SME Financing (2007 Format)

8/14/2019 SME Financing (2007 Format)

http://slidepdf.com/reader/full/sme-financing-2007-format 1/48

1

SMALL AND MEDIUM

ENTERPRISESFINANCING



2

A micro enterprise is an enterprise where investment in plant

and machinery does not exceed Rs. 25 lakh

A small enterprise is an enterprise where the investment in

plant and machinery is more than Rs. 25 lakh but does not

exceed Rs. 5 crore

A medium enterprise is an enterprise where the investment in

plant and machinery is more than Rs.5 crore but does not

exceed Rs.10 crore

Definition of Micro, Small and

Medium Enter rises



3

Indian view of SMEs

• Traditionally defined as:• Small Scale Industries (SSIs)• Small Scale Enterprises (traders and services)• Small Road Transport Organisation

• Professionals

• Focus primarily on manufacturing andless on servicing

• Concentration on traditional industry -textile, engineering, jute, auto ancillary



4

Characteristics of the SMEs

•

The growth recorded by SSI in India is 2% more than any other sector

• The sector accounts for 9% of the country’s GDP

• The sector employs more than 20 million people (Employmentcontribution by SMEs in Andhra Pradesh is 7.5%)

• It has been estimated that a lakh rupees of investment in fixed assetsin the small scale sector generates employment for four persons

• Among the large PSBs, state bank of India’s SMEs exposure grew by24% in 2008

• All banks are targeting SMEs credit growth of 25%

• It has been estimated that a lakh rupees of investment in fixed assetsin the small scale sector produces 4.62 lakhs worth of goods or



5

Characteristics of the SMEs

• Public sector banks’ overall credit to SME sector grew by 26%in 2006-2007, which amounted to Rs.1,85,000 cores

• Reserve Bank of India has advised all commercial banks toachieve 20% annual growth in SME lending

till 2010

• Non-traditional products constitute a massive 95% of the SSIexports

• SIDO, SIDBI, NABARD, NSIC, export promotion authorities areactively involved in the development of SMEs in India

• 45%-50% of the Indian Exports is being contributed by SSISector



Effect of liberalization on sme credit policies

• Earmarking of credit for tiny sector within overall lending tosmall industries

• Opening of specialized SSI bank branches

• Establishment of National Equity Fund for venture capitalsupport

• Technology Development & Modernization Fund through SIDBI

• Enhancement of turnover limit for assessing aggregate workingcapital requirement

• Enhancement of limit of composite loan to Rs. 10 lakhs. (Rs 1million)



• Launch of Credit Guarantee Scheme to cover loansup to Rs. 50 lakhs(Rs 5.0 million)

• Launch of Credit Linked Capital Subsidy Scheme toprovide for subsidy against loans taken for

technology upgradation

• Further enhancement of ceiling composite loan limitto Rs. 25 lakhs (Rs 2.5 million)

• Enhancement of project cost limit under NationalEquity Fund to Rs. 50 lakhs (Rs 5 million)

The Comprehensive Policy Package

announced

on 30th August 20 00



8

Overview of Indian SME Market

• In the last decade SMEs have grown fasterthan the overall economy

• SMEs contribute•

95% of all industry establishments• 40% of domestic exports and industry output• 35% of manufacturing sector

• Industry related contribution has been

declining

• Dominance of service and trade in line withhigher growth registered by service sectors



Page 27 table



10

Traditional Banking

• SME in India characterised by:• Low capitalisation and limited assets

• Geographical diversity and high mortality

• Poor access to capital markets

• Cash intensity in transactions• Lack of credit information

• Poor financial disclosure on account of tax

issues

• Directed lending based on Central Bankguidelines



The Need an d Me thod Theory of funding necessities



12

Requirements of smes

• Loyal and lasting banking relationships

• Doorstep banking

•Reliable Service Quality

• Comfort/ Relationship with bank staff

• Proximity to delivery channels

• Low delivery cost

• Combination of personal and business banking



13

The traditional approach

• High asset impairment• 9.5% of the SMEs have been categorised sick

• Largely in the manufacturing sector

• Post implementation of the WTO/ GATTnorms• Textile, and major SME dominated industry

