SME Financing PPt Dt

SME Access to Finance

Presentation by

Prof. Deepak Tandon

1

Presentation Plan

A. Macro Economic Situation of India B. Indian SME Sector – A Profile C. Institutional Support Structure D. Key Challenges for SMEs E. Enhancing Competitiveness of SMEs F. SMEs Access to Finance G. SIDBI’s Role in Transformation of SMEs H. Outlook for SMEs

2

A. Macro Economic Situation in India

Economy has entered an era of distinct buoyancy GDP growth rate – 7.2% in current fiscal year 6.7% (2008-09) Major drivers : inflation , purchase power, easier availability of credit

& market potential

Bank credit for the fortnight ended 15th January 2010, grew by 13.8% on a YOY basis as against 22% in the corresponding period of the previous year. After swelling to a nine©\month high in the previous fortnight, the outstanding credit of schedule commercial banks decreased by Rs 11,898 crore in fortnight under review. On a YTD basis, credit growth continued to remain sluggish at 8.4% in the current fortnight as compared to 12% in the corresponding period of the previous year. Consequently, as on the last fortnight ended on 2 January 2010, bank credit increased by 79,514 crores, however, in the current fortnight banks witnessed a reversal resulting into a decline in outstanding credit.

3

B. Indian SME Sector – A Profile• Small and Medium Enterprises play a vital role for the

growth of Indian economy by contributing 45% of industrial output, 40% of exports, 42 million employments, create one million jobs every year and produce more than 8000 quality products for the Indian and international markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors. Indian market is growing rapidly and Indian industry is making remarkable progress in various Industries like Manufacturing, Precision Engineering, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT (Information Technology), Agro and Service sectors.

5

C. Institutional Support Structure

MSME Development Act, 2006

Micro, Small & Medium Enterprise (MSME) Development Act on anvil to bring about paradigm shift from industry to enterprise

Defines Micro, Small & Medium Enterprises in the manufacturing and service sectors in terms of investment in plant & machinery and investment in fixed assets respectively

Provisions for National Board, mechanism to tackle problem of delayed payments, procurement of items manufactured by SMEs

6

C. Institutional Support Structure

Central Bank : Reserve Bank of India Separate Ministry at Central Govt. – Ministry of SSI Office of DC(SSI) at the Centre : Small Industries

Development Organisation- SIDO Small Industries Service Institutes (SISIs) for

technical/skill development R&D institutions for technical help Financial Institutions and banks for financing at national

and regional levels Various support institutions for entrepreneurship

development, technical & marketing services and Govt. approvals

7

D. Key Challenges for SMEs

Access to formal finance Quality industrial infrastructure Marketing of products Lack of adequate working capital Technology upgradation and improvement in

quality of products Delayed payments to SMEs Sickness and NPA management

8

E. Enhancing Competitiveness of SMEs

Thrust on growth on infrastructure with private participation

Strengthening of SME clusters Setting up of Industrial Parks and Growth Centres Liberalised financial and banking sector facilitating

assistance to SMEs on competitive terms Minimum regulatory interventions in the affairs of the

enterprises

9

F. SMEs Access to Finance

Banks’ Strategies for Financing SMEs

Improved Risk Management Systems Cluster Based Approach Bill / Invoice Discounting E-Banking Credit Rating Credit Guarantee Venture Capital & Private Equity

10


Improved Risk Management Systems

Advent of Basel norms has brought about perceptional change in risk assessment by banks

The approach is in incentivising SMEs to undertake ratings and declare information (Transparency)

Strong risk assessment and management systems being increasingly put in place to bring about profitable lending to SMEs and thereby shifting focus from lending only to large corporates and public sector enterprises

11


Cluster Based Approach

Cluster based approach for financing SMEs offers possibilities for reduction in transaction costs and mitigation of risk

Risk profile of each cluster being studied by a professional credit rating agency and report made available to banks

Nation-wide 388 clusters of SMEs identified to facilitate banks in focussed lending

12


Receivable Financing Bills / Invoice Discounting / Factoring Offers an alternate mechanism to meet the working

capital needs for quick and hassle free dispensation of credit

Effectively addresses the problem of delayed payments Finding increasing acceptance by both banks and SMEs

and innovative models for discounting being put into use

13


E-Banking

Facilitates quick access to finance for SMEs Offers advantage of lowering the bank’s costs

and greater gains without necessarily increasing lending rates

Internet-based payment systems though at nascent stage, offers great potential

14

G. SIDBI’s Role in Transformation of SMEs

Small Industries Development Bank of India (SIDBI) : apex development financial institution for SMEs in India

Established under an Act of Indian Parliament Commencement of Operations : April 1990 Objective : Promotion, financing & development of small scale

industries and co-ordinating functions of institutions engaged in similar activities

Ownership : Public sector banks, financial institutions and insurance companies owned or controlled by Govt. of India

Structural Linkage: Ministry of Finance and Ministry of SSI in Govt. of India

Nodal agency: For execution of SME programmes of Govt. of India

15


Net worth - USD 1 bn Portfolio - USD 3 bn Cumulative financial assistance to SMEs > USD

14 bn Annual Income (FY 2006) – USD 207 mn Profit after tax (FY 2006) – USD 58 mn Capital Adequacy : 43% Standard Assets : 98%

16


Bouquet of Products

Institutional Loan Products (Refinance / Rediscounting )

Direct Assistance (Term Lending / Bills Discounting)

Promotional & Developmental Initiatives

Micro Finance

Venture Finance

Credit Guarantee for Small Industry Loans

Technological Services

Credit Rating for SMEs

Nodal Agency for Govt. Sponsored Programmes

17

G. CASECSTUDYSIDBI’s role in Transformation of SMEs

Institutional Loan Products

Refinance/Rediscounting Resource support to banks and other lending institutions

to refinance their loans to SMEs

Rediscounting of bills discounted by banks and other lending institutions for sale/acquisition of machinery on deferred payment terms for setting up of new SSI units as also for expansion, diversification, modernisation, replacement, addition of balancing equipment etc.

