Role of Commercial Banks in Financing Small

8/2/2019 Role of Commercial Banks in Financing Small

1/19

Team 3

Role of Commercial Banks InFinancing Small

and Medium Enterprises


2/19

Small and Medium Enterprises(SMEs)

Small and Medium Enterprises (SMEs)constitute the backbone of an economy. Theynot only provide employment and thereforeincome opportunities to a large number of people,

but are also at the forefront of technologicalinnovation and export diversification.


3/19

Finance among the Prerequisitesfor SMEs Development

Financing is one of the necessaryprerequisites for SMEs development such aslegislative, marketing and researchrequirements. Lack of finance represents a major

obstacle to SMEs growth and development. It isundeniable that in both developed and developingcountries, SMEs traditionally lacked access toformal credit, particularly long-term finance


4/19

Cont.. This is because SMEs are considered of high risk

due to insufficient assets, low capitalization, andlack of collateral as well as high vulnerability tomarket conditions.


5/19

Role of the Banking Sector inFinancing SMEs:

Commercial banks play an important and activerole in the economic development of a country.

If the banking system in a country is effective,

efficient and disciplined it brings about a rapidgrowth in the various sectors of the economy.

The following is the significance of commercialbanks in the SME development in a country.


6/19

Role of Commercial Banks in the SMEDevelopment

1. Banks promote capital formation 2. Investment in new enterprises 3. Promotion of trade and industry 4. Development of agriculture business 5. Balanced development of different regions 6. Influencing economy activity 7. Export promotion cells


7/19

1. Banks promote capital formation:

Commercial banks accept deposits fromindividuals and businesses, these deposits arethen made available to the businesses whichmake use of them for productive purposes in the

country. The banks are, therefore, not only the store

houses of the countrys wealth, but also providefinancial resources necessary for economicdevelopment.


8/19

2. Investment in new enterprises: Businessmen normally hesitate to invest their

money in risky enterprises. The commercialbanks generally provide short and medium termloans to entrepreneurs to invest in newenterprises and adopt new methods ofproduction.

The provision of timely credit increases theproductive capacity of the economy.


9/19

3. Promotion of trade and industry: With the growth of commercial banking, there is vast

expansion in trade and industry. The use of bank draft, bill of exchange, credit cards

and letters of credit etc has revolutionized bothnational and international trade.


10/19

4. Development of agriculturebusiness:

The commercial banks particularly in developingcountries are now providing credit fordevelopment of agriculture and small scaleindustries in rural areas.

The provision of credit to agriculture sector hasgreatly helped in raising agriculture productivityand income of the farmers.


11/19

5. Balanced development of differentregions:

The commercial banks play an important role inachieving balanced development in different regions ofthe country.

They help in transferring surplus capital from developed

regions to the less developed regions. The traders, industrialist etc of less developed regions

are able to get adequate capital for meeting theirbusiness needs.

This in turn increases investment, trade and production in

the economy.


12/19

6. Influencing economic activity:

The banks can also influence the economic activity of thecountry through its influence on

a. Availability of credit

b. The rate of interest

If the commercial banks are able to increase the amountof money in circulation through credit creation or bylowering the rate of interest, it directly affects economicdevelopment.

A low rate of interest can encourage investment.

The credit creation activity can raise aggregate demandwhich leads to more production in the economy.


13/19

7. Export promotion cells: In order to increase the exports of the country,

the commercial banks have established exportpromotion cells.

They provide information about general trade

and economic conditions both inside and outsidethe country to its customers.

The banks are therefore, making positivecontribution in the process of economicdevelopment.


14/19

Banking Sector services provided toSMEs, take various forms

(1) short term loans, compatible with SMEs businessand income patterns

(2) repeated loans, where full repayment of oneloan brings access to another, and where the size ofthe loan depends on the client's cash flow


15/19

(3) very small loans, or bank overdraft facilities arealso appropriate for meeting the day to-day

financial requirements of small businesses

(4) factoring and invoice discounting, asset

finance (including commercial mortgages), andequity finance, all being within the framework of acustomer-friendly approach


16/19

Factors recommended that bankstake into consideration

(1) that outlets are located close to entrepreneurs,

(2) to use extremely simple loan applications,

(3) to limit the time between application anddisbursement to a few days

(4) as well as to develop a public image of beingapproachable to low-income people. These are allamong the characteristics that should be

available in banking units serving the SMEssector.


17/19

Advantages of Commercial Banksin Financing SMEs

(1) Clear Regulations illustrating the conditionsof ownership, financial disclosure, andcapital adequacy that help them ensureprudent risk management.

(2) Physical Infrastructure, including a largenetwork of branches, which enables them toreach a substantial number of small and mediumsized clients


18/19

(3) Well-Established Internal Controls,Administrative and Accounting Systems which

facilitate keeping track of a large number oftransactions

(4) Ownership Structures Increasingly Dominatedby Private Sector which tends to encouragesound governance practices, seeking cost-

effectiveness and profitability.


19/19

Thank you

Role of Commercial Banks in Financing Small

Documents

Transcript of Role of Commercial Banks in Financing Small