“Even when Nepal’s macroeconomic indicators are not looking good, our private sector is very resilient, and things are happening”

Siddhant Raj Pandey is Chairman and CEO of Business Oxygen Private Limited (BO2), Nepal’s first private equity fund. BO2 is a part of the Global SME Venture initiative of the International Finance Corporation (IFC). Pandey was a banker for over two decades, having worked at Merrill Lynch and Riggs Bank in London. He was also CEO of Ace Development Bank. Pandey holds a Bachelor’s degree in Business Administration and History from the Virginia Polytechnic and State University (USA) and an MSc in Development Economics from the University of Bristol (UK). the HRM talked with Pandey about the impacts of the Covid-19 pandemic on the SME sector, the challenges for SMEs, and measures of the government to support the crisis mired businesses. Excerpts:

Small and medium enterprises (SMEs) have been hard hit by the multiple waves of the Covid-19 pandemic in the last two years. As CEO of an SME-focused private equity fund, what are your observations on the impact of the Covid-19 pandemic on the SME ecosystem? 
The Covid-19 pandemic is an unprecedented crisis and it is not just a local issue or regional issue, but an international one. And in no time in history, had there been all three crises at once – supply-side crisis, demand-side crisis and financial crisis. SMEs have borne the biggest economic fallout of the pandemic. To begin with, SMEs, especially in an economy like Nepal, have never had the resources to grow. Banks loans are for those who can furnish collateral security. So, there’s this huge chunk called the ‘missing middle’ who are never eligible to get bank financing. Whatever way they manage their businesses was by bootstrapping, getting money from relatives, or using their own savings and other financial resources. And they normally ended up reaching a stalemate because they had no further capital to grow. Now, this was even more exasperated after the Covid-19 situation as the missing middle had no recourse for refinancing because they never availed bank loans, to begin with. Similarly, SMEs in Nepal are traditionally managed and don’t have the wherewithal to operate in a sophisticated market or economy. So, all these factors came about after the start of the pandemic.

BO2 is a part of the IFC SME Ventures Program with the main objective to invest in SMEs that are in the missing middle; these are the companies not able to get bank loans and are in operation but could not scale up because of lack of capital, etc. Beyond that, what we bring is also the technical support that SMEs need. As SMEs in Nepal are traditionally managed, they do not have sophisticated marketing, financial planning, sophisticated IT technology, environment, social governance methods incorporated in their operations. So, when we invest in these enterprises, we ensure that the companies are developed in such a way that they meet international best standards. We even provide the wherewithal for them to transform into that sort of an operation. So, when the Covid-19 came about and for the companies that we had invested in, the first thing we did was we prepared a business continuity plan for them. It was a hand holding them and assisting on how they could manage their operations. As human resources are one of the most important factors, we ensured that they had a safe operational system in place. The other issues that we did is expense management, what was required, how they can manage their business at this time.

As a company in Nepal with foreign direct investment, it was very difficult for us to add more capital to the companies. It is because the system in the country is such that to get FDA approval, it takes more than six months to a year. So, we provided them with technical support.

We have weathered the first two waves of the pandemic and facing the third wave. What are the challenges SMEs are facing at present and would face going forward?
We cannot put all SMEs in one basket. The businesses that will face huge challenges are those in the tourism and hospitality sectors, restaurants, and all the supply chain companies engaged with them. We thought that after the second wave, things will start getting better. But with the surge of the Omicron variant, the arrival of tourists in Nepal has again declined. This has become a very serious issue for the economy. The tourism sector I think will take a couple of years to bounce back.

While SMEs are going through turbulent times, what opportunities have emerged for the SMEs in these last two years?
I see huge opportunities in renewable energy, IT and medical sectors. There’s a huge demand and the companies that we’ve invested in those areas are performing surprisingly well.

What factors do SMEs owners need to be mindful of in terms of capitalizing on the opportunities in these critical times?
It’s very difficult to talk about results for companies that are small in size. For them, I think diversification is very important. The smaller SMEs that we have been investing in, now have realized that they need to have for their factories, parts, and equipment in supply in stock so that they don’t have to be waiting for it to be imported from India because of the supply chain disruptions.

Nevertheless, an unprecedented situation like the Covid-19 pandemic is not something you can plan. I mean, no one thought that the pandemic would last for two years. Hence, anyone’s guess is better than the other. So, keeping reserves, if you can, is good.

