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Sme financing
- 1. ADFIAP International 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
- 2. Structure Of Presentation •Importance of SME- Banking & Economy • SME Financing – Issues • Participation in SME Equity • Initiatives in India
- 3. Importance of SMEs– Banking & Economy
- 4. 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)
- 5. 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)
- 6. 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)
- 7. SME Financing -Issues
- 8. 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)
- 9. SME Financing -Issues • 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
- 10. SME Financing -Issues • 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
- 11. Participation in SMEEquity
- 12. Participation in SMEEquity • 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
- 13. Participation in SMEEquity 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
- 14. Participation in SMEEquity 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
- 15. Participation in SMEEquity 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
- 16. Participation in SMEEquity 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)
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- 18. 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
- 19. Initiatives in India •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
- 20. Initiatives in India PrimeMinister'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
- 21. Initiatives in India Initiativesby Govt. of India Few note worthy measures include: 7. Extension of ‘stimulus package’, for a further period of one year, beyond March 31, 2010 8. Creation of a Special fund to be utilized exclusively for lending to the micro enterprises 9. Providing collateral free loans upto Rs. 100 lakhs under Credit Guarantee Scheme
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