anticipate and respond to these risks in a timely manner, minimizing potential damages and ensuring continuity of business operations.
Another crucial aspect of Risk Management for MSMEs is building resilience. MSMEs are susceptible to shocks and crises, such as natural disasters, economic downturns, or pandemics, which can severely impact their operations and survival.
Effective risk management practices, such as business continuity planning, insurance coverage, and diversification strategies, can help MSMEs withstand and recover from such shocks, ensuring their long-term sustainability. Furthermore, risk management is critical for MSMEs to gain and maintain the trust of stakeholders, including customers, suppliers, investors, and lenders. Managing risks effectively demonstrates a commitment to sound business practices, financial stability, and operational reliability, which can enhance the credibility and reputation of MSMEs in the market.
Enterprise Risk Management (ERM)
Enterprise Risk Management (ERM) is a strategic and comprehensive approach to identifying, assessing, and managing risks across an organization. It involves the systematic process of identifying risks, analyzing their potential impact, and implementing measures to mitigate or exploit them, in order to achieve the organization’s objectives and enhance its overall performance. Traditional Risk management usually focuses on individual risks in isolation.
In contrast to this, ERM goes beyond traditional risk management by taking a holistic and integrated approach to risk management at the enterprise level. It involves considering risks in the context of the organization’s strategic goals, business processes, operations, and stakeholders. ERM typically involves a structured framework that includes a continuous cycle of risk monitoring, risk identification, risk reporting, risk assessment, risk response planning, execution of risk response planning, and again risk monitoring. ERM aims to provide organizations with a comprehensive view of their risk landscape, enabling them to make informed decisions, allocate resources effectively, and improve their risk resilience. It helps organizations proactively manage risks, seize opportunities, and achieve sustainable success in today’s dynamic and uncertain business environment.
How to Implement ERM in MSMEs in India?
Implementing Enterprise Risk Management (ERM) in Micro, Small, and Medium Enterprises (MSMEs) requires a systematic approach that takes into consideration the unique characteristics and resources of these organizations. A step-by-step process to implement ERM in MSMEs is given below:
- Establish a Risk Management Culture: This involves fostering a mindset that recognizes the importance of risk management, encourages open communication about risks, and promotes accountability at all levels of the organization. Leadership should play a key role in promoting a risk-aware culture.
- Identify and Assess Risks: MSMEs should conduct a thorough risk identification and assessment process to identify and prioritize risks that may impact their operations and objectives.
- Develop Risk Response Plans: Once risks are identified and assessed, MSMEs should develop risk response plans to manage or mitigate the identified risks by any one or combination of risk avoidance, risk control, risk shifting and risk absorption. The risk response plans should align with the organization’s overall strategy and objectives.
- Implement Risk Management Practices: MSMEs should establish internal controls, establish risk management policies and procedures, conduct regular risk reviews, and update risk assessments as needed given the resources and capacity of the MSME.
- Monitor and Report Risks: MSMEs should establish mechanisms as an ongoing basis to monitor and report on risks to relevant stakeholders, such as the management team, board of directors, and external partners as applicable.
- Review and Improve: ERM in MSMEs should be considered as an iterative process that requires continuous review and improvement.
Thus, implementing ERM in MSMEs requires a proactive and systematic approach that involves establishing a risk management culture, identifying and assessing risks, developing risk response plans, implementing risk management practices, monitoring and reporting risks, and continuously reviewing and improving the risk management processes.
Hurdles to Implement ERM in MSMEs in India
Implementing ERM in Micro, Small, and Medium Enterprises (MSMEs) can face challenges such as limited resources and capacity, lack of awareness and understanding about risk management, resistance to change, absence of dedicated risk management personnel, and difficulties in identifying and assessing risks due to the dynamic and diverse nature of MSME operations. MSMEs may also face challenges in integrating risk management practices into their day-to-day operations and decision-making processes.
The Way Forward…
Overcoming the challenges requires a tailored approach that considers the unique characteristics and constraints of MSMEs, and emphasizes the importance of leadership support, training, and practical risk management solutions. The regulatory and developmental authorities for MSMEs may organize workshops and brainstorming sessions involving relevant stakeholders. Training programs for existing and potential entrepreneurs may be organized. The authorities may set up a MSME Risk Management Cell at district level to monitor the external environment and provide relevant information and guidance to the MSME units.
Initiative of Globsyn Business School in Promoting ERM in Students
Globsyn Business School strives continuously to bring out the entrepreneurial capabilities in its students. The B-School arranges for an annual event ‘Embryon’, which is dedicated to hone the entrepreneurial skills of its students. External experts from organizations of national and international repute are associated with ‘Embryon’, where inter alia, the students are exposed to Enterprise Risk Management practices.
Dr. Rajib Bhattacharya
Faculty – Finance
Globsyn Business School