sme financing (2007 format)
TRANSCRIPT
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SMALL AND MEDIUM
ENTERPRISESFINANCING
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A micro enterprise is an enterprise where investment in plant
and machinery does not exceed Rs. 25 lakh
A small enterprise is an enterprise where the investment in
plant and machinery is more than Rs. 25 lakh but does not
exceed Rs. 5 crore
A medium enterprise is an enterprise where the investment in
plant and machinery is more than Rs.5 crore but does not
exceed Rs.10 crore
Definition of Micro, Small and
Medium Enter rises
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Indian view of SMEs
• Traditionally defined as:• Small Scale Industries (SSIs)• Small Scale Enterprises (traders and services)• Small Road Transport Organisation
• Professionals
• Focus primarily on manufacturing andless on servicing
• Concentration on traditional industry -textile, engineering, jute, auto ancillary
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Characteristics of the SMEs
•
The growth recorded by SSI in India is 2% more than any other sector
• The sector accounts for 9% of the country’s GDP
• The sector employs more than 20 million people (Employmentcontribution by SMEs in Andhra Pradesh is 7.5%)
• It has been estimated that a lakh rupees of investment in fixed assetsin the small scale sector generates employment for four persons
• Among the large PSBs, state bank of India’s SMEs exposure grew by24% in 2008
• All banks are targeting SMEs credit growth of 25%
• It has been estimated that a lakh rupees of investment in fixed assetsin the small scale sector produces 4.62 lakhs worth of goods or
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Characteristics of the SMEs
• Public sector banks’ overall credit to SME sector grew by 26%in 2006-2007, which amounted to Rs.1,85,000 cores
• Reserve Bank of India has advised all commercial banks toachieve 20% annual growth in SME lending
till 2010
• Non-traditional products constitute a massive 95% of the SSIexports
• SIDO, SIDBI, NABARD, NSIC, export promotion authorities areactively involved in the development of SMEs in India
• 45%-50% of the Indian Exports is being contributed by SSISector
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Effect of liberalization on sme credit policies
• Earmarking of credit for tiny sector within overall lending tosmall industries
• Opening of specialized SSI bank branches
• Establishment of National Equity Fund for venture capitalsupport
• Technology Development & Modernization Fund through SIDBI
• Enhancement of turnover limit for assessing aggregate workingcapital requirement
• Enhancement of limit of composite loan to Rs. 10 lakhs. (Rs 1million)
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• Launch of Credit Guarantee Scheme to cover loansup to Rs. 50 lakhs(Rs 5.0 million)
• Launch of Credit Linked Capital Subsidy Scheme toprovide for subsidy against loans taken for
technology upgradation
• Further enhancement of ceiling composite loan limitto Rs. 25 lakhs (Rs 2.5 million)
• Enhancement of project cost limit under NationalEquity Fund to Rs. 50 lakhs (Rs 5 million)
The Comprehensive Policy Package
announced
on 30th August 20 00
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Overview of Indian SME Market
• In the last decade SMEs have grown fasterthan the overall economy
• SMEs contribute•
95% of all industry establishments• 40% of domestic exports and industry output• 35% of manufacturing sector
• Industry related contribution has been
declining
• Dominance of service and trade in line withhigher growth registered by service sectors
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Traditional Banking
• SME in India characterised by:• Low capitalisation and limited assets
• Geographical diversity and high mortality
• Poor access to capital markets
• Cash intensity in transactions• Lack of credit information
• Poor financial disclosure on account of tax
issues
• Directed lending based on Central Bankguidelines
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The Need an d Me thod Theory of funding necessities
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Requirements of smes
• Loyal and lasting banking relationships
• Doorstep banking
•Reliable Service Quality
• Comfort/ Relationship with bank staff
• Proximity to delivery channels
• Low delivery cost
• Combination of personal and business banking
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The traditional approach
• High asset impairment• 9.5% of the SMEs have been categorised sick
• Largely in the manufacturing sector
• Post implementation of the WTO/ GATTnorms• Textile, and major SME dominated industry
have suffered setbacks
• Exports not able to keep up
• Survival has become difficult without high
protection
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Sa li en t F eatures of S MEs
Turno ve
r
Assets
• Inconsistency in valuation
• Service/ manufacturing risk
profiles difficult to benchmark
• Within industry specific to
capital intensive nature of
industry
• Difficult to benchmark across
