SME Financing

Submitted to Mr. S. Clement

September 17,2010

Submitted By- Mayur

Nandani
Prashant
Pratyush
Pulkit
Rahul
 Scene of SMEs in India(2009 Estimates)

95% of all industrial units

40% of industrial output

SME
SMESector
Sectorin
inIndia
India 45% of industrial employment
accounts
accountsfor
for
35 % of exports

Prime driver of new

employment
 Why are SMEs important?

· High contribution to domestic production

· Significant export earnings
· Low investment requirements
· Operational flexibility
· Location wise mobility
· Low intensive imports
· Capacities to develop appropriate indigenous technology
· Import substitution
· Contribution towards defense production
· Technology – oriented industries
· Competitiveness in domestic and export markets
 
 
 

 
 Trend in SME financing

 The doubling of credit to the MSME sector as announced by Hon’ble Finance Minister
in August 2005, was to be achieved over a period of 5 years lending by FY 2009-10,
was achieved earlier by FY 2007-08. 
 The commercial banks meeting over 90 percent of the institutional credit needs of
this sector
 Doubling of share of MSE credit in priorities sector credit from 17.9 percent in FY
2006-07 to 35.4 percent in November 2009. 
 Obstacles to SME Financing

 Poor access to capital markets

 Collateral
 The intrinsic higher risk associated with small scale activities
 Business plan / strategy
 Accounting, finance, corporate governance
 Credit history, credit discipline
 Equity in business
 The existence of marked informational asymmetries between small
businesses and lenders, or outside investors
Financing gap
Some of the activities undertaken by the Government
 Established the Ministry of Small Scale Industries and Agro & Rural Industries (SSI&ARI)
in October 1999.
 The Ministry of SSI&ARI was bifurcated into two separate Ministries, namely, Ministry
of Small Scale Industries and Ministry of Agro and Rural Industries in September, 2001.
 In 2006 Ministry of Agro and Rural Industries and Ministry of Small Scale Industries
were merged into a single Ministry, Ministry of Micro, Small and Medium Enterprises.
 Government has set up the National Commission For Enterprises in the Unorganised
Sector (NCEUS) to suggest policies and programmes.
 The Government has also established a National Board for Micro, Small and Medium
Enterprises (NBMSME) for framing of rules under MSMED Act, 2006.
 They have undertaken various schemes like
 Bill discounting scheme
 Raw material Assistance scheme
 Where SMEs are helped finance purchase of Raw materials.
 Government stores Purchase Program
 Where in government & its departments promotes buying from SMEs.
 Players in SME Financing

1. Ministry of Micro,Small and Medium Enterprise

2. RBI
3. Exim Bank
4. SIDBI
5. SMERA
6. Private Funds.
 Ministry of MSME and its roles
 The role of the Ministry of Micro, Small and Medium Enterprises is mainly to assist the
States in their efforts to promote growth and development of SMEs, for enhancing
their competitiveness in an increasingly market-led economy.
 It provides with adequate flow of credit from financial institutions/banks.
 Support for technology upgradation and modernization.
 Welfare of artisans and workers.
 Marketing Support / Assistance to MSMEs.
 Support for Entrepreneurial and Managerial Development of SMEs through incubator.
 Building Awareness on intellectual Property Rights(IPR).
 Developing Cluster where SMEs operate collectively.

 This enables various services providers, including banks and credit agencies, to
provide their services more economically, thus reducing costs and improving the
availability of services for these enterprises.
 RBI
 The RBI aimed at providing adequate liquidity to compensate for the squeeze
emanating from foreign financial markets and improving foreign exchange liquidity. 
 RBI advised banks to consider restructuring the dues of MSMEs and issue prudential
guidelines on restructuring of advances.
 RBI provided refinance of an amount of Rs. 7,000 crore to SIDBI to enhance credit
delivery to employment intensive MSE sector.
 RBI also advised banks to contribute an aggregate amount of Rs. 2,000 crore
to MSME Refinance Fund with SIDBI, in advance, on basis of short fall in achievement
of subtarget of 10 percent for lending to weaker section category as on the last
reporting Friday of March 2009. 
 The RBI provided relief by reducing margin on receivables and relaxing the cash
margins on letter of credits/guarantee.
Structure of SIDBI
 Small Industries Development Bank of India

 Set up in 1990 through an act of parliament, it was incorporated initially as a wholly

owned subsidiary of Industrial Development Bank of India(IDBI).
 It started as a refinancing agency to banks and state level financial institutions for their
credit to small industries.
 As it expanded, it now provides direct credit to the SME through 100 branches in all
major industrial clusters in India.
 It has floated following entities for related activities
 SIDBI Venture Capital Ltd- Venture Capital Company
 SME Rating Agency of India Ltd.-Provides composite ratings to SMEs
 SIDBI - New Initiatives

