This action might not be possible to undo. Are you sure you want to continue?
of various countries. India, certainly, is no exception. Over a period of time, it has been proved that SMEs are dynamic, innovative and most importantly, the employer of first resort to millions of people in the country. SMEs in India have recorded a sustained growth during last five decades and today, SMEs have substantial share in industrial production, export and employment. The sector contributes 40 % of the gross value added in manufacturing, around 35 % to direct exports, provide employment to around 28 million people in the country and is a breeding ground for entrepreneurship. Keeping in view its importance, the promotion and development of SMEs has been an important plank in our policy for industrial development and a well- structured programmed of support has been pursued in successive five-year plans for the promotion and development of SMEs in the country. India embarked on the path of opening up its economy and integrating it with the global economy in 1991. The liberalization of economy, while offering tremendous opportunities for the growth and development of Indian industry including SMEs, has also thrown up new challenges in terms of fierce competition both in domestic and international markets. The very rules which provide increased access for our products in the global market, also put domestic industry under increased
competition from other countries, not only in exports but also in the domestic market. In today·s world, technology, competitive strength together with benchmarking with the best international standards and practices have become the drivers of change and accelerated growth. Access on a global basis to modern technology, capital resources and markets have become the most critical determinants of international
competitiveness. This underscores the need for SMEs to be internationally competitive in terms of quality, delivery, after-sales service, price, etc. The need of the hour for Indian SMEs is to upgrade their technology, quality and adopt modern management techniques to keep pace with the changes that are taking place in the global market. Investment would be a prerequisite in these areas to bring about transformation. The availability of adequate credit at affordable cost, thus, becomes critical for Indian SMEs. There exist a well-developed network of financial institutions at national and state
level to channelize credit to SMEs. SIDBI is the
national level principal financial
institution for promotion, financing and development of SMEs. It provides direct assistance to the SSI sector through several schemes like direct discounting, project finance, assistance for technological up gradation and modernisation, marketing, finance, resource support to institutions engaged in developing SSIs, venture capital, factoring services, etc. It also provides indirect assistance comprising refinance, bills rediscounting (equipment) and against Inland supply of bills through an organized network of 910 Primary Lending Institutions (PLIs) including banks and SFCs with more than 65,000 outlets throughout the country. In order to enhance the flow of credit to the sector, various initiatives have been taken by the Government of India/Reserve Bank of India from time to time, viz. enhancement of loan limit under Composite Loan Scheme, increase in project cost limit under National Equity Fund (NEF) Scheme, launching of Credit Guarantee Fund Trust for Small Industries, extension of concessional assistance under Technology Development and Modernization Fund Scheme, introduction of special schemes for modernization of units under Technology Up gradation Fund Scheme for textiles and jute industries, Tannery Modernization Scheme and Credit Linked Capital Subsidy Scheme for Technology Up gradation. Further, to give focused attention to the needs of SSIs, public sector banks have so far opened 391 specialized SSI branches. Last year, the Government of India has announced that the credit to SMEs would be doubled in the next five years. Various policy directives and schemes have been announced from time to time to help improve the credit flow to the sector. The credit rating system for SMEs has recently been introduced to ensure availability of adequate and timely credit at low cost. Dedicated agencies for credit rating to SSI sector have been created with a provision of subsidized credit rating charges. The concept and practice of cluster financing has been brought into practice. Besides, the RBI has recently allowed banks to appoint business correspondents for collecting deposits and delivering credits. This could concept and practice of cluster financing has been brought into practice. Besides, the RBI has recently allowed banks to appoint business correspondents for collecting deposits and delivering credits. This could decline from 17.5 % in 1998 to 8.5 % in 2006. Lack of credit
at reasonable rate has hindered the growth of SMEs in the past. According to the third All India Census of Small Scale Industries, there are around 11.85 million small scale units in India, out of which, only 1.63 million are registered and rest are unregistered. Only 14.26 % of the units in registered sector and 3.09 % in unregistered sector have access to institutional finance. The coverage of institutional finance, thus, is far from satisfactory. It is no wonder that according to a survey conducted by SSI Ministry in