sectors/ industry• Not a true indicator of capital
invested
• Difficult to assign broad based
risk band
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Sa li en t F eatures of S MEs
No . of
employees
Net W orth
• Difficult to compare
internationally
• Difficult given India’s labour
intensive operations
• Representative of capital
backing business
• Sustainability of business
governed by capital deployed
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Management
Acceptable financial conditions
Collateral Value
Sound and feasible business and plans
Positive outlook of industry
Clean litigation records
Areas fina nc ial in stit uti ons w ould
evalu at e b ef ore de cidin g whether to
grant credi t
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In dicativ e P ara me ters o f S ME s
Debt-equity Ratio- 3:1
Promoter's Contribution- As may be
required to arrive at the Debt Equityratio of 3:1
Margin for Term LoanAll backward areas in the State 25%
Other areas and Municipal limits of all cities
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In dicativ e P ara me ters o f S ME s
Rate of Interest
(table on page 65)
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In dicativ e P ara me ters o f S ME s
Repayment
Working Capital ComponentNot exceeding 10 years (including moratorium
upto 13 years)Term Loan ComponentNot exceeding 8 1/2 years (includingmoratorium of 18 months)
Security:Fixed assets and hypothecations or collateral
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PR OBLEMS IN L END ING T O S MES
• Prospects: This refers to both the Industry and Firmanalysis in terms of growth prospects, financialstability, threat perceptions and the like
•
Purpose: The need and form of Loan
• Payment: The possibility of repayment
• Person: The will and ability of a person to repay
• Protection: The type of security provided to thelender, its value and ease of liquidation
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GOVERN MENT INITIA TIV ES
National Equity Fund Scheme (NEF)
Direct Credit Schemes
Technology Up gradation Fund Scheme for Textile Industries (TUFS)
Direct Discounting Scheme - Equipment (DDS-E)
Composite Loan Scheme (CLS)
Single Window Scheme (SWS)
CREDIT GUARANTEE FUND SCHEME FOR SMEs
NSIC SCHEMES:
Bill Financing
Working Capital Finance
Export Development Finance
The Equipment Leasing ScheME
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Th e C re dit F aci li t ies fr om NABAR D
Providing refinance to lending institutions in rural areas
Bringing about or promoting institutional development andevaluating, monitoring and inspecting the client banks
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to ruraldevelopment
Offers training and research facilities for banks, cooperativesand organizations working in the field of rural development
Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and
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MY THS AB OUT SMAL L
AND MEDIUM
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SMEs p redomi nan tl y w an t cred it
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Asse ts c ontr ibut e m aj or porti on o f
Ban k
SME re lat ed p rof itsl Despite the focus on lending, deposits generate most SME
profits
l Only speciality lenders can consistently profit from credit
alone
l Banks must focus on deposit generation
l
Small business lending should enhance or support thedeposit relationship
l Cash Management Services a key product requirement
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Br ick an d Mor tar sup port m an dat ory
for d evelop ing SME busi ness
l Swedbank, Sweden
l40% of SME clients use tele banking
l35% of SME clients net banking
l Wells Fargo - largest US based lender to SME
lNon branch based delivery
lCentralised hubs for credit operations, servicing
lDelivery outsourced
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The c ause s of sickne ss o f SME indu stri es
• Diversion of funds
• Dissension among partners
•
·Shortage of power
• ·Technological obsolescence
• ·Overdependence on purchases by Government
• ·Lack of awareness of credit facilities available
• ·Lack of knowledge about various credit schemes
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The c ause s of sickne ss o f SME indu stri es
High risk on account of poor financial and marketingmanagement
Vulnerability to high market risk and high rate of mortality
Non availability of information regarding their performanceon regular basis to assess and rate their strength andweaknesses
High transaction costs involved in financing SMEs leading
to ultimately non remunerative to borrower ass well aslender
Poor margin in transactions due to involvement of
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EXISTING GAPS
Delivery of finance not linked with delivery of business development
Financing institutions do not assume the role of
partners to SMEs both in assuming risks andassisting in management and marketing
Non- existence of reliable information systems tostudy the risk pattern and to provide market
intelligence to SMEs
Non availability of suitable debt and equityinstruments to help SMEs to raise fund from the
