alternative sources of funding for smes in india

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Alternative Sources of Funding for SMEs in

India

Contributed by Nishant Pathak, Knowledge Buddy

There are over 13 million SMEs in India, providing employment to 42 million people. Fromthese figures an outside observer can easily state the fact that we are in fact an SME drivennation. Yet we can clearly see that in India almost everyone is obsessed with large businessesand Multi National Corporations. India has always been in denial when it comes to dealing withits SMEs. Even then SME¶s in the last decade have shown a growth higher than the nationalgrowth rate.

In a study conducted by Milagrow Business and Knowledge Solutions, it was found that

74% of the sick SMEs in India attribute their sickness to the fact of low availability of

funds. Which is not surprising, as the same study also showed that 92% of all SMEs

interviewed are dependent on personal or family savings.

In this light let us explore a few areas of external funding that SMEs can explore.

Bank Loans

Bank loans have been the most traditional way of securing funds for SMEs in India. However since the beginning of the economic recession, bankers have curtailed lending to SMEs due tothe greater risk of non-performing assets (NPAs). Moreover, large firms that raise funds through both the capital market and banks have turned increasingly to banks, ever since the capitalmarket crashed at the beginning of 2008 ² thereby offering banks a line of business that is morelucrative than lending to SMEs, according to a recent World Bank Report.

This trend is worrisome in light of the fact that most of the SMEs in India only rely on Banks tosecure funds.

Private Equity Funds

Private equity firms are targeting Indian SMEs in a big way. For this financial year they are poised to invest close to $5 billion in to SMEs in India, this figure makes up 70% of their totalinvestments in India. Another advantage of PE firms lies in the fact that they not only bringcapital but experience and expertise from established businesses. They expose their portfoliocompanies to best in class practices and work extensively to see that they are implemented intothe organizations that they are funding.

However in India we often see resistance from SMEs when it comes to Private equity firms, oneof the main reasons for this is Indian SMEs, which are primarily owner driven or family owned



are hesitant to let someone else tell them on how to run their own business. This combined withlack of good valuation limits their role in finding SMEs.

Compared to developed economies, India has very few angel investors. This is surprising giventhe growth of the Indian economy over the last few years and the potential displayed by Indian

SMEs in today¶s time. Angels typically invest their own funds, unlike venture capitalists, whomanage the pooled money of others in a professionally-managed fund. Although typicallyreflecting the investment judgment of an individual, the actual entity that provides the fundingmay be a trust, business, limited liability company, investment fund, etc. In recent years we haveseen CEOs and successful entrepreneurs who want to give back to the society by investing innew ventures and start ups. Recent entities like Indian Angel Network which was founded in2006 is already one of the largest angel network in the country with close to 90 individualmembers and institutional members like SIDBI, IBM and many more. An angel investor will

also be more attuned to the start-up or venture that he invests in. This means that the

venture does not only benefit financially but also gets access to some top-notchµmanagement capital¶.

Alternative Investment Markets

Faced by growing competition from overseas exchanges wooing Indian companies to seek primary listing with them, SEBI in May 2006 announced certain guidelines to encourage Indiancompanies to raise domestic capital. Although a step in the right direction, we are still very far away from realizing an Alternative Exchange where the cost of listing and compliance thereafter is affordable to SMEs which have smaller capital requirements.

SMEs cannot afford the prohibitive cost of IPOs. The need of the hour is a dedicated SME

Exchange which can provide a cost effective solution to SMEs without undervaluing thecompanies.

The main objective of creating an alternative exchange is help SMEs in India with excellenttrack record but who are in need of major cash infusion. There is a raging debate on thefeasibility of setting up such an exchange with some experts stating that the cost involved could be anywhere close to Rs. 500 Crores. Other argue that if NSE/MCX could have been setup withan investment of only Rs. 45-50 crores then why can¶t we replicate the same for setting up anSME Exchange.Setting up an SME exchange although a daunting task, will have immense long term benefits interms of fulfilling the capital requirements of thousands of SMEs in India.

Indian SME Policy Initiatives in 2009

15 Feb 2011 at 05:35

R andolph O'Brian



The Ministry of Micro, Small and Medium Enterprises (MSME) started several schemes for thedevelopment of micro, small and medium enterprises in India. These schemes offered a greatsuccess for the MSMEs in 2009 even after the impact of economic recession.

Priority of Skill Development

Many measures had been taken to enhance the training capabilities of MSME DevelopmentInstitutes, Tool Rooms, and other organizations which come under the Ministry of MSME.Several programs were organized free of cost for weaker sections of society.

Better Credit Flow The Policy Package for Stepping up Credit to Small and Medium Enterprises (SME) wasestablished by Indian government in 2005 in order to double the credit flow to the MSME sector within five years. The credit flow which was found to be Rs. 67,634 crore at the end of March2005 increased to Rs. 1,91,307 crore at the end of March 2009.

Improvement of Competitiveness

The National Manufacturing Competitiveness Programme (NMCP) for MSMEs contain 10components. Among them, six were operational and these include quality management systemsand quality technology tools, support for entrepreneurial and managerial development of MSMEs, building awareness on intellectual property rights, marketing support/assistance toMSMEs, mini tool room scheme, and lean manufacturing competitiveness scheme.

Coverage of Capital Subsidy Spreads 15 percent capital subsidy was provided on loan amounts up to Rs. 100 lakh for upgradation of technology under the Credit Linked Capital Subsidy Scheme for Micro And Small Enterprises(CLCSS). 7810 proposals of subsidy were approved and Rs. 338.68 crore was released to theMSMEs under the scheme until October 2009.

Employment Generation The Prime Minister¶s Employment Generation Programme (PMEGP) was started in August 2008with a total plan outlay of Rs. 4735 crore that included Rs. 250 crore for backward and forwardlinkages. 2,17,762 applications were received under PMEGP until March 2009, out of which83,454 candidates got selected. Until 31st August 2009, loans were disbursed in 25,507 cases by banks which gave employment opportunities to about 2.55 lakh persons.

Apart from these, there were schemes for quality improvement and success of credit guaranteescheme.

alternative sources of funding for smes in india

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