Fuelling Indian Entrepreneurs:
SME Financing
Ramnath Pradeep,
Chairman & Managing Director
3 December 2010
Agenda
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Introduction to Micro Small and Medium Enterprises
(MSMEs)
Role of Banking Sector in Development of MSMEs
Financing to MSMEs
Challenges and Opportunities
Challenges faced inm financing to MSMEs and Solutions
Recent Trends
Micro Small and Medium Enterprises
(MSMEs)
7%
70%
60%
6%
6%
6%
6%
6%
6%
8%
9%
8%
7%
6%
6%
5%
50%
40%
GDP
Total Industrial Production
Contribution of MSEMs (%) at 1999-2000 prices
44%
40%
40%
39%
30%
39%
39%
39%
45%
39%
4%
3%
2%
1%
20%
10%
0%
-1%
0%
19992000
20002001
20012002
20022003
20032004
20042005
20052006
20062007*
20072008*
Micro, Small and Medium Enterprises (MSMEs) play a very significant role as they are the engines
of growth in development and transition of economies to a higher plane.
They have played an important role in India achieving its current robust overall economic growth.
They have had a critical role in employment generation, amount of manufactured output, in
exports and economic empowerment of a vast section of the population.
They also enhance inclusive growth by the manner in which they evolve, leverage local resources
and innovate to create products and services.
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Today, MSMEs account for 8% of GDP, 95% of overall industrial Units, 45% of
manufacturing output and 40% of all exports of the country
*The data for the priod upto 2005-06 is only for small scale industries (SSI). Subsequent to 2005-06, data with reference to micro, small and medium enterprises are being reflected.
Contributions to Employment Generation
MSMEs performance: Units, Investment, Production, Employment and Exports
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Year
Total MSMEs
(In Lakhs)
Fixed investment
(Rs Lakh Crs)
Production
(Rs Lakh Crs)
Employment
(Lakhs)
2002-2003
109
1.62
3.14
260
86,013
2003-2004
113
1.7
3.64
271
97,644
2004-2005
118
1.78
4.29
282
124,417
2005-2006
123
1.88
4.97
294
150,242
2006-2007
261
5
7.09
294
182,538
2007-2008
272
5.58
7.9
626
202,017
2008-2009
285
6.21
8.8
659
Export (Crs)
NA
MSMEs give employment to a large number of unskilled and semi-skilled people in India (In the year 200809, there were about Rs. 2.85 crore enterprises providing employment to about 659 lakh persons).
As per the data available, there are more than 6000 products, ranging from traditional to high-tech items,
which are being manufactured by the Indian MSMEs.
They support larger corporate by supplying raw material, basic intermediate goods, finished parts and
components, etc
MSMEs employ nearly 65 million people, which is next only to the agriculture sector. It may be the only
other sector which has the capacity to absorb the surplus labor released from agriculture as and when we
move towards corporatization of agriculture
The rise in the number of MSME units in India, amount of fixed investment made, employment, production
and exports, have seen a quantum jump since 2006-07, part of which may be due to addition of Medium
scale units to micro & Small Scale Industries forming MSMEs.
Source: Annual Report 2009-10: Government of India, Ministry of Micro, Small And Medium Enterprises
Role of Banking Sector in Development of
MSMEs
Outstanding Bank credit to micro and small enterprises
Percentage of MSE
All scheduled
credit to Net Bank
commercial Banks
Credit
As on March
Public sector
Banks
Private Sector
Banks
Foreign Banks
2005
67,800
8,592
6,907
83,498
9
2006
82,434 (21.6)
10,421 (21.3)
8,430 (22.1)
101285 (21.3)
7.5
2007
102,550 (24.4)
13,136 (26.1)
11,637 (38)
127,323 (25.7)
7.2
2008
151,137 (47.4)
46,912 (257.1)
15,489 (33.1)
213,538 (67.7)
11.6
2009
191,408 (26.6)
46,656 (-0.5)
18,064 (16.6)
156,128 (20)
11.4
2010 (p)
278,398 (45.4)
64534 (38.3)
21,069 (16.6)
364,001 (42.1)
13.4
(Source: RBI annual report 2009-10 and report on trends and progress of Banking in India 2009-10)
Note: Figures in bracket indicate YOY growth
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The most important factor to ensure that the MSME sector grows in India is to provide adequate finance to
the sector and induce them to employ better risk management practices.
