Sanguine Srinagar: Arjimand Hussain Column

Why J&K’s businesses fail

17 March 2024

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Ever wondered what makes some new businesses succeed while others struggle in J&K?

I have had some deeper insights into these questions over the last six years of my association with Ziraat Times. The reasons and factors are many, but today, based on my global experience with startups, I would like to focus mainly on bank finance and risk analysis and mitigation factors. To me, these factors are the most significant ones in determining whether a business would succeed or struggle in our context.

The overall outlook for bank-financed industries and startups in J&K does not present a comforting picture today. However, we do have plenty of success stories too. This situation must inform the decisions of prospective business men and women, especially those planning to seek big bank loans.

Interest rates for bank finance for our businesses is too high when we compare these rates with successful industrial and entrepreneurial societies. Secondly, when our businesses and startups take loans for their ventures, the assumptions on revenue, operating costs and profits are often flawed or lack details. Those assumptions, the problem is, are not linked to a robust risk analysis and mitigation planning. Let us unpack what that means.

Unsustainably high debt levels today plague many established and new businesses in J&K, leading some banks to seize collateral, including homes, in some cases. This situation is worrisome and highlights the importance of meticulous business model analysis, especially risk analysis, before seeking high-interest loans.

Over the years, I have been observing that the Detailed Project Reports (DPRs) of most of J&K’s businesses and industrial units overly focus on the analysis of the break-even equilibrium between the state subsidy, bank loans and the business persons’ own capital. However, that analysis does not usually factor in worse and worst case scenarios. Importantly, what is often missing in the DPRs is a robust risk analysis for various scenarios of the business. If at all there is a risk analysis, that lacks depth and misses out on several foreseeable and unforeseeable scenarios.

Our new businesses and startups usually do good market analysis in both formal and informal ways. However, that market analysis often misses the larger picture, especially the national level and global dynamics underpinning the supply chain and profitability of that business. In today’s uncertain world, where supply chains are as fragile as hardly ever before, a robust risk analysis must include a market analysis influenced by global factors. Without that analysis and mitigation planning, the quantum of risks only gets worse.

The problem is that while most of our businesses do detailed financial projections, they do not do the same for multiple foreseeable and unforeseeable scenarios. And quite often we see that businesses are barely ready for worse case scenarios, not to talk about the worst ones. Consequently, businesses are taken by surprise, and often crumble.

To prevent this situation, new businesses in J&K must embrace risk analysis and mitigation planning, with a particular focus on their sales, loan interest rates and return on investment (ROI). Considering the diversity of variables and uncertainty, thorough risk assessment before seeking a bank loan is a must. That assessment should be a comprehensive exploration of various scenarios, including market competition, operational costs and unexpected developments.

Beyond risk assessment, a critical factor for new businesses in J&K is a deep understanding of bank loan terms, particularly interest rates. Many new businesses take bank loans without a proper understanding about how the compound and simple interest work. They often tend to compare their business models with established businesses with high loan exposure but significant and sustained revenue streams. That comparison is fundamentally flawed. New businesses often lack the cushion of own capital and profit margins of established businesses that could help them repay their loans.

Some state incentive schemes for businesses in J&K offer a good cushion for sustainability, especially in industries where subsidies cover a large capital cost component. However, that is not the case for all businesses. High-interest rates eat away at profit margins, making it difficult, if not impossible, to repay the loan. New businesses should ideally compare loan options from various lenders, negotiating the best possible interest rate.

When it comes to startups, one of the primary reasons for caution lies in their inherent risks. With government jobs getting scarcer and the population constantly rising, our youngsters have fewer options other than plunging into business. To some youngsters the promise of independence and potential wealth, much better than what traditional government jobs can offer, is appealing. However, this enthusiasm, if not tempered with financial prudence, can lead to a crippling downfall.

While there are numerous examples of successful startups in J&K today, most startups are struggling. The reason being the same – over reliance on high-interest loans and poor risk analysis and mitigation planning.

With most of the state marketing patronage gone, today’s startups’ products or services face high competition from a diverse set of actors, and customer acceptance remains an unknown. Without a thorough understanding of these risks and a well-defined plan to mitigate them, relying on loans at high interest rates becomes a recipe for disaster for our startups.

Equally crucial is a clear understanding of return on investment (ROI). Fundamentally, the ROI has to be significantly higher than the loan’s interest rate to ensure a sustainable business model. If the projected ROI falls short, it is a clear indication that the loan is unlikely to be a wise financial decision. And that is the trap where a large number of J&K businesses have fallen in.

Through meticulous risk analysis and mitigation planning, and a very cautious approach to taking high interest bank loans, J&K’s new businesses can significantly increase their chances of success and avoid the financial pitfalls that plague the established businesses in J&K today. Investing in a comprehensive business model analysis might sound daunting for cash-strapped startups, however, the costs associated with conducting such an analysis pale in comparison to the potential financial devastation of a failed venture.

Our youngsters must appreciate that the devil is indeed in the details. They must evaluate the risks cautiously before taking high interest loans with uncertain revenue outlook.

(The writer is an international development specialist, having worked in 18 countries, and founder of Ziraat Times)