have suffered setbacks

• Exports not able to keep up

• Survival has become difficult without high

protection



14

Sa li en t F eatures of S MEs

Turno ve

r

Assets

• Inconsistency in valuation

• Service/ manufacturing risk

profiles difficult to benchmark

• Within industry specific to

capital intensive nature of

industry

• Difficult to benchmark across

sectors/ industry• Not a true indicator of capital

invested

• Difficult to assign broad based

risk band



15

Sa li en t F eatures of S MEs

No . of

employees

Net W orth

• Difficult to compare

internationally

• Difficult given India’s labour

intensive operations

• Representative of capital

backing business

• Sustainability of business

governed by capital deployed



Management

Acceptable financial conditions

Collateral Value

Sound and feasible business and plans

Positive outlook of industry

Clean litigation records

Areas fina nc ial in stit uti ons w ould

evalu at e b ef ore de cidin g whether to

grant credi t



In dicativ e P ara me ters o f S ME s

Debt-equity Ratio- 3:1

Promoter's Contribution- As may be

required to arrive at the Debt Equityratio of 3:1

Margin for Term LoanAll backward areas in the State 25%

Other areas and Municipal limits of all cities




Rate of Interest

(table on page 65)




Repayment

Working Capital ComponentNot exceeding 10 years (including moratorium

upto 13 years)Term Loan ComponentNot exceeding 8 1/2 years (includingmoratorium of 18 months)

Security:Fixed assets and hypothecations or collateral



PR OBLEMS IN L END ING T O S MES

• Prospects: This refers to both the Industry and Firmanalysis in terms of growth prospects, financialstability, threat perceptions and the like

•

Purpose: The need and form of Loan

• Payment: The possibility of repayment

• Person: The will and ability of a person to repay

• Protection: The type of security provided to thelender, its value and ease of liquidation



GOVERN MENT INITIA TIV ES

National Equity Fund Scheme (NEF)

Direct Credit Schemes

Technology Up gradation Fund Scheme for Textile Industries (TUFS)

Direct Discounting Scheme - Equipment (DDS-E)

Composite Loan Scheme (CLS)

Single Window Scheme (SWS)

CREDIT GUARANTEE FUND SCHEME FOR SMEs

NSIC SCHEMES:

Bill Financing

Working Capital Finance

Export Development Finance

The Equipment Leasing ScheME



Th e C re dit F aci li t ies fr om NABAR D

Providing refinance to lending institutions in rural areas

Bringing about or promoting institutional development andevaluating, monitoring and inspecting the client banks

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to ruraldevelopment

Offers training and research facilities for banks, cooperativesand organizations working in the field of rural development

Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and



23

MY THS AB OUT SMAL L

AND MEDIUM



24

SMEs p redomi nan tl y w an t cred it



25

Asse ts c ontr ibut e m aj or porti on o f

Ban k

SME re lat ed p rof itsl Despite the focus on lending, deposits generate most SME

profits

l Only speciality lenders can consistently profit from credit

alone

l Banks must focus on deposit generation

l

Small business lending should enhance or support thedeposit relationship

l Cash Management Services a key product requirement



26

Br ick an d Mor tar sup port m an dat ory

for d evelop ing SME busi ness

l Swedbank, Sweden

l40% of SME clients use tele banking

l35% of SME clients net banking

l Wells Fargo - largest US based lender to SME

lNon branch based delivery

lCentralised hubs for credit operations, servicing

lDelivery outsourced



The c ause s of sickne ss o f SME indu stri es

• Diversion of funds

• Dissension among partners

•

·Shortage of power

• ·Technological obsolescence

• ·Overdependence on purchases by Government

• ·Lack of awareness of credit facilities available

• ·Lack of knowledge about various credit schemes



The c ause s of sickne ss o f SME indu stri es

High risk on account of poor financial and marketingmanagement

Vulnerability to high market risk and high rate of mortality

Non availability of information regarding their performanceon regular basis to assess and rate their strength andweaknesses

High transaction costs involved in financing SMEs leading

to ultimately non remunerative to borrower ass well aslender

Poor margin in transactions due to involvement of



EXISTING GAPS

Delivery of finance not linked with delivery of business development

Financing institutions do not assume the role of

partners to SMEs both in assuming risks andassisting in management and marketing

Non- existence of reliable information systems tostudy the risk pattern and to provide market

intelligence to SMEs

Non availability of suitable debt and equityinstruments to help SMEs to raise fund from the