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MSMEs primarily rely on their own capital (including family & friends) as well as bank finance for purchase
of land, building, plant and machinery as also for working capital, etc.
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Since their fund requirements are not large enough to enter the equity market or to raise the same through
bond issues etc., this sector is largely dependent on debt financing from banks.
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While bank lending has been able to satisfy the demands of this sector to a certain extent, there is a
significant gap between demand and supply of SME finance.
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In May’10 at Institute of Small Enterprise & Development-Kochi, Dr KC Chakrabarty, DG-RBI, has said that
only 4-5% of MSMEs are covered by institutional funding, given that approximately 95% of villages are not
covered by banks.
Size of the MSME Sector
Sr. No.
Details
Micro
Small
Medium
Total
1
# Manufacturing enterprises
9,74,609
57,666
2,828
10,35,103
2
# Service enterprises
5,01,072
15,915
402
5,17,380
3
Total number of MSMEs
1,475,681
73,581
3,230
15,52,492
4
% distribution of total units
95.05
4.74
0.21
100
5
% share of manufacturing units
94.16
5.57
0.27
66.67
6
% share of service units
96.85
3.08
0.08
33.33
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It can be seen from the above table that Micro sized units constituted the major share (95%)
of the overall MSME sector, with Small units being just under 5% and Medium sized units
forming hardly 0.21%.
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The banking sector has to device appropriate strategies and products for each of these
segments. While the Micro segment may require tapping through Financial Inclusion
projects, the Small and Medium units may be capable of being provided support through
the regular products, albeit with some tweaking in terms of the norms & financial criteria
used to judge their credit worthiness.
Challenges (1/2)
Financing Challenges
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Absence of a wide range of financing options and other services to sustain the business.
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Accessing adequate and timely financing, particularly longer tenure loans.
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Accessing credit on easy terms has become difficult in the backdrop of global financial
crisis and the resultant liquidity constraints, which has affected the growth of SMEs and
impeded overall growth and development.
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The financing constraints faced by Indian SMEs are attributable to a combination of
factors that include policy, legal/regulatory framework, institutional weaknesses and lack
of reliable credit information on SMEs.
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Banks have a traditional methodology of lending to this segment (against collateral and
with a linkage to net worth as judged through tax returns); the SMEs end up being under
financed.
Skill shortage
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Access to skilled manpower, R&D facilities and marketing channels is limited.
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Lack of skills about decision-making, good management, accounting practices.
Challenges (2/2)
Capabilities
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Lack of innovative improvements in their products and processes.
Inability to capture new markets.
Inability to compete with big players in terms of product quality, range of products,
marketing abilities and cost.
Other Factors
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Enhanced competition from China & other low cost production centres.
Bribery and corruption emanating from red-tapism and high-handedness of the
bureaucracy
Lack of Infrastructure
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Absence of infrastructure, quality labour, business acumen and limited options/
opportunities to widen the business.
Inability to capture market opportunities (which may require larger production facilities)
and non achievement of economies of scale, homogenous standards of production and
lack of regular supply.
Solutions (1/2)
Research and Information
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Market research is essential to succeed – more so when exploring a totally unknown
overseas market.
Be aware of the policy changes not only of India but also of the countries identified for
doing business with.
Proper due diligence of buyer / seller is a must to ensure time and money are invested in
the right direction.
Use promotional campaign budget intelligently – every Rupee counts.
Going to Market
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Think beyond conventional marketing practices - use personal contact networks, social
networks, e-commerce tools, B2B portals, business networks, industry and marketing
networks.
Become members of various business to business (B2B) portals to have cost advantages
and maximum online exposure.
B2B portal membership can also enable offering features and support services
customized for international trade and promote products directly to potential buyers.
Solutions (2/2)
Channels
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E-business is today the latest and most acclaimed trend in the world of business because
of its low cost and high visibility. eg. applying to e-tenders.
