ADFIAP
International CEO Forum VII“Sustainable SMEs through Value Chain
Financing”
“SME Best Practices & Financing Models”
-Equity Financing
Mr. B.P. Singh, Dy. MD, IDBI Bank Ltd., India
Structure Of Presentation
• Importance of SME- Banking & Economy
• SME Financing – Issues
• Participation in SME Equity
• Initiatives in India
Importance of SMEs –
Banking & Economy
Importance of SMEs
• Small and Medium Enterprises (SMEs) are vital for
development of a country
– Helps reshaping the productive sectors
– Generates employment
– Creating an environment for entrepreneurship
– Promotes innovation
• Globally, SMEs contribute over 90% of Business Enterprises
and 50-60% of Total Employment.
(UNIDO Report 2009-10)
Importance of SMEs
• In Europe, Japan and the USA, 99% of the enterprises
belong to the small business segment
• Employment generated through Small businesses is more
than 50% in the EU and approximately 40% in the USA
(World Retail Banking Report 2010)
Importance of SMEs
• In Europe (2002-2007), number of SMEs grew by 11%,
and number of employees went up by 9% vis-à-vis 4% and
3% respectively for the larger enterprises
• Globally, SME business accounts almost one-third of retail
Net Banking Income (NBI), though it comprises less than
10% of total retail banking portfolio.
(World Retail Banking Report 2009-10)
SME Financing - Issues
SME Financing - Issues
• Approx. 85% of SMEs in emerging markets suffer from credit
constraints
• Approx. 70% of all emerging-market SMEs do not use any
formal credit
• This means informal sector meets their financial requirements,
though at times with stringent conditions
• Nearly 23.7% of SMEs disappear in two years and nearly
52.7% of SMEs exit the market in four years due to business
failure, bankruptcy, or other reasons
(Estimates IFC 2010)
SME Financing - Issues
• Recent global economic downturn has further aggravated
the problems that already existed
Some of the key issues are:
• Financing assumes material role in SMEs experiencing
high growth prospects including opportunities for takeover
• Very few SMEs are able to finance their expansion
through their Cash Flow and have to explore external
sources of funding
• In credit filtration process SMEs are at a disadvantage
SME Financing - Issues
• Lack of successful track record of SMEs creates a
perception of greater credit risk among the banks
• SMEs lack the substantial asset base (collateral) to provide
as security against bank loans
– More pronounced for SMEs in the services sector
• Limited exposure to Direct Equity financing sources
– Paucity of private equity investors for SMEs
– Reluctance by SME to dilute their share holding
Participation in SME Equity
Participation in SME Equity
• Equity financing for SMEs is a complex issue
• SMEs need a range of financing vehicles at different stages
of their development
• Seed Money to start up the company generally comes from
friends, professional contacts and family
Participation in SME Equity
Role of Banks
• Bank’s are redefining SME financing by engaging in equity
and quasi-equity investments
• Leveraging on their understanding of the SME sector and
their access to capital
• Banks are attempting to carve out profitable roles for
themselves in the rapidly growing emerging markets by
directly taking equity exposure
Participation in SME Equity
Role of Banks
• Banks are also passively participating as investors in SME
equity funds
• Some banks also;
– Provide Advisory Services
– Act as meeting point for overseas investors
• Banks need to acquire & develop skill sets to understand the
SME sector, particularly in the area of risk assessment
– These risks may be addressed through partnerships that leverage the
complementary strengths of the bank and its partners
• A number of models that take these strengths into account
have emerged around the world
Participation in SME Equity
Exit Mechanism – Issues
• Like any investment, liquidity of the investment for both
buying and selling is crucial
• Due to certain underlying risks and less number of investors,
SME equity is relatively illiquid
• Traditional stock exchange platforms and
mechanisms are not suitable to promote trading
trading
Participation in SME Equity
Exit Mechanism – Probable Solutions
• Dedicated SME stock exchanges, or at least separate
trading windows with different rules
• Suitable mechanisms would be required for exit from
stressed entities
– Possibly under the ambit of specialized SME Asset Reconstruction
Companies (ARCs)
Initiatives in India
Initiatives in India
• Government has initiated a National Equity Fund (NEF)
• NEF provides equity support to entrepreneurs (Tiny & Small
Scale Industries) for:
– Setting up new projects
– Undertaking Expansion, Modernization, Technology upgradation,
Diversification
– Rehabilitation of viable sick units
• Assistance from NEF helps SSIs
– Strengthens their equity base
– Improves their eligibility for receiving term financing
Initiatives in India
• Public Sector Banks have been advised to achieve a minimum
20% y-o-y growth in credit to the SME sector
• Capacity-building programs are offered with an objective of
developing competitive small business practices, policies and
strategies.
– This includes Training initiatives to achieve the competitiveness of
SMEs through innovation, technology transfer, etc.
• Business incubation efforts to encourage the spirit of
entreprenuership
Initiatives in India
Prime Minister's MSME Task Force
Constituted in September 2009 by Prime Minister of India
Purpose:
• To highlight the concerns and issues relating to MSMEs
• To suggest relief and stability measures for MSMEs,
especially in the aftermath of the recent economic
downturn
Initiatives in India
Initiatives by Govt. of India
Few note worthy measures include:
1.
Extension of ‘stimulus package’, for a further period of
one year, beyond March 31, 2010
2.
Creation of a Special fund to be utilized exclusively for
lending to the micro enterprises
3.
Providing collateral free loans upto Rs. 100 lakhs under
Credit Guarantee Scheme
THANK YOU