 India SME Asset Reconstruction Company(ISARC)

 It is a specialized under NPA resolution.
 Established to acquire, manage and recover illiquid or ‘Non-Performing’ Assets
[NPAs] from Banks / FIs.
 Credit Guarantee Fund Trust For Micro and Small Enterprises
 To operationalize the Credit Guarantee Scheme Government of India and SIDBI have
set up Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
 India SME technology Services Ltd(ISTSL)
 It provides a platform where small enterprises can tap opportunities at the global
level for acquisition of technology or establish business collaboration.
 Credit Guarantee Fund Trust for Micro and Small
Enterprises

• Set up by GOI and SIDBI. Its objective are:

 Collateral is an important aspect of SME financing, which leaves SMEs
underfinanced.
 The Credit Guarantee Scheme encourages banks to lend up to Rs 5,00,000
without collateral. 
 Credit guarantee funds provide partial or full guarantees to small enterprises,
which can then use these guarantees to take collateral-free loans from bank.
 This has given high-quality assets, and allowed banks to offer comfortable terms
and credit at low cost to entrepreneurs.
 SME Rating Agency(SMERA)

• Was established in October 2005

• It focuses primarily on the Indian Small and Medium Enterprise (SME) segment.
• It has completed 7000 ratings
• Joint initiative by SIDBI, Dun & Bradstreet and several leading banks in the country.
• SMEs have started deriving benefits in terms of interest rate reductions and increase
in credibility
 Loans by Banks

• Private banks are moving into invoicing and factoring services, where the working
capital requirements of an SME are met immediately. 
• If an SME is supplying to the larger corporate based on planned schedules, then the
bank steps in to fund it through purchase orders. 
• For example, if an SME is manufacturing components on a purchase order, the bank
funds the SME on an open account. 
• Once the goods are shipped to the corporate, the payment is made by the corporate
to the bank, but the recourse lies with the SME.
 Loans by Banks

• Many banks are getting into export factoring.

• SMEs in the past had to wait for a letter of credit from a foreign bank, which was drawn
by the corporate abroad, and only then were they able to get the funding for their
working capital requirements.
• They are moving into export factoring with credit protection. 
• Here the corporate sends the export order and the bank funds the SME on an open
account .
• But banks like HSBC have tied up with Atridius, an European factoring and credit
protection agency, to prepare a due diligence report on the importer or the corporate. 
• This allows the bank to advise an SME on whether to sell the goods to the importer.
• Atridius mitigates the risk for the bank, but the recourse is on the SME.
 Who is a Venture Capitalist?

• A venture capitalist is a person who invests in a business venture, providing capital for
start-up or expansion. 
• Venture capitalists are looking for a higher rate of return than would be given by
more traditional investments.
 Need for Venture Capitalist

• Has the potential to finance start-ups

• Are generally willing to accept high levels of risks for high potential profits.
• Do not require collateral nor charge interest payments.
• Long-term or at least medium term capital.
• SIDBI Venture Capital Ltd is currently managing two national level funds, viz. NFSIT &
SME Growth Fund.
 Private Equity Funding

1. Private equity consists of investors and funds that make investments directly into
private companies.
2.Capital for private equity is raised from retail and institutional investors.
3.It can be used to fund new technologies, expand working capital within an owned
company, make acquisitions.
4.The investor acquires a stake in the company, becoming a partial or full owner.
5.So, the company which is in need of money is able to raise it without collateral and with
ease.
How do SMEs get money?(PE)
 Exim Bank

 Export-Import Bank of India is export finance institution of the country,

set up in 1982.
 Exim Bank’s extends export Line Of Credit(LOC) to overseas financial
institutions, regional development banks and foreign governments and
their agencies and Buyers’ Credits (BC) to foreign corporates .
 LOCs serve as a market entry mechanism to Indian exporters provide a
safe mode of non-recourse financing option to Indian exporters.
 LOCs/BCs are particularly relevant for Indian SME exporters as the
payment risk is borne by Exim Bank.
 Problems in SME

• 9.5% of the SMEs have been categorized sick

• Poor financial disclosure on account of tax issues
• High risk perception has led to high borrowing cost
• Credit history, credit discipline
• Collateral
• Working capital
• The poor quality of projects submitted for financing 
• The inability of SME to make the best possible use of available sources of funding.
• The negative attitude displayed by SME toward equity financing.
Thanks You