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E-mail marketing is one of the most popular forms of internet advertising and has unique
advantages.
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Mobile marketing is another excellent way for SMEs to connect to their intended audience
in an effective manner.
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Promptness in replying to e-mails for queries received is very important
Major Challenges faced in Financing and
Possible Solutions
Major Challenges in Financing to MSMEs
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Lack of transparency of financials and other information with MSMEs, since most MSMEs
follow a sole proprietorship or partnership structure.
Limited reach of Banks to rural areas where MSMEs usually exists.
Limited risk appraisal and credit delivery due to lack of local knowledge and proper
documentation like financials and business plan etc.
Competition from unorganized sector
High servicing costs associated with the sector.
Organized sector may see this as a higher risk and lower profitability business.
Possible Solutions (1/2)
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Provide lending in small buckets at rates that are more remunerative than the industrial
sector, but competitive when compared to unorganized sector.
Device innovative methods of risk appraisal and credit delivery. Example: Providing credit
based on understanding of owner’s character, personality and capabilities.
Use other delivery channels like post office, RRBs and NGOs to get access to those areas
and information about the SMEs.
Knowledge and training sessions to MSMEs to help them understand the importance of
financials and business planning.
Provide special receivable finance schemes and factoring services.
Provide skills training to SME labour and technicians in collaboration with ITIs.
Lowering cost of finance through tie-ups with CGTMSE and informing SMEs about the
benefits of better credit ratings.
MSMEs - Financing for fuelling
Entrepreneurs
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The development of new entrepreneurs is critical to India’s growth and development.
There has been a burst of entrepreneurship across the country, spanning rural, semi-urban
and urban areas.
Majority of the new entrepreneurs of today are still self-financed.
There is a widely held perception among entrepreneurs that it is very difficult to get bank
loans at the start-up stage while becoming comparatively easier at the growth stage.
Perceptions regarding bank finance have not improved in case of entrepreneurs.
Banks need to understand that there will be failures as well as successes in business.
Banks will have to tone up their risk assessment and risk management capacities, and
provide for these failures.
Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and
growth of the country.
MSMEs need to :
► Educate and empower themselves to make optimum utilization of the resources, both
human and economic, to achieve success
► Be informed of the latest developments taking place globally.
► Acquire skills necessary to keep pace with the global developments.
► Develop a strong technological base.
► Develop an international business outlook.
► Inculcate competitive spirit
► Be willing to restructure themselves
► Innovate - it is the necessary core competence for success in the new landscape.
Factors affecting Bank’s lending
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There are a number of issues in lending to the SME sector, which banks generally face. The
key issues among them are;
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High administrative costs of small-scale lending;
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Quality of information provided.
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High risk perception of the micro and small enterprises (MSE). It has become difficult
for banks to be able to assess risk premiums properly, creating differences in the
perceived versus real risk profiles of SMEs.
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Weak financial strength of SMEs and rising NPAs in the sector.
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Inability to provide adequate collateral and other factors.
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SMEs are considered to be potential defaulters and financially less viable.
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Imposition of interest rate ceiling further reduces the desire of banks to service the
credit requirement of these sector.
Recent Trends
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Setting up of the first rating agency SMERA (SME Rating Agency) a transparent rating
system - primarily for the SME segment.
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To encourage collateral free loans, the Credit Guarantee Cover offers to ‘Member Lending
Institutions’ (MLIs), up to 75% of amount of default under the Credit Guarantee Fund Trust
Scheme for Micro and Small Industries (CGTMSE).
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The enactment of a specialized legislation, Micro Small and Medium Enterprises
Development Act (MSME Act), targeted at meeting specific needs of the micro, small and
medium enterprises, is another noteworthy step.
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The establishment of CIBIL helped to remove information asymmetries, by reducing
problems of adverse selection and moral hazard..
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New Sources of Finance such as Angel Investors, VCs and PE Funds
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Financial inclusion initiatives, including
entrepreneurs for easy availability of credit.
