Sme financing

ADFIAPInternational 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


• 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)


• 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


• 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


• 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


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


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


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 trading mechanisms are not suitable to promote trading


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


• 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


• 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


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 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

Economy & Finance

Sme financing