2003-04, 48 % of the respondents cited shortage of working capital as at the key reason for sickness in the industry. Non-availability of acceptable collateral is the major problem at the time of starting a venture. The problems get further compounded in case of young and women entrepreneurs. Even though the Government along with SIDBI has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI), to encourage banks to extend financial assistance to SMEs without collateral, the banks still seem to be hesitant to extend credit to SMEs. Similarly, despite a scheme for technology and quality up gradation with a subsidy component, the disbursement under the scheme is certainly below expectations. It is clear from the above, that despite the best intentions of the Government to expand the credit to SMEs, the results are far from satisfactory. It calls for an urgent need to have a relook on the policy measures for the promotion of SMEs and iron out the problems hindering the growth of credit to this sector. Following points could be considered: y First, a very important issue to understand is the composition of Indian SMEs and their financing needs. As per third All India SSI Survey, out of 11.85 million SSI units in India, more than 99 % units falls in the category of tiny, i.e. investments in plant and machinery of these units is less\ than Rs. 25 lakh. Even in this tiny sector, majority of them would be very small and would include cottage industries and artisans. Only a few lakhs would actually form what can be termed here as modern SSI sector having investments in plant and machinery in the range of Rs. 25 lakh to Rs. 1 crore. The financing needs of these modern SSIs along with medium enterprises, say with an investment in plant and machinery less than Rs. 10 crore, are, most of the time, quite different than that of tiny enterprises. These big units among the SSI sector would often require funds
mainly for diversification and expansion of the business and technology up gradation that needs to be dealt with separately. The schemes like credit ratings are most relevant to this sector. On the other hand, micro financing would be a very effective tool for financing smallest of small enterprises providing coverage to a large number of small units and also reducing the risk of banks. Further, there is a need of reorientation of government functionaries to this vast range of SMEs. It will be in the best and the relevant schemes. y Second, one will have to realistically assess the positions of banks and other financial institutions in this regard. They have the concerns about the NPAs and the growing incidences of sickness in SSIs. Obviously, financing of SMEs should be a profitable venture for banks so that they can extend credit to SMEs. As the large enterprises have access to alternative sources of financing, like capital markets\ and often the rate of interest is very low in case of large enterprises, banks have also started looking at SMEs as a potential thrust area. However, this needs to be further strengthened by the right mix of promotional policies reducing the risk of banks while financing the SMEs. Banks, on their part, would do well by providing adequate publicity to various promotional schemes so that a large number of units could get benefited. y Third, it is often observed that there is a lack of understanding of the government policy directives and guidelines and schemes of the RBI and the SIDBI on the part of field level functionaries of financial institutions. The officials need to be sensitized regarding the needs of the SMEs through proper training. y Fourth, a number of private banks are venturing in the field of SME financing with innovative schemes. Besides, cluster financing and innovative financing schemes like factoring are emerging as powerful tools for extending credit to SMEs. Credit rating is also gaining prominence. However, again there is a lack of understanding of these schemes on the part of banks and other financial institutions as well as SME entrepreneurs. It, therefore, becomes extremely important to engage SMEs and financial institutions and apex SME interest of the sector if government officials are properly designated to take care of certain set of SSIs
a constructive dialogue to ensure better
understanding of policies and schemes. SME associations should come forward in this regard and organize programmes in which all the stakeholders could be invited and the schemes could be popularized. y Fifth, the SME associations and NGOs should come forward and accept more respon- sibilities. Their role should not be limited to only lobbying for their members. The associations and NGOs can play a crucial role in micro financing. They could also provide specialized services to the SMEs in preparation of project documents and help in procedural aspects and could also help banks in assessing the risk for financing a venture. y Sixth, a few changes and improvements in the policies could help infuse credit to this sector. Equity participation ceiling of large companies in small scale sector should be raised from 24 % to 49 %. It would certainly motivate large enterprises to invest in small enterprises and thereby expansion of these units. Similarly, technology up gradation fund of SIDBI needs to be strengthened. The scope of credit linked capital subsidy scheme should be enhanced to cover a wide spectrum of products, sub-sectors and technologies. y Seventh, over the period, it has been observed that small units that are linked to large corporate as suppliers, service providers, etc. are usually successful. It is relatively easier for the banks and financial institutions to finance various requirements including working capital, technology up gradation, etc. of these units. Promotions of clusters linked to large units, thus, could help expansion of credits to small units. Finally, it has been observed that one of the major reasons for delays in sanction and disbursal of loans is the lengthy documentation and legal procedures involved in the process. While the large industries can afford to hire specialists for the job, the small scale entrepreneurs are often ill-equipped to handle this job on their own. It will greatly help SMEs if facilitation services are provided by various promotional agencies like SISIs, DICs, SIDCs, industry associations, banks, etc. The evaluation of various applications should also take place in a time bound manner and a stand should be taken within a stipulated time period. In case the application is
rejected, the bank must apprise the applicant of the reasons for not granting the loan. For the benefit of SMEs, which through improved efficiency have managed to reduce the stock, the banks should give consideration to other factors for computing the maximum permissible bank finance.