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Some other policies including increasing credit flow, widening credit spread, use Access to
Early Stage Finance of cluster approaches; debt restructuring; fixing time limits for disposal
of applications; and fixing stringent penalties for delayed payments are other important
steps in this regard.
Micro
finance
and
micro
equity helped
Regulatory Environment
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According to RBI :
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40% of the total advances to MSE sector should go to Micro (manufacturing)
Enterprises having investment in Plant and Machinery up to Rs 5.00 lacs and Micro
(service) Enterprises having investment in equipment up to Rs 2.00 lacs.
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20% of the total advances to MSE sector should go to Micro (manufacturing)
Enterprises with investment in Plant and Machinery above Rs 5.00 lacs and up to Rs
25.00 lacs; Micro (service) Enterprises with investment in Equipment above Rs 2.00
lacs and up to Rs 10.00 lacs.
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Thus, 60% of MSE advances should go to the Micro Enterprises (which is quite
relevant as Micro enterprises form 95% of the MSMEs).
In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, RBI has
advised the member banks to :
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Achieve 20% year-on-year growth in credit to Micro and Small Enterprises to ensure
enhanced credit flow;
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The allocation of 60% of the MSE advances to the Micro Enterprises is to be achieved
in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year
2012-13 and
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Achieve 10% annual growth in number of Micro Enterprise accounts
SME Initiatives at Corporation Bank (1/3)
Corp EXCEL- MSME Excellence Award
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In recognition of contribution of mSMEs and to encourage successful
entrepreneurs awards are being given by the Bank.
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National level awards under 10 categories such as Food and Agro Based
Processing Sector, Textiles and Apparels Sector, Auto components, Gems &
Jewellery, Chemicals & Petro Chemicals.
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Selection based on Triple Bottom Line concept.
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MSMEs dealing with any bank can apply for the award.
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Awards are given for Micro Enterprise, Small Enterprise, Medium Enterprise
and Emerging Corporate segments.
Major Government of India Schemes Implemented by Corporation Bank
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Credit Guarantee Scheme of CGTMSE (Credit Guarantee Fund Trust for Micro
and Small Enterprises)
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Technology Up gradation Fund Scheme (TUFS)
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Credit Linked Capital Subsidy Scheme (CLCSS)
SME Initiatives at Corporation Bank (2/3)
Corporation Bank - Commonwealth Youth Enterprise Financing
Programme – Partnership between Corporation Bank and
Commonwealth Secretariat
Under Commonwealth financing programme, Corporation Bank
has tied with Commonwealth Secretariat to effectively augment
finance to Micro & Small Enterprise Section.
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The Bank will provide small loan with range of Rs.1 lakh to Rs.6 lakh
to identified beneficiaries with special focus on youth and woman.
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On a pilot basis, the programme will cover 4-5 districts in India and on
gaining experience, the programme will be extended to other districts.
SME Initiatives at Corporation Bank (3/3)
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Formulated a Comprehensive Policy on Advances to Small & Medium
Enterprises [SMEs]
Launched 6 Customized Credit Products targeted at SMEs
As a Process Re-Engineering Measure ‘SME Processing Cells’ have been
established in all Zonal Offices
SME Nodal Officers have been designated in all the zones to attend to the
grievances of SME clients
Adopted Cluster Based Approach for Lending to SMEs
The Bank has signed an MoU with SIDBI for financing SMEs, jointly with Small
Enterprises Financial Centres of SIDBI.
Entered into MoU with the Rating Agencies viz. SMERA/ ICRA/ CARE/ CRISIL/
FITCH and Dun & Bradstreet for rating SMEs.
Concessional Interest Rate of 0.25% for rated SME’s
SME Products and Service Offerings
The Bank's offerings are:
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Funds for Working Capital Requirements
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Project Funding
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Customized Loan Products
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Bank Assurance
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Distribution of Mutual Fund Products
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Collection of Direct / Indirect Taxes
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Pay Roll Accounts of your employees
Customized Loan products for SMEs
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Corp SME Gold Card
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Corp SME Credit Card Receivable Funding
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Corp SME Receivable Funding
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Corp SME Tex Plus
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Corp SME Auto Plus
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Corp SME Liquid Plus
Thank You