In some cases, we have actually added some capital as well to tide them over. But that having said also depends upon the forecast of the company’s financials.

How do you view the measures of the government and central bank to support the crisis-stricken SMEs? Have the measures announced in the budget and monetary policies actually produced results?
That has been effective and helpful to the businesses in the formal sector, meaning the ones that took banking loans got for refinancing. Anyone outside the formal sector, only very few have received that sort of refinancing or financing. Those are the ones that are the majority of the economy, but also the ones who are suffering.

So, what is needed to support them?
There should be a system whereby the government gives long-term subsidized loans to SMEs. But the problem here is that the refinancing is for a very short period. But the process is very long and cumbersome. It should be expedited. And I think it should reach out to all businesses, not the ones who are privileged. And of course, the FDI process should be expedited as there are too many hurdles, too many bureaucratic hassles. The other thing, the FDI threshold limit should be brought down. It’s not just the capital, it is also the technical know-how that international investments bring to the equation. That should be factored in.
The FDI threshold should be lowered as many businesses such as IT don’t take half a million dollars of investments. We should look at the value add that that technology brings. Let us look at the examples of ANZ Grindlays and Oberoi who came to Nepal with small investments. But the value addition that they have left behind in Nepal’s economy is huge. Most of the present-day CEOs of banks and general managers of big hotels were trained in those organizations.

What are the flexibilities required in Nepal, to attract foreign investments for SMEs sectors? 
I think everything is in place. It’s just the sense of urgency is not there. Instead of facilitating the process, our system is there to create more problems. And each interpretation of the law has its own translation by the person who’s behind the desk. So, it needs to be expedited. So, if a foreign investor has x amount of money to invest in Nepal and if it takes so long to get things done, he/she will go to Vietnam, Cambodia or Bangladesh. We’re competing for that pie; we have to understand that investors come here to make money as well.

What role domestic banks and financing institutions can play in helping SMEs to get back to their feet, apart from the measures taken by the central bank?  
It’s all about risk assessment who has the risk appetite. I mean, banks have their own risk assessments to invest in. But what’s most important right now after the COP 26 summit is the climate-smart approach. What is the effect of climate-smart on SMEs is something that we’re not even looking into? I mean, BO2 is a climate-focused fund. So, it is our mandate to appraise and evaluate our companies and to make them environmental, social and governance (ESG) compliant. But then it is just a handful of companies as we just have 16 investments. But it has to go on a wider level. And I don’t mean ESG is in terms of just ticking the box. The NRB did bring out a notification that banks have to do this ESG measure. But you know, is there any monitoring on that? Is there any assessment? Is there any evaluation on that? I don’t think so. There’s a cost to that and who’s going to bear that cost. SMEs are not going to be able to bear that cost on their own. So, there has to be intervention, technical support. And I don’t know if the government’s been thinking along those lines.

How are BO2 funded and assisted enterprises performing currently?
We evaluate in terms of the whole basket. Some of them have done very well, some have not done very well. But we have managed to exit from a few companies during this pandemic. So, I see that if this Omicron is not going to be too much of a risk to the economy, we will bounce back. Even when Nepal’s macroeconomic indicators are not looking good, our private sector is very resilient, and things are happening.

If things go into normal levels, which are the areas as a private equity firm like yours is looking to invest?
We will continue to invest in sectors like IT and renewable energy. We will also continue to expand investments in areas such as medical, technology, and healthcare. It’s an irony that we cannot invest in agriculture because FDI is not allowed in agriculture. Barring FDI in the agriculture sector doesn’t make sense for an economy that has is what 26 percent of our gross national income comes from agriculture and 60 percent of the people are employed in that sector. It needs a lot of technical support and investments and yet FDI is not allowed to be invested in this sector.

We are looking into creating larger funds than what we have. I see huge potential here, we have a pipeline of very good companies that are in need of capital, that we will continue to expand.

What has the pandemic taught businesses in Nepal?
The businesses that had the sense to move early and try to downsize in expense management have survived. Businesses that went to other different verticals could do that overnight. For instance, a restaurant business that got into the frozen food business and delivery services, businesses that created e-commerce platforms and quickly moved to that sort of pivot are the ones who survived. While the others who just complained and did nothing have continued to suffer.

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