30

Advantages of sme financing

l Low risk given the support of the Corporate

l Historically low NPAs

l RaROC returns are high despite the declining interest yield curve

l High risk return ratio

l Creates cross selling opportunity within the Corporate and the

SMEs

l Exit barriers are high once the product is rolled out



RE CENT INNO VATIONS

• Venture capital funds have been floated to sharerisk, cost of funding and to provide support onmarket and management knowhow

• Credit guarantee and rating institutions have been

floated to support banks to assume riskunhesitatingly in financing SMEs

• More appropriate credit instruments have beendeveloped to help SME to have facile credit withless cost and collaterals

• Better information systems and training moduleshave been developed to make SME viable and



INNO VATiv e stra tigie s to f in an ce

sme s

• Creating partnership relationship of micro financinginstitutions with SMEs for risk sharing

• Developing equity market and venture capital for SMEs

• Evolving credit cards to maintain required liquidity inoperation of SMEs

• Building kiosks at village centers to disseminates marketintelligence and data on technological up gradation and

climate

• Providing facilities for securitization of debts for improvingliquidity of financing

•



Recent developments

Some initiatives have been taken by commercial banks inIndia to make SME financing less risky. In this specialmention is providing rating facility. Besides this, venturecapital has been floated to assume higher risk

Lending on the merit of the project rather than on the basisof collateral is gradually evolving particularly with the helpof venture capital

Change in lending strategies:

6. Transaction lending technology7. Relationship lending technology

8. Mixed technology, i.e. taking risk cover and sharing therisk through marketable products.



CGTMSEOne of the major causes for low availability of bank finance to this

sector is the high risk perception of the banks in lending to MSEs andconsequent insistence on collaterals which are not easily available with these

enterprises. The problem is more serious for micro enterprises requiring small

loans and the first generation entrepreneurs.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises

(CGMSE) was launched by the Government of India to make available

collateral-free credit to the micro and small enterprise sector. Both the existingand the new enterprises are eligible to be covered under the scheme. The

Ministry of Micro, Small and Medium Enterprises and Small Industries

Development Bank of India (SIDBI), established a Trust named Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to

implement the Credit Guarantee Fund Scheme for Micro and Small

Enterprises. The scheme was formally launched on August 30, 2000 and isoperational with effect from 1st January 2000. The corpus of CGTMSE is

being contributed by the Government and SIDBI in the ratio of 4:1 respectively

and has contributed Rs.1346.54 crore to the corpus of the Trust up to September 30,

2007. Based on the future requirement, the corpus is likely to

be raised to Rs.2500 crore.



INNOVATIONS



36



37

BA NK O F I NDI A:

SME P RODUCT SUI TE

CASE S TUD Y



38

SME

• Customisedliability product /solution

• Integrated toother productsuites

• Fee basedrevenue model

• Web baseddelivery

• Customer

interface throughCall centre

• Minimum Branchuse

Institutional

• Correspondentbanking products

• Co-operative Banks

• Suite of Settlementbanking products

• ATM sharing /remittanceproducts

• Liability /InvestmentManagement

• Advisory products

• Web based delivery

E-Finance

• Technologyplatform for otherbusiness

• SME Portal

• SME businesscard solution /processing

• SettlementBankingoperations

• Factoryprocessing fortrade finance /correspondentbanking products

• Dealer Finance

• Vendor Finance

• EquipmentFinance

• LeveragingCorporaterelationships

• Cross Sell Liabilityproducts

Corporate

Linked Standalone

• All units withnetworth ofRs.0.50 croreupto Rs.50.00

crore

• Asset sizeRs.5500.00 crore

• Diverse &undifferentiated

• Shift them onliability platform

• Card / web baseddelivery



39

Liability products

Th e k ey driv er f or SME Business

Prim ar y product of fering t o be

Current A cc ount w ith wrap ar ou nd se rvice s

Ce ntralisa tion of pr ocesses

Client acqu isit io n and ser vi cing

Cust omised of fering base d on relati onsh ips

W i

n d

o w t o

c r

o s

s

s e l

l



40

Service & Delivery

lInformation

lLogging requests

Call centre

Customer

Branch

ATM

lFor all

transactionsexcept high

value cash

lDrop box point

lHigh value cash

transactions

lHandles exceptions

lCross sells

lMonitors accounts

Account/ Relationship

manager

Trade finance

factory

Credit factory

RPC/CPC

Processes all pure

credit related

requests

Processes all

trade related

requests for a city

lProvide

support

backbone forall transaction

requests

lServices

doorstep

deliveries

lInformation

lLoggingrequests

Internet“Processing centres*”