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Advantages of sme financing
l Low risk given the support of the Corporate
l Historically low NPAs
l RaROC returns are high despite the declining interest yield curve
l High risk return ratio
l Creates cross selling opportunity within the Corporate and the
SMEs
l Exit barriers are high once the product is rolled out
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RE CENT INNO VATIONS
• Venture capital funds have been floated to sharerisk, cost of funding and to provide support onmarket and management knowhow
• Credit guarantee and rating institutions have been
floated to support banks to assume riskunhesitatingly in financing SMEs
• More appropriate credit instruments have beendeveloped to help SME to have facile credit withless cost and collaterals
• Better information systems and training moduleshave been developed to make SME viable and
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INNO VATiv e stra tigie s to f in an ce
sme s
• Creating partnership relationship of micro financinginstitutions with SMEs for risk sharing
• Developing equity market and venture capital for SMEs
• Evolving credit cards to maintain required liquidity inoperation of SMEs
• Building kiosks at village centers to disseminates marketintelligence and data on technological up gradation and
climate
• Providing facilities for securitization of debts for improvingliquidity of financing
•
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Recent developments
Some initiatives have been taken by commercial banks inIndia to make SME financing less risky. In this specialmention is providing rating facility. Besides this, venturecapital has been floated to assume higher risk
Lending on the merit of the project rather than on the basisof collateral is gradually evolving particularly with the helpof venture capital
Change in lending strategies:
6. Transaction lending technology7. Relationship lending technology
8. Mixed technology, i.e. taking risk cover and sharing therisk through marketable products.
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CGTMSEOne of the major causes for low availability of bank finance to this
sector is the high risk perception of the banks in lending to MSEs andconsequent insistence on collaterals which are not easily available with these
enterprises. The problem is more serious for micro enterprises requiring small
loans and the first generation entrepreneurs.
The Credit Guarantee Fund Scheme for Micro and Small Enterprises
(CGMSE) was launched by the Government of India to make available
collateral-free credit to the micro and small enterprise sector. Both the existingand the new enterprises are eligible to be covered under the scheme. The
Ministry of Micro, Small and Medium Enterprises and Small Industries
Development Bank of India (SIDBI), established a Trust named Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to
implement the Credit Guarantee Fund Scheme for Micro and Small
Enterprises. The scheme was formally launched on August 30, 2000 and isoperational with effect from 1st January 2000. The corpus of CGTMSE is
being contributed by the Government and SIDBI in the ratio of 4:1 respectively
and has contributed Rs.1346.54 crore to the corpus of the Trust up to September 30,
2007. Based on the future requirement, the corpus is likely to
be raised to Rs.2500 crore.
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INNOVATIONS
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BA NK O F I NDI A:
SME P RODUCT SUI TE
CASE S TUD Y
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SME
• Customisedliability product /solution
• Integrated toother productsuites
• Fee basedrevenue model
• Web baseddelivery
• Customer
interface throughCall centre
• Minimum Branchuse
Institutional
• Correspondentbanking products
• Co-operative Banks
• Suite of Settlementbanking products
• ATM sharing /remittanceproducts
• Liability /InvestmentManagement
• Advisory products
• Web based delivery
E-Finance
• Technologyplatform for otherbusiness
• SME Portal
• SME businesscard solution /processing
• SettlementBankingoperations
• Factoryprocessing fortrade finance /correspondentbanking products
• Dealer Finance
• Vendor Finance
• EquipmentFinance
• LeveragingCorporaterelationships
• Cross Sell Liabilityproducts
Corporate
Linked Standalone
• All units withnetworth ofRs.0.50 croreupto Rs.50.00
crore
• Asset sizeRs.5500.00 crore
• Diverse &undifferentiated
• Shift them onliability platform
• Card / web baseddelivery
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Liability products
Th e k ey driv er f or SME Business
Prim ar y product of fering t o be
Current A cc ount w ith wrap ar ou nd se rvice s
Ce ntralisa tion of pr ocesses
Client acqu isit io n and ser vi cing
Cust omised of fering base d on relati onsh ips
W i
n d
o w t o
c r
o s
s
s e l
l
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Service & Delivery
lInformation
lLogging requests
Call centre
Customer
Branch
ATM
lFor all
transactionsexcept high
value cash
lDrop box point
lHigh value cash
