Introduction
Globally, Micro, Small, and Medium Enterprises (MSMEs) represent the most dominant segment of the business ecosystem, accounting for nearly 90% of enterprises and over 50% of total employment (World Bank). In India, the MSMEs sector hold a similar significance as a key pillar of growth, contributing around 30% to the Indian GDP and over 45% to the country's exports (GoI). The MSMSE sector is employs over 110 million people: emerging as the second-largest employer after agriculture in India. However, MSMEs face numerous risks such as financial, operational, regulatory, and strategic that can threaten their survival. While traditional risk management focuses on mitigating individual risks, Enterprise Risk Management (ERM) offers a holistic, proactive, and strategic approach that is far more effective for MSMEs. This blog explains:
- The key risks faced by MSMEs
- The limitations of traditional risk management
- How ERM provides a better framework for MSMEs
- Steps to implement ERM
What are the major risks faced by MSMEs?
MSMEs operate in a dynamic and often unpredictable environment. Some of the most common risks include:
1. Financial Risks
- Cash flow volatility
- High dependency on informal credit
- Delayed payments (especially in B2B transactions)
2. Operational Risks
- Supply chain disruptions
- Technology obsolescence
- Workforce shortages
3. Regulatory & Compliance Risks
- Frequent changes in tax laws (GST, income tax)
- Labour law compliances
- Environmental regulations
4. Strategic Risks
- Competition from large corporations & global players
- Changing customer preferences
- Digital transformation challenges
5. External Risks
- Economic slowdowns
- Political instability
- Natural disasters (e.g., floods, pandemics)
Given these challenges, MSMEs need a structured risk management approach which is not just firefighting individual risks but embedding risk awareness into their business strategy.
So, why Traditional Risk Management falls short for MSMEs?
Most MSMEs follow a siloed approach to risk management:
- Reactive rather than proactive (fixing issues as they arise)
- Focused only on financial or operational risks, ignoring strategic risks
- Lacks integration with business planning
This fragmented approach leaves businesses vulnerable to unforeseen disruptions which not just hindering growth of the MSME but sometimes led to total shut down of the enterprise due to unpreparedness towards the unforeseen events.
Why Enterprise Risk Management (ERM) is the Solution for MSMEs?
ERM is a comprehensive, top-down approach that aligns risk management with business objectives. Unlike traditional methods, ERM:
- Takes a holistic view of each operation at the enterprise such as covering financial, operational, strategic, and compliance risks.
- ERM is proactive rather than reactive which helps in identifying risks before they escalate.
- ERM enables better decision making as it helps MSMEs prioritize risks based on impact.
- Finally, ERM improves resilience of the enterprises with well-prepared businesses for unforeseen economic shocks & disruptions
So how does ERM Benefits MSMEs specifically?
- Cost Efficiency: ERM benefits MSMEs in reducing unexpected losses by early risk detection
- Competitive Advantage: ERM helps MSMEs adapt faster than competitors
- Investor & Lender Confidence: Implementing ERM in the enterprises demonstrates strong governance, improving funding opportunities
- Sustainable Growth: The ERM strategies aligns risk-taking with long-term business goals
What are the Steps to implement ERM in MSMEs?
1. Risk Identification: MSMEs should list all potential risks from each department such finance, operation, strategy etc.
2. Risk Assessment: After the risk identification in detailed, the MSME should evaluate likelihood or nature of impact whether the identifies risk is high, medium, or low. This will help in prioritising in resolution of the risk and continuous track on each risk identified.
3. Risk Mitigation Strategies: Developing an action plan is crucial as it documents what would be the action plans in case of arise of the risk identified. It could be to avoid, reduce, transfer, accept etc.
4. Integration with Business Strategy: The risk management should align with growth plans of the MSMEs.
5. Continuous Monitoring & Review: Finally, the enterprise should review and update risk assessments regularly which will not only benefit in improving the mitigation strategies to the existing risks but also will help in identify new risks of the MSMEs as it grows.
Explaining the ERM through an example:
Suppose a small manufacturing firm faces risks like raw material price fluctuations, GST compliance, and competition. Instead of handling each issue separately, they implement ERM by:
- Diversifying suppliers to reduce dependency
- Automating GST compliance using software
- Investing in digital marketing to stay competitive
What would be the Result?
Lower operational risks
- Better compliance, and
- Improved profitability
Conclusion
Micro, Small and Medium Enterprises (MSMEs) form the backbone of both the Indian and global economy. By fostering entrepreneurship, generating employment and promoting inclusive development, MSMEs continue to drive economic transformation at the grassroots level. However, MSMEs are prone to multiple risks. So, systematically identifying, assessing and monitoring a wide range of risks (e.g. strategic, financial and legal risks) following Enterprise Risk Mitigation (ERM) will help to find suitable and robust risk mitigation strategies. Given their limited resources, MSMEs need ERM even more to navigate uncertainties and sustain growth. By adopting ERM, MSMEs will not only minimize surprises with proactive risk detection but also optimise resource allocation by focusing on high-impact risks and which will build long-term resilience for the MSME in the volatile market.
As of July 2025, India is home to more than 60 million MSMEs and the number is growing faster than ever with multiple government schemes and make in India initiatives. Are you one of the MSME? Is your MSME prepared for unforeseen risks? Start by conducting a basic risk assessment today and gradually integrate ERM into your business strategy. Feel free to contact us for more information and help needed in this regard.
Reference:
GoI (2025), Enhancing Competitiveness of MSMEs in India.
https://www.worldbank.org/en/topic/smefinance
https://www.ijfmr.com/papers/2025/3/43963.pdf
About MicroInsurance Innovation Hub Foundation
The MicroInsurance Innovation Hub (MIIH) Foundation aims to revolutionize the Microinsurance segment, especially in India and the Asia Pacific region. Based in Hyderabad, it focuses on developing inclusive insurance solutions tailored to underserved populations. By exploring product, technological, and process requirements, the hub supports interested companies in penetrating this market segment. With a mission to serve the underprivileged, it strives to enhance insurance penetration and foster inclusive growth.
The Hub would work to support the development of micro insurance in the Indian insurance industry through exploring various aspects of this business, the product range, the technological requirements, the process requirements, and the type of people required to enhance penetration. For more information write us at contact@microinsuranceinnovation.com
Disclaimer:
The Microinsurance Innovation Hub (MIIH) Foundation is a Section 8 company and has members who intend to foster financial inclusion of underserved and unserved communities through providing Insurance. The innovation hub will act as an open platform to the stakeholders of microinsurance. This Hub will exclusively work in the Microinsurance / Inclusive Insurance space in India and other regions. The information provided here is gathered from various sources and Microinsurance Innovation Hub doesn’t validate any data. The information here are intended solely for internal discussion purposes.