Monday, October 17, 2011

Routes of Alternative Finances

Peter Drucker said “Because of its purpose is to create a customer, the business has two and only two functions: marketing and innovation. Marketing and innovation produce results. All the rest are costs”. Indeed once we are looking on the alternative finances for small and medium scale businesses, we found innovation and its skilled marketing as only way out for reaching a desirable end. Barring the finances from banks/ Venture Capitalists/ Private Equity, there are only few institutional routes of business financing…afterall, even we can’t rely on highly suspicious routes of Sovereign Wealth Funds {SWF} and Participatory Notes {PN}, which bears no accountability and simply creates a myopic illusion of something better!

But world is not without choices. Improving access to Community/Co-operative finance for SMEs, especially in their initial investment and the infusion of equity among its stakeholders could be a healthy way for SMEs to tap into its growth and innovative potential. However, a large number of SME may face an equity gap. When their initial funds will be exhausted, entrepreneurs have to obtain external finance to develop their project. Financing SMEs is, often considered a risky investment on account of the low rates of return; specifically during the seed phase. In India, lack of serious business angels is another dampening factor which otherwise could invest in young innovative SMEs. The inability to obtain early stage investment, narrowing down many SMEs reaching a size;where they can attract expansion capital. This restrains their growth. Despite these serious odds, SMEs as sources of innovation and employment generation can be the catalyst of India’s growth. So giving them the opportunity to start up, develop and accomplish their potential outcome will make a vital contribution to the quest of Indian economy.

In last few years, obsessions for giant monolith businesses have lowered in India, which is encouraging for economy size businesses. Overarching effects of this transcendence is visible in many crucial areas, so naturally financing also poising for twists with innovations. Complexities of institutional finances, particularly flawed handling of Priority Sector Lending {PSL} by most of the Indian banks except Regional Rural Banks, necessitate for SMEs to also look on alternative sources of finance. On existing networks of co-operative institutions, a sizable number of farming based small and medium businesses have been thriving, here a think for more professionalization in these activities can let an unprecedented opportunities to the aspiring SMEs. First of all, there is need for overhauling of regulatory structure in Co-operative institutions, besides increasing focus on improving the governance inside its functional ambit.

In its working mechanism, Co-operative action relies on community participation. An individual considered here a constituent of community and a stakeholder of collective action directed for productive enterprises. It’s true, Co-operative movements have never touched its true potential in India because of inside malfunctioning and political interference in its administration albeit this will be still unthinkable to denounce its intrinsic qualities. Stable and inclusive motives of its action simply endow Co-operative action to broaden the community based businesses. In more than hundred years of its history in India, Co-operative businesses have performed very well in the states of Gujarat, Maharashtra and also once in states of U.P and Bihar. Afterall, who can forget that AMUL had started as SME in ANAND/Gujarat, under the abled leadership of great Varghese Curion…and all credit of this success goes to this man who trusted and dared for an out of box thinking by relying upon the local communities for production/financing under the umbrella of Co-operative. Today, AMUL is the most profound assertion of community lead business in all over the world; time is ripe now to move forward with the similar replications. SMEs have golden opportunities to revive a symbiotic working relation with Co-operative institutions to tap its real potential.

At initial level, concentration of capital would be infact low or near about the optimum level which will be needed a frugal management practices for SMEs to make their way forward in limited resources. But the positive factor will be the member/stakeholders very close entitlement with the venture…that means, sharing of common interest will be an unique characteristics of this model will be smoothly allow a sustainable business. Such business model on social/community action is not unheard of in India, only it needs a new pattern of execution and diversity in its expansion from primary sector businesses to secondary and tertiary as well.

Beyond the formal mode of financing, community business seems the most appropriate option for SMEs in India. As we can’t expect SMEs being funded with endowments like the Ivy League institutions of U.S or the public funding of BBC in U.K, so an equity based community model will be the best suitable route for Small and Medium Businesses {SMB} to attain their genuine goal. In India, community lead businesses have striking similarities with the Co-operative enterprises, that obviously accord reliable and proven routes for SMEs to get financed and dwell with a stable model capable of giving long term feasibility in business. A business with sound prospects must be given a fair chance…adequate remodeling of the existing Co-operative laws and improving professional governance will allow SMEs a sound alternative of financing and will also give a much needed lease to the dwindling Co-operative institutions. Excessive idealism or extreme hardening of profit motives are equally bad for a business…SMEs are increasingly doing good in India but their real potential will be realise once, they will get the multiple channel of financing. Government and industry bodies must have to come forward on this very crucial issue.
Atul Kumar Thakur
October 17, 2011, Monday, New Delhi

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