Financing Issues in SMEs

SME Financing – Issues and Practices.

Presentation by

Mohammad Thoriq BahriIndonesia Delegation

SME Financing - Issues

Approx. 85% of SMEs in emerging markets suffer from credit constraints

Approx. 70% of all emerging-market SMEs do not use any formal credit

Informal sector meets their financial requirements, WITH OTHER SOURCES AT HIGHER INTEREST RATES.

Nearly 23.7% of SMEs disappear in two years and nearly 52.7% of SMEs exit the market in four years due to business failure, bankruptcy, or other reasons


Recent global economic downturn has further aggravated the problems that already existed

Very few SMEs are able to finance their expansion through their Cash Flow and have to explore external sources of funding.


• Lack of successful track record of SMEs creates a perception of greater credit risk among the banks

• SMEs lack the substantial asset base (collateral) to provide as security against bank loans.

– Lack of equity support from public

• GOVERNMENT SUPPORT.

Ministry of Small Scale Industries, Govt. of India has been promoting use of IT in SME’s, to enhance SME competitiveness, in view of globalization.

Government Support

Value-added services. viz : E-transaction portal Supply databases Advisory and Infomediary Services Market intelligence Technology providers Information providers Linkages with relevant institutions

Linkages to SME’s

Non-availability of institutional finance on affordable and easy terms is hindering SME’s access to new technologies.

Non availability of venture capital to the fullest extent.

Financial Access for SME’s

IFCI IDBI SIDBI ICICI SFCs SIDO NSIC

Financial Access through insitutions for SME’s

Some of its the popular schemes are Credit Linked Capital Subsidy Scheme for

Technology Up-gradation, Credit Guarantee Scheme, ISO 9000 / IS 14001 Certification Integrated Infrastructure Development

Scheme


Recently Government of India has taken a number of initiatives to help SSI viz. Credit Rating Scheme SME Fund Credit Cards


• Credit Rating Scheme

• SMEs have been depending for a quite long time on government support, such as reservation of products, incentives, concessions, subsidies, government policy, for collection of dues, labour policies, etc.

I

Why this act?

Credit Rating Scheme The scheme has been introduced to

encourage the SSI Units to get their credit rating done, by reputed third party credit rating agencies.

The credit rating will facilitate hassle free flow of credit to SMEs, while enhancing comfort-level of lending banks.


• Banker to understand the financials and other requisite details about the customer to make a lending decision.

• The credit scoring models are single point indicator

for diverse risk factors as also tool for pricing.

Why Credit Scoring ?

Risk of Default in the SME sector is spread amongst a wider base of borrowers and therefore the pricing would be linked to the Credit Rating of the constituent considering also the RBI directives from time to time.

• In view of the severe competition in the market, interest rates offered at times may have to be lower than the rate arrived at reckoning the borrower’s credit rating and to be approved by boards

Pricing

• Applied to score the borrower as well as score the effectiveness of services rendered by the organization (both sides can be scored)

• Internal assessment as to whether the portfolio is remunerative

• services, operational efficiency and better control

• Used for predicting /forecasting response, attrition, retention, recovery

• profitability, collections and provisions

Why credit scoring?

• As per Basel II norms, the banks are required to quantify the risk associated with each borrower and arrive at the risk weights by assigning rating.

Why credit Scoring?

• NSIC is the nodal agency for implementing the scheme

• The validity of a rating shall be for a period of one

year from the date of issue of the rating letter..

• Rating fee as per credit rating orgn and turnover of small enterprises.

Modalities of the SME Credit Rating Scheme

• In the event of the request for Rating being treated as closed by the Rating Agency due to non-receipt of the complete information, 50% of the fees received from the Small Enterprises shall be refunded by the Rating Agency.

Information by SMEs

. SME Fund

SIDBI : principal financial institution for promoting, financing and development of industries in the small-scale sector.

To improve credit availability SME fund of $ 2 billion has been operational since 2004.


Credit Cards Laghu Udyami Credit Card (LUCC) Scheme

(Small Enterpreneur’s Credit Card) has been liberalised.

Credit limit enhanced from $4000 to $20,000 for borrowers with satisfactory track record.


Other Initiatives Allocation of more than $100 million

towards Technology Upgradation Fund for Textiles

Setting up of Knowledge Commission Institutions of Excellence at IISC, Bangalore


Other Initiatives Weighted deduction of 150% of expenditure

on in-house research and development facilities of companies, engaged in biotechnology, pharma, electronics, telecommunications, chemical, or other notified products.

Custom duty exempted on capital goods and raw materials to a company for R&D project.


• Public sector banks have been advised to open at least one specialized branch in each district.

Specialized SME branches

• Credit facilities extended to a single Small Enterprises, Borrower (i.e. erstwhile SSI), either by way of Term Loan or Working Capital or both, without any collateral security or third party guarantee, will be covered, if eligible, under SIDBI’s Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme .

Collateral Security and Margin Norms

• The buyer to make payment on or before the date agreed on between him and the supplier in writing

• The agreement between seller and buyer shall not exceed more than 45 days.

• The buyer fails to make payment of the amount to the supplier, he shall be liable to pay with compound interest

Delayed Payment Act, 1998

• In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective state government.

Delayed Payment

• Scoring by Banks for financing of SMEs

• MANUFACTURING ENTERPRISES• LOANS FOR FOOD AND AGRO

PROCESSING• SERVICE ACTIVITIES PROVIDING OR

RENDERING OF SERVICES• EXPORT CREDIT

TYPES OF FINANCE

• Loans to persons involved in assisting the decentralized sector in the supply of inputs to

and marketing of outputs of artisans, village and cottage industries.

• Loans to cooperatives of producers in the decentralized sector viz. artisans village and

cottage industries.• Loans sanctioned by banks to MFIs for on-lending

to MSE sector as per the conditions.

INDIRECT FINANCE

• For working capital limits up to Rs.5 Crores , Turnover Method would be applicable as mandated under Nayak Committee Recommendations for financing working capital needs of the SMEs

• At 20% of the projected turnover based on the assumption of a three month operating cycle.

Working Capital Assessment

• For Small and medium enterprises, a debt restructuring mechanism for units in SME sector has been formulated by Department of Banking Operations & Development of Reserve Bank of India.

Debt Restructuring Mechanism for MSMEs

• Banks have been advised that the decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances.

• The rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable'.

Decision on Viability

• 60 clusters have been identified by the Ministry of Micro, Small and Medium Enterprises, Government of India for focused development of Small Enterprises sector.

• All SLBC Convenor banks have been advised to incorporate in their Annual Credit Plans, the credit requirement inthe clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India.

Cluster Approach

Economy & Finance

Financing Issues in SMEs