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in media, among academicians, national and international forums and among policy makers in recent times. What is it that makes it so important a sector to attract such a wide attention? The answer lie in the fact that it has played a very important role in socio-economic development of the country by contributing significantly to the overall growth in terms of the GDP, employment generation and exports. It is the back bone of Indian economy. It contributes to about 8%-9% of India’s GDP by providing employment to more than 40 million people in course of producing about 8,000 products. It comprises 45% of the industrial output in the country and contributes to about 40% of India’s exports. Definition of MSME Enterprises are broadly classified into two categories: a) Enterprises engaged in production/Manufacturing of goods for any industry b) Enterprises engaged in rendering/providing of services Both categories of enterprises have been further classified into micro, small, medium and large enterprises based on their investment in plant and machinery (for manufacturing enterprises) or on equipments (in case of enterprises providing or rendering services). The present ceiling on investment to be classified as micro, small or medium enterprises is as under:
* Fixed costs are obviously higher
SME in the global scenario Even in the global scenario SMEs have always played a crucial role in their respective country's economy. International comparisons reveal that SMEs create the majority of jobs. In the USA, nearly half of the private workforce is employed in small firms, of which three-fifth have less than five employees. In Japan, 78 percent of jobs are generated by SMEs. The same sector in Korea accounts for 99 percent of all manufacturing enterprises and 69 percent of employment in this sector. Therefore, SMEs must play a central role in the country’s employment strategy. This will require modification of policies and programmes to level the playing field, improve availability of credit, increase productivity, raise quality consciousness and competitiveness, and enhance job quality. Recent experiences of different countries in the context of globalisation also demonstrate that SMEs are better insulated from the pressures generated by the volatility of world trade and capital markets. They are more resistant to the stresses, and more responsive to the demands of the fast-changing technologies and entrepreneurial responses. Indeed, they are observed to be a very important vehicle for new technology adoption and entrepreneurial development. Ensuring the competitiveness of the SMEs is important as it would help in overall growth of manufacturing sector as also the national economy. Impediments to growth Much has been said and done for the development of MSME in India through policy initiatives, regulatory intervention and industry forums. However given the sheer size and the key role played by MSME much more needs to be done. Before proceeding towards the solutions it is very important to understand the problems at the most basic level. The problems faced by most of the players in this sector are: Access to funds: Funds are required for starting a new business, to grow the existing business, research and development, marketing and working capital. Banks are not very comfortable in lending to MSMEs due to a variety of reasons
including small size, lack of information, lack of understanding of the business, lack of effective internal mechanisms to understand and evaluate the credit risk involved with this sector. In addition to this time taken for raising funds, complex procedures, high collaterals etc make it difficult for MSME to get bank finance at low cost. Archaic and outdated labour laws: Regulations and legislations are formulated to support businesses and to protect the rights of different stakeholders. However multiple and at times contradictory laws defeat the whole objective of regulations and instead become impediments to growth of the businesses. There are currently number laws like Minimum Wages Act, 1948; Trade Unions Act, 1926; Contract Labour Act, 1970; Weekly Holidays Act, 1942; Beedi and Cigar Workers Act, 1966 and many more. Compliance with them creates cost in terms of time and money for MSMEs and hampers their growth. Research and development: This is one very crucial area where Indian MSMEs are way behind their global counterparts. This not only affects the quality of products and services but also reduces the competitiveness in the international market. Government policies: Government of India have been taking various initiatives towards promoting and developing MSME sector in India since independence. A number of high level committees have been formed to address various concerns pertaining to MSME. However poor implementation restricts the effectiveness of the policies leading to persistence of issues. Lack of awareness of global trade: The dynamics of business has gone a sea change during the last decade. Integration with the international markets has become a crucial factor for success of all type of enterprises including MSMEs which seeks a market oriented approach. Most of the players in this sector are product and technology oriented. In addition to this there is a lack of information, capability to build up an international market position and insufficient management skills. A high cost of acquiring information on foreign buyers, distribution channels, quality standards etc creates serious competitive disadvantage for this sector for competing effectively in the international market.
Management: Majority of companies in this sector are people run companies rather than system run companies. Over dependence on a few key personnel creates challenges to grow up in scale and operations and also the exit of such personnel may create serious limitations for continuation of the business. Impact of current meltdown on MSME The current meltdown of global financial and commodity markets begun with the fall of housing markets in USA leading to collapse of the sub-prime market in August 2007. The problems later on engulfed the entire financial and commodity markets throughout the world leading to a serious liquidity crisis and most of the developed economies going into recession including USA, UK, and Japan. It also led to slowdown in emerging economies like India and China as most of their growth was either due to exports to developed markets like USA or due to foreign investments. Fall of credit markets in US and Europe resulted in foreign investors pulling back their investments leading to a sharp fall in equity indexes around the world. Coupled with this the RBI followed a tight monetary policy by increasing the key rates like Repo, reverse repo and CRR resulting into a serious liquidity crunch in the domestic markets. The impact on MSME sector of the above can be understood as under:
Slowdown in key markets like USA, Europe and Japan resulted in decline in demand for goods produced by export oriented enterprises hence directly affecting their revenues and profitability.
Due to overall increase in risk perception and liquidity crunch in the domestic markets the cost of funds has increased considerably for the MSMEs to more than 15% now.
Many MSMEs did a lot of capacity building during the boom time, a significant amount of which was financed by debt increasing the interest cost significantly. Such companies are facing liquidity pressures due to decrease in demand for their products and unavailability of alternative sources of finance.
The big financial firms in US and Europe were the key clients of Indian BPO and KPO industry. The collapse of big banks like Lehman Brothers,
Bear Sterns etc. led to immediate cut down of their business seriously affecting the outsourcing industry.
Export oriented auto ancillary manufacturers have been the worst affected due to fall in demand of vehicles resulting as a result of high oil prices during the first 9 months of the year and a general economic slowdown.
Steps taken by GOI in wake of the current crises
A four per cent cut in ad-valoram duty across the board, to boost additional spending Government to seek authorisation for additional plan expenditure of up to Rs 20,000 crore in the current year to provide an interest subvention of two per cent up to March 2009 for pre and post-shipment export credit for labour-intensive exports like textiles, leather, marine products and SME sector
To provide an additional Rs 1,100 crore for full refund of terminal excise duty/CST and another Rs 350 crore for export incentive schemes and a back-up guarantee of Rs 350 crore to ECGC (Export Credit Guarantee Corporation) for providing guarantee for exports to difficult markets and products
The government doubled the current guarantee cover for loans to up to Rs one crore from the existing limit of Rs 50 lakh. Lock in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme.
RBI announced a refinance facility of Rs 7,000 crore for Small Industries Development Bank of India to facilitate the flow of credit to such industries.
Textile sector to get an additional Rs 1,400 crore towards the entire backlog of Technology Upgradation Fund.
Current funding scenario Banks have been the most important funding option available to MSME. At the end of March 2007, the loans outstanding against the MSME sector from the scheduled commercial banks is estimated at $54 billion. Apart from banks
MSMEs can also access funding through various schemes run by Ministry of MSME and SIDBI. Recently funding through PE, venture capital, ECB and factoring have also increased and was to the tune of $3 billion during 2007. Alternative Sources of finance- the way forward….. Factoring: A challenge for many small businesses is access to financing. In particular, many firms find it difficult to finance their production cycle, since after goods are delivered most buyers demand 30 to 90 days to pay. For this duration, sellers issue an invoice, recorded for the buyer as an account payable and for the seller as an account receivable, which is an illiquid asset for the seller until payment is received. Factoring is a type of supplier financing in which firms sell their credit-worthy accounts receivable at a discount (equal to interest plus service fees) and receive immediate cash. Factoring is not a loan and there are no additional liabilities on the firm’s balance sheet, although it provides working capital financing. In addition, the supplier can mitigate the credit risk if the factoring is done “without recourse” meaning that the factor that purchases the receivables assumes the credit risk for the buyer’s ability to pay. Factoring is a comprehensive financial service that includes credit protection, accounts receivable bookkeeping, collection services and financing. The benefit of factoring is that the credit provided by a lender is explicitly linked to the value of a supplier’s accounts receivable and not the supplier’s overall creditworthiness. Therefore, factoring allows high-risk suppliers to transfer their credit risk to their high-quality buyers. Factoring may also be particularly well suited for financing receivables from large or foreign firms when those receivables are obligations of companies who are more creditworthy than the factoring client itself. Venture capital/Private equity: This is yet another attractive source of finance especially for new firms in this sector and firms which might not be suitable for borrowing from banks. Apart from providing risk capital to the enterprises, VC firms may also work at an operational and managerial level by offering their skills and expertise hence contributing toward success of such enterprises. The
total equity investments in MSMEs including VC amounted to Rs 4000 cr in 2007-08. Road to be taken going further.....
A Market oriented approach: About 66% of the MSME fail because of
lack of demand. A market oriented approach can help MSMEs to design, develop and produce goods as desired by the customers and hence ensuring a good demand for them.
Exploring and utilizing alternative sources of finance: Banks loans and
working capital limits from banks are the finance is the most preferred financing option for the MSMEs. However it is not easy to get bank finance at a lower cost. The enterprises should explore other sources of finance like factoring, PE, Venture capital, ECB etc
The MSMEs need to enhance managerial skills and knowledge on
prospective markets by employing professionals and/or through advisors specializing in these areas.
The Credit Guarantee Scheme offered to the MSMEs by the government
should cover a guarantee of 100 percent rather than 75 percent.
The cluster approach has been quite successful. More than 350 clusters
exist in India, at present in totality they contribute about 60% of India’s export. Some of them are so big that they produce up to 70% to 80% of the total volume of that particular product produced in India. This approach needs to be encouraged further through public private partnership (PPP), geographically concentrated in few areas which have immense opportunities for expanding employment and also has opportunities for exports.
Reforming of the existing multiple and contradicting regulations and laws
to make way for more industry friendly and supportive regulations.
The coverage of the Technology Upgradation Fund (TUF) Scheme needs
to be broadened to the entire SME sector irrespective of the product line. At present it is available for cotton, textiles and jute industry.
Ensuring access to infrastructure, in respect of power, water, roads, etc.
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