SMEs Financial Worries

SMEs have emerged as the most vibrant sector of the Indian economy accounting for about 95% of industrial units in the country. The sector contributes approximately 40% of value edition in manufacturing and around 45% exports. It has emerged as a panacea for providing employment to around 42 million persons and promoter of inclusive economic growth.
The Planning Commissions Working Group on SMEs for the 11th Five Year Plan has estimated that SMEs need approximately Rs3000 billion in working and term loans during the plan period. This sector remains neglected since long time; a reliable database on the sector concerning with heterogeneous range of activities is the need of hour which would boost the proper policy framing.

The next step should be developing a capital market exclusively for SMEs on the lines of Alternate Investment Market (AIMs) of London, NASDAQ, NSE and even NIKKEI have separate windows for small companies. Earlier OTCEI and INDONEXT were promoted by BSE for the same purpose albeit both experiments failed; hence optimum precaution must be put in place in any further endeavors in this regard.
In present circumstances SMEs are unable to borrow sufficient funds that is absolutely alarming for both the immediate and long term perspectives; the share of Micro enterprise in net bank credit witnessed a sharp decline from 42 percent from 2002-03 to 2.8 percent in 2007-08.

The share of enterprise with an investment below Rs5 lakh fails more drastically from 2.2 percent to 1.6 percent of total bank credit over the same period. Besides SMEs sector also requires dedicated Venture Capital Funds that must be willing to invest anything between Rs2 crore and Rs50 crore to facilitate innovation in SMEs.
Presently, Private Venture Capital funds prefer to invest Rs50 crore or more and are hence irrelevant to SMEs. In view of the enormous demand for equity capital for SMEs in the country, a major initiative is required in this direction.

Challenges are heading much faster; according to All India Census (2001-02), only 14.2 percent of the registered and 3.09 percent of the unregistered Small Scale Industries (SSIs) had availed themselves of bank finances.
SMEs are vehicle of inclusive with huge potential for employment generation, therefore it wouldn’t be viable to surpass the rudimentary requirements of this sector; Basel II Norms on Banking Supervision and Mandelson plan in UK could be the fine example before Indian government to infuse financial support to SMEs.
MSMEs (Medium and Small Scale Industries) Act, 2006 modified the title enterprise instead of industry to provide proper recognition to the service sector and conferred pride of place to Micro-enterprises; ceilings are also redefined now as up to Rs25 lakh is called a Micro enterprise, up to Rs5 crore Small enterprise, up to Rs10 crore as Medium enterprise.

These modifications necessitate for change in lending pattern of financial institutions; adjustment must be made to tap the various financial requirements of SMEs. Task force constituted by the Central government and initiation of SME Rating Agency (SMERA), a group venture of SIDBI, Dun & Bradstreet Information services India ltd and several leading banks of the country are welcome initiatives for the sake of SMEs and hope that it would boost the much needed morale of entrepreneurship in the country.
Atul Kumar Thakur
October3rd2009, New Delhi
atul_mdb@rediffmail.com