2. SME FINANCE The exact information on how small firms are financed in their early stages is limited because the majority of SMEs is financed outside the public doma in, throu gh inf ormal sou rces. It is c lear, however, that sma ll businesses use different types of finance compared to large firms, mainly because small businesses do not have access to capital markets and owner-managers themselves a re the single most im portant providers of start-u p finance. The sources SMEs really use depend upon different factors: the stage of business development where initial sta rt-u p capita l is sought from inte rnal sou rces, from the entrepreneur's ow n pocket, and later on s ources of external fund ing become more important; the extent and sou rce of funds depend upon the size of business , with larger ventu res seeking external s ourc es the industrial sector in which a SME ope rates (some production firms are based on tangible assets ² land, buildings, equipment SMEs, like female-owned face larger b arrie rs in the access to capital, at least in some countries.
3. DEVELOPMENT OF SME FINAN CE IN INDIA To cure the overall d isease of lack of a ppropriate growth of Indian SM Es ² Small and Medium Enterprises, India needs several small pills such as adequate credit delivery to SMEs , better risk mana gement, technological up gradation of Banks esp. Public S ector Banks , att itudinal c hange in Bankers and s o on. Am ong them , the major problem of inadequate financing to SMEs needs an urge nt attention. Having said this , it is pertinent to mention that Small Industrial Development Bank of India has achieved landmark results in the dom ain of small and medium enterprise financing and fulf illing their credit re quirements time to time in various forms such as long term project finance, working capital f inance, bill
discounting etc. However considering the level of appetite for c redit facilities of Indian small and medium enterprises, private and public sector banks in India need to w ork out an unique and innovative model of financing to this vital sector (SME) of Indian Economy. In today·s changing world , reta il trading, SME financing, ru ral c redit and overseas ope rations are the major growth d rivers f or Indian bank ing industry. The scene has changed since the adoption of financ ial sector restructu ring programme in 1991. The reform in the financial sector in India along w ith the overall second generation econom ic reforms in Indian economy has transf ormed the landscape of banking industry and financial institu tions. GDP grow th in the 10 years after reforms averaged around 6 %. With the introduction of the reforms especially in financial sector and successful implementation of them res ulted into the marked im provement in the f inancial health of the comm ercial banks measured in terms of capital adequacy, prof itability, asset quality and provisioning for the doubtful losses. Now , the rules of the game have completely changed . Consolidation has become the new mantra f or survival. Due to the growing influence of globalization on the India n banking industry , the author is of the opinion that the financial sector w ould be opened u p for greater inte rnationa l competition und er WTO. Opening up of the financial sector f rom 2005, under WTO, w ould s ee a number of global banks taking large stakes and control over banking entities in the c ountry. They are expected to bring with them capital, technology , and management skills which wou ld increase the competitive spirit in the system leading to greater efficiency. Government policies to allow greater FDI in banking industry and the move to amend Banking regu lations Act to remove the existing 10 pe r cent cap on voting rights of s hareholde rs are pointe r to these developments. The pressu re on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and the various F ree Trade Agreements (FTAs) that Ind ia is entering into with othe r countries , such as Singapore, will also impact on globalization of Ind ian banking. However, the flow need not be one way. Some of the Indian banks may also emerge as global players. As globalization opens up opportunities f or Indian c orporate entities to expand their overseas operations, banks in
India wanting to increase their international presence could naturally be expected to follow these corporate e ntities and othe r trade flows out of India. Alongside, the growing pressu re on c apital s tructu re of banks is expected to trigger a phase of consolidation in the banking industry. In the pas t mergers were initiated by regulators to protect the inte rest of depos itors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to ga in momentum in the coming years. A merger between two public sector banks or between a public sector bank and a private bank could be the next logical development. Cons olidation cou ld also take place throu gh strategic alliances or partners hips cov ering s pecific areas of business such as credit cards, insurance, SMEs financing etc. Secondly, risk mana gement has bec ome the key to success in which adoption of the state-of-the -art technology and latest rating and management skills tu rn out to be the significant aid for better risk management. The ability to gauge the risks and take appropriate position will be the key to successful financ ing in the eme rging Indian banking scenario. Risk -takers will su rvive, effe ctive ris k mange rs w ill prospe r and risk -averse are likely to pe ris h. In this context, Indian banks have to ensure: 1. Risk management has to trickle down from the corporate office to branches. They shou ld be made more accountable and responsible towards the ir duties. 