Financing SMEs Issues, Perceptions and Recommendations

23. 8. 2013 Dr. Paritosh Basu

Discussion Flow
MSME Store House of Unlimited Potentials Financing of SMEs Perceptions & Issues Dont Challenge Your Limits Limit your Challenges

Todays SMEs are tomorrows MNCs and TNCs Let us move on

MSMEs - Store House of Unlimited Potentials

Graphical Analysis : Grant Thornton

Value has a value only if its value is valued

Financing of MSMEs Issues and Perceptions

Financing of SMEs Issues and Perceptions

Circa 85% of SMEs in emerging markets suffer from credit constraints Circa 70% of all SMEs in emerging market do not use any formal credit Generally informal sector meets financial requirements with stringent terms SMEs exit or disappear due to business failure, bankruptcy, or other reasons Approximately 23.7% in two years, and

52.7% in four years

Financing assumes material role, experiencing high growth prospects including opportunities for takeover

SMEs can hardly fund expansion by internal cash generation, hence explores external sources
Data Source: Estimates of IFC 2010

Financing of SMEs Issues and Perceptions

In credit filtration process SMEs are not in priority list except in focused FIs Lack of successful track record creates a perception of greater credit risks SMEs lack substantial asset base (collateral) to provide as security against loans More so for service providers

Limited exposure to Direct Equity financing sources

Less appetite of PE investors for SMEs Reluctance by SME to dilute their share holding
Data Source: Estimates of IFC 2010

Credibility plus lack of timely and adequate access to finance

Enormity of Fund Requirement and Issues

Equity - 6. 0
Debt - 26. 5

Self and Informal - 25. 5 (78%) Sources Formal - 7.0 (22%) , 2010
Nos. in INR trillion Graphical Analysis: Grant Thornton, India 7

Dont challenge your Limits, Limit your Challenges

It is Time to Introspect and Build on Governance and Trust

Target - Where to go from where ??

Zone - A Tomorrow
Yesterday

Business performance management is all about making sense of What is happening now and What should happen in forward path

Today

Zone - B

% age Change in Turnover

Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action

Window for Introspection Regret Matrix Analysis

Select The Project through the process of elimination Regret Matrix Table (Graded Assessment of Parameters)

Project

ROCE (%)

Price Sensivity

Market Share

Social Desirability

A B C D

15 19 23 17

M L VH H

M VH H L

H L M H

VH = Very High H = High M = Moderate L = Low

Note: Prepare the Project Report with rightful due diligence

Selection will depend upon Certainty Equivalent of evaluating factors 10

Save Drops in Operations and Create More Values Recommendations for Operational improvements Integrate India with Bharat Integrate SMEs with Global Value Chain Implement National Skill Development Mission Bring Resources for Value Generation closer to Human Capabilities for all pervasive growth Establish Proactive Technical Advisory Center in each District

Unlock full potential of Green Logistics and Scrap Recycling Encourage Communion formation for minimisation of value destruction
Let InnoventionismTM be the Mantra for SMEs

Manage Finance though Governance and ERM Recommendations for Financial Activism Establish Metal and Agro Bazar in each state Promote PE and Angel Investors Introduce full value chain for Finance: L/C Limit > Buyers Credit > Term Loan > Escrow Facility for Collection and Loan Repayment

Establish structured facilities for providing Factoring Services Promote Shared CFO Services with IT facilities using Cloud Computing Encourage large scale sector to integrate with Toll Manufacturing Models Let pervasive Risk Management be the way of life
Let us build through Shared Facilities for Governance

How to approach the process of value creation

1. Half filled with water 2. Half empty 3. The glass is full - half filled with water and half with air Successful Value Creation presupposes positive attitude and approach towards business

Source: Unknown

Further Thoughts

The essence of management lies in dropping the last letter and make it Manage Men! It is still better to drop the last two letters and make it Manage Me!
14

Thank You