18

G. SIDBI’s role in Transformation of SMEs

Direct Assistance

Term Lending / Bills Discounting

Term loans to SMEs for setting up projects for expansion, diversification, modernisation, technolgy upgradation, acquiring machinery, etc.

Direct discounting of bills raised by SME suppliers of

machinery/raw material/ parts/sub-assemblies, etc.

19

G. SIDBI’s role in Transformation of SMEs

Promotional & Developmental Initiatives

As a development financial institution, SIDBI has been pursuing various promotional & developmental (P&D) initiatives targetting different segments of the SME sector

The initiatives cover the areas like entrepreneurship development programmes for different target groups like women, rural poor and ex-servicemen, technology and quality upgradation programmes, management development programmes, women empowerment, rural industrialisation, environment management, market support and information dissemination

As these are basically subsidised programmes, a special budget is earmarked to meet their costs out of the Bank’s profits

The ultimate objective is to ensure that the activities taken up at a pilot level for the specific target groups in due course offer scope for business opportunities to the credit delivery institutions

20


Micro Credit

Micro Credit seen as a tool for poverty alleviation, employment generation and women empowerment

SIDBI Foundation for Micro Credit (SFMC) came into being in 1999 to channelise micro credit to needy poor across the country organised as Self Help Groups (SHGs) through Micro Finance Institutions (MFIs)

The MFIs nurtured as ‘Agents of Change’ and supported through quality based interventions

The approach is on extensive capacity building of MFIs and thereby increasing the credit absorption by SHGs

Over 2.6 million persons, predominantly women covered under SFMC through over 90 active MFIs

Risk Fund for MFIs & Corpus support for their transformation to formal lending institutions also introduced

21


Venture Finance

Encouraging first generation and other high risk projects through venture financing route by way of equity participation

To provide impetus to fledgling Information Technology (IT) sector in India set up a separate outfit called SIDBI Venture Capital Ltd (SVCL) in 1999 to support the small IT ventures

Initially set up a National Fund for software & Information Technology with support from Govt. of India and IDBI - a all India Financial Institution sister

Expanded the reach to the IT projects through regional level funds An International Fund set up in collaboration with Small Enterprises

Assistance Fund, USA Support extended setting up Innovation and Incubation Centres to promote

entrepreneurship in association with Institutions of Technical Excellence For encouraging small grass root innovations, Micro Ventures Innovation

Fund was set up Launched National SME Growth Fund with for promoting industries in

biotechnology, food processing, pharmaceuticals and other Knowledge based industries

22

G. SIDBI’s role in transformation of SMEs

Credit Guarantee for Small Industry loans

Credit Guarantee Trust for Small Industries (CGTSI) set up by SIDBI & Govt. of India in August 2000 with a contemplated corpus of USD 540 mn.

The primary objective of CGTSI is to encourage collateral free loans to small and tiny businesses from banks and FIs

Loans upto USD 54,000 extended by banks/FIs covered for guarantee under the scheme

In the last 6 years, guarantees extended to about 41000 businesses with an aggregate credit of USD 217 mn

23

G. SIDBI’s role in transformation of SMEs

Technological Services To provide various technology related support services, in collaboration with

UN-Asia Pacific Centre for Transfer of Technology, SIDBI set up Technology Bureau for Small Enterprises (TBSE) in 1995

TBSE had aimed at becoming a one stop solution provider for all technology related problems of SMEs in India.

Range of services offered on nominal charges included : Technology Information Match Making Finance Syndication Business Collaboration Support Services

To give more flexibility in operations, TBSE has since been converted into India SME Technology Services Ltd in 2005

24


Credit Rating for SMEs

SME Rating Agency of India Ltd (SMERA) promoted by SIDBI in 2005 in association with credit rating agencies and banks

India’s first and only rating agency dedicated to the SMEs- Rating of the issuer

Facilitates access to finance by providing reliable, comprehensive and transparent rating

Provides unbiased information for enhancing credit flow to SMEs

So far completed SMERA has completed over 170 ratings

25


Nodal Agency for Govt. Sponsored Programmes

Technology Upgradation

Credit Linked Capital Subsidy Scheme

Technology Upgradation Fund Scheme for Textiles and Jute Industry

Equity-linked

National Equity Fund Scheme

Micro Credit

Portfolio Risk Fund

Infrastructure

Integrated Infrastructure Development Scheme

Credit Guarantee Fund

Credit Guarantee Scheme

26

H. OUTLOOK FOR SMEs

SMEs continue to be the thrust area for Government policies The growing economy and the tremendous market potential of

the country augurs well for the sustained growth of SMEs in the country

Panacea for employment and decentralised industrial development

Latest policy package for SMEs envisages 20% annual growth in credit to SME sector from FY 2005, to be doubled by 2010

With the enactment of MSME Act, the sector is all set to emerge as the most significant player in national economy

SIDBI as the apex institution will continue to play its key role in facilitating timely and adequate credit besides meeting the developmental needs of the sector

27

“wanting to be someone else is a waste of the person you are” : KURT COBAIN (1967 - 1994)

THANK YOU28

SME Financing PPt Dt

Documents

Transcript of SME Financing PPt Dt