With the strong focus on promoting the MSME sector and supporting their functioning by timely capital infusion, easy access to credit, providing necessary advisory assistance and technology infrastructure, the MSME’s are slated for an unprecedented growth in the years to come.
SMEs are the engine of India's economy. They are a central part of the economic development model in the emerging economies like India, and they play a significant part in fuelling growth, innovation and prosperity. Despite all the positive development happening in this sector, there is still a huge demand supply gap and the sector is plagued by numerous challenges, such as:
- Availability of timely and affordable credit
- Inadequate capital infusion and delayed payments from large corporates and PSU’s leading to working capital gaps
- Restricted access to organized finance.
Traditionally banks have been the largest source of funds for the SMEs. Banks in India have had a conservative ecosystem, being risk averse and credit has primarily been extended against collateral.
Also, the need gaps between organized lending sector and SME’s had resulted in SME’s reaching out to the high interest rate unorganized sector, leading to sustainability issues and high rate of chronic sickness. Realizing that the risk averse lending practices were hampering the growth, RBI and policy makers have taken significant efforts to strengthen SME financing. A plethora of options in terms of lending partners and customized debt solutions have been made available to the SME’s. These available options currently cater to the financing need of a very small segment of the total universe and there is still a huge demand supply gap which needs to be plugged through innovative financing options and timely capital infusion.
The current lender-borrower relationship is plagued by issues such as:
- Collateral Issue - Unavailability of desired/acceptable collaterals or unwillingness to mortgage family owned assets.
- Interest cost – High cost of raising funds.
- Management of funds - Mismanagement of short term and long term assets resulting in doubtful sustainability.
- Unavailability of Credit Rating.
- Lack of technical expertise in information sharing and proposal development leading to failure in generation of required interest and confidence amongst lenders.
- Asymmetry in available financial information on Business.
The landscape of the Indian SME sector has changed over the period of years. Government and the policy makers have realized the role SMEs play in the economic and social development, while a lot of innovation has happened in the area of SME lending we still feel a lot more that can be done.
To meet the demand and leverage our footprint in the industry, we at RFL have adopted a cluster based lending within the identified geographies and building distribution capabilities to create a Direct to Customer model. We have also developed a unique mix of product offerings that aim to solve various financing needs both for long term and short term requirements. We offer both 'Secured' and 'Unsecured' loans’, for the self-employed, who are in business for more than 3 to 4 years with a proven business model and who aspire to raise capital for expansion. Thus we want to be the ‘Growth Capital’ providers to SME’s in India in the form of debt.
And finally my advice to SMEs towards getting best funding will all depend on the type of funding the SMEs are looking if they are looking for a debt options then there are number of debt options available based on the stage of business.
Number of Govt. formulated schemes like Collateral free loan up to INR 1 cr.
- Funding for working capital gaps are available via various credit lines like bill discounting, traditional bank overdraft, securitization of receivables, working capital term loan, factoring finance and short term trade finance.
- For export business owners, there are pre-shipment and post-shipment credits available to take care of the foreign exchange exposure against receivables.
- For capital expenditure (capex) and long term expansions, banks and NBFCs offers collateral based term loans (Loan against Property) and operating/financial lease options.
If they are looking at equity based funding then -
Angel and Venture Capital
- Private Equity (PE) funds for higher ticket size requirements
- Access to funds through SME Exchanges.
The emerging economic scenario in the country has thrown open vast opportunities for development and diversification of the MSME Sector. The present Government’s initiative of “Make in India”, and its emphasis upon increasing the share of the Manufacturing Sector in the Gross Domestic Product (GDP) from the present 14-15% to 25% by 2022, have the potential of transforming the fortunes of the Sector enabling it to scale unheard heights. The plans and schemes of the Government of India, such as “Digital India” and “Skill India”, are expected to spread entrepreneurship and skill development, thus contributing to creation of employment opportunities.
By Mr. Kavi Arora, CEO & MD, Religare Finvest
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