2. As audit and supervision shifts to a risk -based approach rather than transaction oriented, the risk awarene ss levels of line functiona ries also will have to increase. 3. There is a growing need for banks to deal with issues relating to `reputational risk' to maintain a high degree of public conf idence for ra ising capital and other res ources. In this process, the technological ad vancement of Indian banks w ould create a soothing climate to manage their risk in a better way. In the years to come , technological developments would render flow of information
and data faster, leading to prompt a ppraisal and decision-mak ing. This would enable banks to make credit m anagement more effective, besides leading to an appreciable reduction in transaction cost. In order to reduce investment costs in technology, banks a re likely to resort sha ring of facilities such as ATM networks . Banks and financia l institutions will join togethe r to sha re facilities in the areas of payment and settlement, back-office processing, data warehousing, and so on ² majorly f or cost effectiveness and secondary m otto w ould be to provide everything under one head. The advent of new technologies could see the emergence of new players doing f inancial intermediation. For example, we could see utility service providers offering, say, bill payment s ervices or supe rmarkets or retailers doing basic lend ing operations . S o f or better profit margin, with the help of technological innovation, c ons olid ation and innovation in corporate lending, the conventional definition of banking might undergo changes. Considering such developments in the banking industry of India , it seems that the next decade will be an e ra of consolidation and integration. In such a scenario, the expected integration of various inte rmediaries in the financial system would require a strong regulatory framework. It would also requ ire a number of legislative changes to enable the banking system to remain c ontem porary and c ompetitive. There wou ld be an increased need for self-regulation among India n banks since development of best international standard practices cou ld evolve better through this rathe r than based on mandatory regulatory prescriptions. For instance, to enlist the confidence of the global investors and international market players, the banks will have to initiate adopting the best global practices of financial accounting and reporting. It is expected that banks should migrate to global accounting s tandards smoothly rat her than waiting for the regulatory circulars and guidelines, although it w ould mean greate r disclosu re and tighte r norms. Last and the most important development in the Indian banking industry is its change of focus in corporate lending on account of above mentioned changes and challenges. In the shelte red days of corporate lending by banks, when customers could be freely charged, banks concerned themselves with only `revenue' which was equal to cost plu s profit. Post-reforms - after 1991, when the cost of services became nearly
equal across banks and cost-control was a key to higher profits , the focus of financia l ins titutions especially ba nks shif ted to `profit', w hich was equal to revenue minus cost. This was an alternative measure of revenue stream which every bank thou ght of due to effects of external environment on their w ork ings. And in the future, as domestic and international com petition hots u p, financial ins titutions inc luding bank s may have to s hif t their focus to `c ost' w hic h will be determined by revenue minus profit. In other w ords , cost-control in tandem with efficient use of resources and increase in productivity w ill determine the winners and laggards in the future. The econom ic theory of ¶su rviv al of the fittest· works everywhere it seems through this example. The ray of hope is Small and Mediu m Enterprises (SMEs) 1 which is an emerging, inevitable and profitable target market f or the finance rs· i.e . financial ins titutions and banks. However, that need not mean banks and financial institu tions will back-up the social banking. Rather than being seen as directed and philanthropic-like financing, suc h lend ing should have been now more business driven. On the contrary, the authors believe that all the sou rces or ma rket of revenues have not been vanished yet. The SMEs sector is c ons idered to be an untapped market f or financia l ins titutions in India. We just need to combat certain obstacles. The hu rdles which need to be removed are:1. Minim ization of probabilities of ske wed returns f rom SMEs by better risk management 2. Eradicate inconsistency in the knowledge of SMEs business . For example, entre preneurs may possess more inf ormation abou t the nature and cha racteris tics of their products and processes than potential financie rs. 3. Absence of managerial intermedia ries whose role companies and technical is to evaluate expe rtise of and monitor
4. Lack of international infrastructu re and expertise in SME financing.