41

Corporate linked business

Clie nt A cquisit io n and Mar ketin g

Relat io nsh ip M anage rs t o ide ntify po tential

Appr aisal

Pre-app roved an d para me terised

Monit oring

Cre dit F act ory - CO PS

Ser vicing

Call C entre s, BPO ,

Deliv eryCh annel neut ra l an d par tly o ut so ur ced t o channel

D r

i v e

r o f

S

M

E

a s

s e t s



42

Other Services

• Power-Pay

• Payroll management

• payroll

• retirement

• employee benefit and PF management

• 4th party logistics

• PFS loan and credit products

• Insurance - life and non life

• Office products

• Bill payment module



43

Other Services• Credit cards

• Forex services

• Tax computation

• Cash flow analysis

• Legal advisory

• Mutual fund advisory

• Personal services - hotel, airlines

• Software and other equipment

• Human resources - head hunting services



NEED o f the hou r

Most of the research studies on financing of SMEs have highlighted the need to

link availability of finance to SMEs to the delivery of business development toimprove its viability. It is therefore necessary to evolve a model that shall providefor a partnership in between SMEs and banks. The partnership concept takes careof sharing of risk in business proportionate to their respective financialinvolvement. Moreover, if we extend the partnership concept further, it would alsohelp borrower to get more acceptable rate of interest. In fact, such partnershipconcept may lead to sharing of earnings instead of charging interest on loan as is

prevalent in Islamic sharing of earnings instead of charging interest on loan as isprevalent in Islamic banking which of late is growing in importance due to presentrise in oil prices. Moreover, it is necessary to build reliable information on SMEs tohelp assess market opportunities and risk management There is also an urgentneed to develop equity market for SMEs. This may be done by spreading successstories of SMEs in India. It has been the 71 findings of many research studies thatSMEs mostly depend upon external capital and this should not be only loans from

banks but should be partly equity raised from the market besides the nominalequity held by the promoter. In this the supportive role of mutual funds andventure capitals could be of great help in developing capital market for SMEs.Further, securitization is another area to be developed to take care of non-performing assets (NPAs) that are blocking regular flow of funds to creditinstitutions catering to SMEs. It is obvious that in India gradually banks shouldadopt relationship lending technology and treat transaction lending technology as



LIS T OF KEY F INANC IAL

INST ITUTIONS· INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

· INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

· INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

· EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

· INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)

· SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA (SCICI)

· INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. (IL&FS)

· TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION OF

INDIA LTD. (TDICI)

· RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD. (RCTFC)

· TOURISM FINANCE CORPORATION OF INDIA (TFCI)

· NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

· NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)

· STATE FINANCIAL CORPORATIONS (SFCs)

· STATE INDUSTRIAL DEVELOPMENT CORPORATIONS

· STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)

· STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDCs)

· SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)



THE TATA C APITAL P ER SPEC TI VE



47

Challenges Ahead

Lo wer cost of ac quisit io n of c lients

To c hurn and re tain cre dit w orthy clie nts

Main tain high qua lit y po rtfolio

Lo wer transact io n c osts

Opt im ise int ere st and f ee based income

Ensur e clie nt and pr od uc t level profit ability

N o

t

q u i t e

e a

s y

! ! !



Suggestions for Tata capital

Retain exist in g clie nts and widen “sh are of w alle t”

throu gh cr oss sell

Pre appr oved se lect io n of c redit expo sures

Dynamic po rtf olio t rac king

Bran ch ne utra l deliv ery

Aggressiv e BPO

Le verage t ec hno lo gy t o enh ance spr ead s

Seg mentati on ba se d o n c ust omer k no wledge

Pr oduct of ferin g ba se d o n c ustomer demand

L e

a d

t h e

S

M

E

P a

c k

SME Financing (2007 Format)

Documents

Transcript of SME Financing (2007 Format)