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Sayee Probhu
Small is beautiful but is it Powerful? Yes, say the SMEs.
SMEs have been stories that happened away from the public eye, not seen and
hence, not known. But can one ignore the silent march of a multitude, relentlessly
The growth recorded by SSI in India is 2% more than any other sector; it
accounts for 40% of the country’s GDP, 35% of Direct exports, 15% of Indirect
Exports (through Merchant Exporters, Trading Houses & Export Houses) and
employs more than 20 million people. The SSIs needs just Rs. 60, 000 – 70, 000
to generate employment for one man, while for the same a whopping 5-6lakhs is
The exports from SSI sector has ridden on the performance of garments
(readymade garments, woollen garments and knitwear), leather and gems and
jewellery, sports goods, plastic products, processed food units from this sector. It
technology and marketing. This article would however, restrict itself to the
discussion of inadequacies in capital and means to improve Credit Flows to the
SSI sector.
SME DEFINED
If given a choice to define SMEs we would end up with over 60 of them. The
common among them relate to, either Singly or the combination of, Investments
UNIDO defines SMEs based on size, location and technology, being Modern,
The Industries Development And Regulation Act, 1951, defines SMEs according
(SSSBE)
Women Enterprises Managed by one or more women
formulate & implement suitable policies for them. The limit on investment in
Plant & Machinery and a plethora of laws governing (58 laws in 7 different
categories) them, some of the SSIs seek refuge in remaining small inspite of
opportunities to grow. The small size, opacity of the firms and their lack of
1. Under-utilization of Capacities.
The table below indicates the enormity of each of the hindrances to the survival
The following parameters are used in various connotations by banks/FI for their
lending decisions:
1. Prospects: This refers to both the Industry and Firm analysis in terms of
5. Protection: The type of security provided to the lender, its value and ease
of liquidation.
Applying the same parameters, without factoring their uniqueness, has resulted
a. Of the Rs.477,899 crore Net Bank Credit ,only 11.1% was available to the
SSI sector and out of the same 50.84% was available to the tiny sector.
b. The Net Bank credit to the SSI sector has decreased from 15.6% at the
systematic credit appraisal system and high “Total Real Cost “ of borrowing in the
formal sector has led to the longevity of the informal sector despite its atrocious
SMEs continue to face this dilemma of choosing between the formal and informal
sectors in lending. The reasons for the same can be attributed to the
The number of unregistered units is more than six times the registered units.
the SME sector explain the biases in lending to them. This bias is further
NPAs arising out Priority sector lending and lending to private companies (who
Thus, it is clear that lending mechanisms followed for the private corporate sector
with transparent and verifiable financials are as good as that for the opaque
SMEs, rooting for collaterals is also unviable given the propensity of the
The question then is how can the lending institutions view the SMEs differently
For the lending pattern to be effective, clarity must be sought on the need and
This would not only make it easier for lending institutions to identify and
corroborate the category to which a borrower belonged but also provide enough
incentives for the units to upgrade and adopt a capital and technology intensive
growth path.
Financing, and Innovative SMEs follow a reverse Pecking Order. This is because
the latter don’t want to and aren’t capable of the servicing the inflexibility in
repayment of Debt. But as they mature they follow the Pecking Order .
The valley of death spreads its shadows to other stages of the life cycle also.
Growing companies, especially ones that invest in capital need not only term-
and required more working capital. Lack of it forced them to either roll back these
changes or find alternative and more expensive funds for working capital needs.
SMEs based on the dual approach will enable better evaluation of funding
The following modes to evaluate risk are unbiased and available to any user:
Correlation between these two data types are examined and weights
assigned and a score arrived at. Higher the score, the lower the credit
defaults and not about the repayment history. The Ganguly Committee
3. Models that assess the default risk, like ONICRA (Onida Individual Credit
The identification of Need & Method of Financing coupled with proper risk
assessment would not only enhance proper pricing of financing options but also
For an effective credit flow, supply side constraints, in the form of quantum and
quality of financing and the demand side constraints, in terms of effective use of
I. Supply Side
SIDBI, the primary lending agency for SMEs, has several products to cater to the
Equipment leasing.
Rediscounting (1%).
SIDBI also handles the Technology Up gradation Fund (TUF), the National
Equity Fund (NEF), CGTSI, is assisted by agencies like NSIC, SIDO, SISI,
KVIC.
The SER sponsored study mentions that SME’s lack of awareness of the
3. Composite loan limit for SSI enhanced from RS.25 lakhs to Rs.50 Lakhs.
6. Credit limit enhanced to RS.10 lakhs in the Laghu Udyami Credit Card
Scheme for.
8. All loans upto Rs. 25 lakhs eligible for Credit Guarantee Scheme.
credit institutions.
8. Uniform priority sector lending targets for Indian and Foreign Banks.
provide not only financing but mentoring services as well. Locally oriented
recovery basis.
OTCEI could provide an ideal exit route through low cost IPOs. SME
companies prefer the OTCEI route to the line of credit offered by SIDBI on
establishment of Credit Bureaus, the time would be ripe for Mutual Funds
to step in. These would not only provide visibility to the SMEs but also
5. With the advent of TRIMS, the SME sector would be open to FDI,
measures for tapping and utilizing foreign funds and prudential norms for
norm for informationally opaque firms says a World Bank study. Fiscal &
region or Sector specific SMEs and has demonstrable results in the near
8. One stop shop financing by SIDBI would enable greater visibility; focus
on utility of the products and penetration for proper credit delivery. The
dismal performance of SIDBI with its current strength of 40 branches and
CONCLUSION
The size of SMEs has put them in a catch-22 situation, easy entry but little hope
of survival, because lifeblood in the form of finance is too little, too late.
A World Bank study on effect of Financial & Legal constraints to firm growth
concluded that:
The agencies involved should apply focused Fiscal, Monetary and Regulatory
Reference: