1. MSME FINANCING CHALLENGE Team Strategem Devansh Doshi Nikhil Indla IIFT Delhi

2. Meet a Typical Indian Entrepreneur 3. Who is he? Mr Aggarwal is a man in his late 20s living in Meerut, Uttar Pradesh He is a twelfth pass student He works in a sports goods manufacturing company for the page 7-8 years In this time he has acquired detailed knowledge of the business and made contacts with buyers and suppliers He now wishes to set up his own business in the sports goods manufacturing cluster of Meerut He needs INR 75 lakh to get his business off the ground He is a first generation entrepreneur from a poor family with few assets to their name totalling to INR 10 lakhs 4. Financing the Start Up Stage 5. Financing Options Venture Capital Funds SIDBI Venture Capital ICICI Venture Capital Bank Loans Nationalized Banks Private Sector Banks Development Finance Institutions SIDBI Uttar Pradesh Financial Corporation NBFC Shriram Finance Mahindra and Mahindra Financial Services Informal Source Friends Relatives 6. Problems in Financing Options Venture Capital Funds Ecosystem is underdeveloped Focus is on services sector and geographically clustered Bank Loans Extensive documentation Banks generally risk averse and conservative No prior record Development Finance Institutions Bureaucratic functioning and red tape Scale of operations not big enough NBFC Unwilling to lend because of the absence of adequate information No creditor protection under SARFAESI Act Informal Source Lend on unfavourable terms Account for nearly 90% of capital raised 7. Government Initiatives Priority sector lending targets Credit guarantee Fund Trust for Micro and Small enterprises SIDBI New Policy Initiative Norms on tax incentives for VC need to be relaxed The issue here is to make all these available to Mr.Aggarwal 8. SBI SME Collateral Free Loan Eligibility Micro and Small Enterprises engaged in Manufacturing and Service sector. For Manufacturing sector, original investment in plant & machinery should be upto Rs 5 crore and for Service sector, original investment in equipment upto Rs 2 crore. Purpose Working capital needs (Fund Based+ Non Fund Based). Term loan for construction of Building, office, acquisition of machines / equipments including expansion and modernization of the unit. Facility Cash Credit Term Loan Letter of Credit & Bank Guarantee Quantum of Finance Total Exposure to the unit : Upto Rs. 1.00 crore (All facilities WC, TL & NFB facilities) Interest Rate Attractive rates of interest* Service Charges concession in processing and service charges. Other charges as applicable. Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) Guarantee Borrowers eligible under the scheme will be covered under CGTMSEguarantee scheme. Security Primary Security:- Assets created out of bank finance Existing assets of the borrower as per definition of CGTMSE No collateral No third party guarantee Repayment Period Working Capital (WC): One year, repayable on demand. Working capital limits will be renewed every two year. However, performance of the unit and conduct of account will be reviewed annually for continuation of limits. Term Loan: Maximum Seven Years including moratorium period. 9. Existing Banking Products Working Capital Capital Machinery Finance Business Expansion Finance Short Term Loans Festival Working Capital Loans 10. MSME Development Finance Institutions A new type of NBFCs catering specifically to the MSME needs Provide access to priority sector lending Extend creditor protection under SARFAESI Act 11. Working Capital Financing 12. Options and Problems NSIC and SIDBI provides finance to procure raw materials and marketing finance for the short time Absence of scale to meet financing needs. SIDBI has a loan portfolio of Rs 53,875 while the gap is estimated at Rs 2.15 lakh crore Loan products by commercial banks Lack of flexibility in repayment schedules that are needed to deal with volatility in cash flows Bill discounting by commercial banks High cost of discounting Factoring by NBFCs Factoring firms are unpopular because it leads to buyers asking for discounts NBFCs offer working capital loans High transaction costs 13. Working Capital Financing: Mexican Development Bank Nafinsas Way 14. Factoring Exchanges A platform with the CCIL and MSME stock market needs to be developed This electronic platform is an factoring exchange Receivable bills can be auctioned on an electronic platform Bank discounting in the range of 10% -12% He typically have to wait for 90 to 120 days for the payment Mr. Aggarwal sell products to big companies in bulk 15. Reverse Factoring Non-payment and legal issues in recollection can pose problem in factoring Factors purchase the accounts receivables of only the larger, most creditworthy buyers Buyers need to be registered with the SMERA that will access their worth Working with only the registered buyers reduces both the cost of assessing accounts receivable risk and the risk of non-payment itself 16. Redefining MSMEs 17. The New Definition Type Micro Small Medium Employees Capital (in Rupees) Employees Capital (in Rupees) Employees Capital (in Rupees) Production < 25