Fuelling Indian Entrepreneurs: SME Financing Ramnath Pradeep, Chairman & Managing Director

3 December 2010

Agenda

► 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)

► 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.

► Today, MSMEs account for 8% of GDP, 95% of overall industrial Units, 45% of manufacturing output and 40% of all exports of the country

Contribution of MSEMs (%) at 1999-2000 prices

40% 40% 39% 39% 39% 39% 39%44% 45%

6% 6% 6% 6% 6% 6% 6%

7%8%

0%

10%

20%

30%

40%

50%

60%

70%

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007*

2007-2008*

To

tal In

du

str

ial P

rod

ucti

on

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

GD

P

*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 give employment to a large number of unskilled and semi-skilled people in India (In the year 2008-09, 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.

YearTotal MSMEs

(In Lakhs)Fixed investment

(Rs Lakh Crs)Production

(Rs Lakh Crs)Employment

(Lakhs)Export (Crs)

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 NA

MSMEs performance: Units, Investment, Production, Employment and Exports

Source: Annual Report 2009-10: Government of India, Ministry of Micro, Small And Medium Enterprises

Role of Banking Sector in Development of MSMEs

► 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.

► 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.

► 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.

► 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.

► 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.

As on March Public sector

BanksPrivate Sector

BanksForeign Banks

All scheduled commercial Banks

Percentage of MSE credit to Net Bank

Credit

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

Outstanding Bank credit to micro and small enterprises

(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

Size of the MSME Sector

► 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%.

► 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.

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

Challenges (1/2)

► Absence of a wide range of financing options and other services to sustain the business.

► Accessing adequate and timely financing, particularly longer tenure loans.

► 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.

► 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.

► 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.

Financing Challenges

► Access to skilled manpower, R&D facilities and marketing channels is limited.

► Lack of skills about decision-making, good management, accounting practices.

Skill shortage

Challenges (2/2)

► 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.

Capabilities

► Enhanced competition from China & other low cost production centres.► Bribery and corruption emanating from red-tapism and high-handedness of the

bureaucracy

Other Factors

► 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.

Lack of Infrastructure

Solutions (1/2)

► 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.

Research and Information

► 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.

Going to Market

Solutions (2/2)

► 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.

► E-mail marketing is one of the most popular forms of internet advertising and has unique advantages.

► Mobile marketing is another excellent way for SMEs to connect to their intended audience in an effective manner.

► Promptness in replying to e-mails for queries received is very important

Channels

Major Challenges faced in Financing and Possible Solutions

► 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.

Major Challenges in Financing to MSMEs

► 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.

Possible Solutions (1/2)

MSMEs - Financing for fuelling Entrepreneurs► 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

► There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are;

► High administrative costs of small-scale lending;

► Quality of information provided.

► 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.

► Weak financial strength of SMEs and rising NPAs in the sector.

► Inability to provide adequate collateral and other factors.

► SMEs are considered to be potential defaulters and financially less viable.

► Imposition of interest rate ceiling further reduces the desire of banks to service the credit requirement of these sector.

Recent Trends

► Setting up of the first rating agency SMERA (SME Rating Agency) a transparent rating system - primarily for the SME segment.

► 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).

► 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.

► The establishment of CIBIL helped to remove information asymmetries, by reducing problems of adverse selection and moral hazard..

► New Sources of Finance such as Angel Investors, VCs and PE Funds

► Financial inclusion initiatives, including Micro finance and micro equity helped entrepreneurs for easy availability of credit.

► 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.

Regulatory Environment

► According to RBI :

► 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.

► 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.

► 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 :

► Achieve 20% year-on-year growth in credit to Micro and Small Enterprises to ensure enhanced credit flow;

► 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

► Achieve 10% annual growth in number of Micro Enterprise accounts

SME Initiatives at Corporation Bank (1/3)

Corp EXCEL- MSME Excellence Award

► In recognition of contribution of mSMEs and to encourage successful entrepreneurs awards are being given by the Bank.

► 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.

► Selection based on Triple Bottom Line concept.

► MSMEs dealing with any bank can apply for the award.

► Awards are given for Micro Enterprise, Small Enterprise, Medium Enterprise and Emerging Corporate segments.

Major Government of India Schemes Implemented by Corporation Bank

► Credit Guarantee Scheme of CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises)

► Technology Up gradation Fund Scheme (TUFS)

► 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.

► 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.

► 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)

► 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: ► Funds for Working Capital Requirements► Project Funding► Customized Loan Products► Bank Assurance► Distribution of Mutual Fund Products► Collection of Direct / Indirect Taxes► Pay Roll Accounts of your employees

Customized Loan products for SMEs► Corp SME Gold Card ► Corp SME Credit Card Receivable Funding ► Corp SME Receivable Funding► Corp SME Tex Plus► Corp SME Auto Plus ► Corp SME Liquid Plus

Thank You