transactions
lHandles exceptions
lCross sells
lMonitors accounts
Account/ Relationship
manager
Trade finance
factory
Credit factory
RPC/CPC
Processes all pure
credit related
requests
Processes all
trade related
requests for a city
lProvide
support
backbone forall transaction
requests
lServices
doorstep
deliveries
lInformation
lLoggingrequests
Internet“Processing centres*”
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Corporate linked business
Clie nt A cquisit io n and Mar ketin g
Relat io nsh ip M anage rs t o ide ntify po tential
Appr aisal
Pre-app roved an d para me terised
Monit oring
Cre dit F act ory - CO PS
Ser vicing
Call C entre s, BPO ,
Deliv eryCh annel neut ra l an d par tly o ut so ur ced t o channel
D r
i v e
r o f
S
M
E
a s
s e t s
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Other Services
• Power-Pay
• Payroll management
• payroll
• retirement
• employee benefit and PF management
• 4th party logistics
• PFS loan and credit products
• Insurance - life and non life
• Office products
• Bill payment module
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Other Services• Credit cards
• Forex services
• Tax computation
• Cash flow analysis
• Legal advisory
• Mutual fund advisory
• Personal services - hotel, airlines
• Software and other equipment
• Human resources - head hunting services
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NEED o f the hou r
Most of the research studies on financing of SMEs have highlighted the need to
link availability of finance to SMEs to the delivery of business development toimprove its viability. It is therefore necessary to evolve a model that shall providefor a partnership in between SMEs and banks. The partnership concept takes careof sharing of risk in business proportionate to their respective financialinvolvement. Moreover, if we extend the partnership concept further, it would alsohelp borrower to get more acceptable rate of interest. In fact, such partnershipconcept may lead to sharing of earnings instead of charging interest on loan as is
prevalent in Islamic sharing of earnings instead of charging interest on loan as isprevalent in Islamic banking which of late is growing in importance due to presentrise in oil prices. Moreover, it is necessary to build reliable information on SMEs tohelp assess market opportunities and risk management There is also an urgentneed to develop equity market for SMEs. This may be done by spreading successstories of SMEs in India. It has been the 71 findings of many research studies thatSMEs mostly depend upon external capital and this should not be only loans from
banks but should be partly equity raised from the market besides the nominalequity held by the promoter. In this the supportive role of mutual funds andventure capitals could be of great help in developing capital market for SMEs.Further, securitization is another area to be developed to take care of non-performing assets (NPAs) that are blocking regular flow of funds to creditinstitutions catering to SMEs. It is obvious that in India gradually banks shouldadopt relationship lending technology and treat transaction lending technology as
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LIS T OF KEY F INANC IAL
INST ITUTIONS· INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
· INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)
· INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
· EXPORT-IMPORT BANK OF INDIA (EXIM BANK)
· INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)
· SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA (SCICI)
· INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. (IL&FS)
· TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION OF
INDIA LTD. (TDICI)
· RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD. (RCTFC)
· TOURISM FINANCE CORPORATION OF INDIA (TFCI)
· NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT
(NABARD)
· NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)
· STATE FINANCIAL CORPORATIONS (SFCs)
· STATE INDUSTRIAL DEVELOPMENT CORPORATIONS
· STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)
· STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDCs)
· SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
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THE TATA C APITAL P ER SPEC TI VE
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Challenges Ahead
Lo wer cost of ac quisit io n of c lients
To c hurn and re tain cre dit w orthy clie nts
Main tain high qua lit y po rtfolio
Lo wer transact io n c osts
Opt im ise int ere st and f ee based income
Ensur e clie nt and pr od uc t level profit ability
N o
t
q u i t e
e a
s y
! ! !
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Suggestions for Tata capital
Retain exist in g clie nts and widen “sh are of w alle t”
throu gh cr oss sell
Pre appr oved se lect io n of c redit expo sures
Dynamic po rtf olio t rac king
Bran ch ne utra l deliv ery
Aggressiv e BPO
Le verage t ec hno lo gy t o enh ance spr ead s
Seg mentati on ba se d o n c ust omer k no wledge
Pr oduct of ferin g ba se d o n c ustomer demand
L e
a d
t h e
S
M
E
P a
c k