The markets are in jittery, and for valid reasons. The rupee has hit an all-time low of 53 and macroeconomic indicators of the economy are sagging. Industrial production is on a downward spiral. Policymaking is ground to an apparent halt, and the rollback of the decision to open up multi-brand retail has sapped investor confidence. The negative growth registered in industrial production in October, a sharp 5.1% decline, and shows that industrial productivity is slowing far more rapidly than expected.
All these pose greater risks for overall economic growth in 2011-12, already watered down to 7.6%, with further downward revision on the cards. For now, slowdown worries take their toll on capital goods and companies stocks. Its impact is going to be more severe on micro, small and medium enterprises (MSMEs), which have been already running through bad time a rough patch, affected with huge financing gap and consistent decline in global demand for their products.
Despite being hamstrung by these, MSMEs rely on open market for their business finance, as internal mobilisation through informal sources makes the business more vulnerable. Though the socioeconomic importance of MSMEs is well recognised in academic and policy circles, they are starved of funds, with little interest shown by institutional investors. The priority sector lending policy outlines that 40%of net bank credit of public and private sector banks must be earmarked for those sectors, which include MSMEs. The policy stipulates 32%of net bank credit of foreign banks for the priority sectors, of which 10%is allocated to MSMEs. But barring regional rural banks, how many banks comply with this criterion? In the absence of proper channelisation, the mandated allocation hardly makes a difference to the business of the firms get financed by them.
Here, it’s imperative to keep in mind that the MSME sector is not homogenous, but is constituted by three different sub-sectors. These sub-sectors need to be serviced separately. For micro enterprises, access to credit is priority. For small enterprises, access to credit is relatively easy, though limited, and therefore remains important along with cost. For medium enterprises, access to institutional finance is easy though the cost incurred on credit is quite high. Collateral based lending offered by banks and financing companies is normally made up of a combination of asset-based finance, contribution-based finance and factoring-based finance using reliable debtors and guarantors. Substantial numbers of MSMEs are falling short on collateralised security needed for bank loans, and lack the prospect of high returns to attract formal venture capitalists and other risk investors like private equity funds. Moreover, market is also suffering from deficient information, diluting the effectiveness of financial statement based lending and credit scoring.
The sector expects that the government will take the decision to earmark 20%share in public procurement (wherein it will procure 25-30%of its needs from MSMEs), a proposal which is hanging fire for quite some time. Anil Bhardwaj, secretary-general of Federation on Indian Small and Medium Enterprises (FISME), observes that “this will work as lifeline in ongoing slowdown. To ramp exports, FISME has suggested the need to take up export promotion in urgency to enhance MSME participation in export from 0.5% to 5% in next 10 years”. For this to happen, the prevailing support mechanism, which heavily rely on Export Promotion Council for exposing MSME s to export market, has to be discarded. FISME also has valid reasons to criticise the RBI’s indifferent approach on MSME finance, but their demand for separate financial regulator for MSME seems not practical. Because, it alone wouldn’t ensure the micro centric approaches of new regulator on these small businesses, also after a certain point, policy must be shaped with optmising the interests of industries involved and its end consumers. So, basic idea should be at the ground to address the odds, which restraining the finances of this segment of industries.
James Carville, who advised US President Bill Clinton, once remarked that for being ecstatic on bond markets, “I used to think that if there was reincarnation, I wanted to comeback as President or the Pope or as a 400 baseball hitter. But now I would like to come as bond market, you can intimidate anybody.” Such is the negativism about the bond market even in western economies, but surprisingly that hardly directs the saving towards financing MSMEs worldwide.
Venture capital, as financial intermediary, also not providing viability to MSMEs for better engagement; the basic proposition could be found through their working model, that being able to secure finance is critical and most difficult for any business. It’s applicable to startups seeking venture fund or mid-size companies that need cash to grow up. So venture capital is most suitable for business with large up-front capital requirements which can’t be financed by cheaper alternative such as debt. Another financing option, private equity shows explicit interest s in typical leveraged transaction, where it buys majority control of a growing or mature firm. This works different from a venture capital or growth capital investment fund in which the investors invest in young business and rarely bids for decisive control. Beyond these lesser suitable options, bank remains the most appropriate route for bridging the gap of financing for MSMEs. So, it’s essential, bank come forward for effective partnership with MSMEs which is the engine of growth.
Atul Kumar Thakur
December 15, 2011, Wednesday, New Delhi
Email: summertickets@gmail.com
Showing posts with label SMEs. Show all posts
Showing posts with label SMEs. Show all posts
Friday, December 30, 2011
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
Email: summertickets@gmail.com
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
Email: summertickets@gmail.com
Sunday, October 4, 2009
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
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
Subscribe to:
Posts (Atom)
Posts
