Milagrow IMT Study: Practices for SME Development from EU, North America and Latin America and Recommendations

presents
a path breaking study on
Best Practices in SME Development from Europe, North America and Latin America
“Recommendations for Indian Policy Makers”
Prepared under the mentorship of:
Mr. Rajeev Karwal
Founder Director
Milagrow Business & Knowledge Solutions
Dr. Anwar Ali
Director
Institute of Management Technology

Agenda
Challenges faced by Indian MSME Sector
Countries and Areas of focus
Best Practices & Recommendations for Indian Policy Makers

Challenges faced by Indian MSME Sector
Inadequate financial support
Inability to promote their products & services in domestic & international markets
Lack of support from Government organizations, large enterprises, etc.
Lack of appropriate need-based training and development programs
Lack of knowledge about low-cost brand communication solutions
Unavailability of latest news, trends and technologies
Lack of adequate networking opportunities
Poor knowledge management

Countries & Areas of Focus

Big role of Government in implementing MSME supportive policies in country to develop the industry
Government is supportive in investing huge funds in development of MSMEs in the economy which also reflects in funding of R&D efforts of small business
MSMEs account for almost 80% of employment, 62% of sales and 50% of exports
Supports long-term policies & development through strategic plans for MSMEs
Availability of huge funding resources & technological support
99.7% industries are MSMEs, accounted for 70% employment in economy
Innovation driven culture in MSMEs supported by extensive R&D
99.7% industries are MSMEs, accounted for 61.5% employment & 52% of turnover
Top ranked country for supporting entrepreneurs

UK
Sweden
Spain
Italy
Germany
Finland
European Countries

Important role of supportive organizations in the development of MSMEs
MSMEs account for 45% GDP, 60% jobs & 75% of net employment growth
OMSME, the supporting organization plays an accountable & not just a responsive role
MSMEs contribute to more than 50% GDP & 40% workers are skilled
Policies are supportive of funding, marketing & women entrepreneurs’ development
Strong penetration of ICT in MSMEs
Important role of supporting organizations like Sebare & Apex
Role of Government in Infrastructure development, training, technical assistance to MSMEs to enhance their workers’ productivity and welfare
Private sectors plays an important role in development of MSME
Business regulations have been largely simplified for the MSMEs

Venezuela
Canada
USA
Brazil
Mexico
Argentina
North & Latin American Countries

Areas of focus
Funding Structure
Technology Upgradation Assistance
MSME Policy Framework
Role of Supporting Organizations
Infrastructure Development and Marketing Assistance
Training and Skill Development Programs

Best Practices & Recommendations

Funding Structure: Priority Sector Lending
Best practice prevails in
Findings
Obama Administration wants lending to small businesses to be reserved at a much higher levels than the already existing levels.
On an average, banks with more than $1 billion in assets typically devote about 21% of their commercial loan portfolios to small business loans while, community banks with less than $1 billion in assets devote 56%.
Current Policy in India
Indian MSMEs contribute 40% or thereabouts to industrial economic activity whereas their share of credit is around 10%. Most public sector banks do not even accomplish their MSME lending targets
Recommendations
Reserve 20% lending for MSMEs: Government must make it mandatory that like agriculture, the MSMEs must have atleast a 20% quota out of the total 40% priority sector lending quota.
Recognize credit rating for easier credit: The commercial sector banks must recognize the government-approved credit rating agencies and disburse faster and cheaper credit with much lesser documentation.
US

Funding Structure: Credit Guarantee Lending
Findings
Italy’s credit guarantee system takes the help of private funds and implements a 3 layer system, which helps in dividing the responsibility clearly in different levels. The Mutual Guarantee Institution, Banks & Government work together and credit guarantee is as high as 80% for direct lending & 90% for MGI lending . The fee is minimally less at about 0.125%
In US, the Small Business Administration works in tandem with the Treasury Department and plans to increase the maximum size of its guaranteed loans for small businesses from $ 2m to $5m.
MSMEs have to go through a lengthy process for placing loans requests.
CGTMSE in India gives only 75% guarantee on MSME lending and charges 1.5% as the fees
Recommendations
Disburse collateral-free credit faster: CGTMSE must work with the public & private sector banks, & the government organs at the centre & the state, to ensure that collateral free credit is disbursed faster
Raise collateral free limit: Upto 100% collateral free credit for highest credit-rated MSMEs and at a minimal fee of less than 1% upto Rs. 1 crore.
Treat CGTMSE loans differently: CGTMSE must make the norms for declaring a loan as NPA by Member Lending Institutions easier & transparent, so that they are not dis-incentivized.
Italy
US

Funding Structure: Access to Bond Markets
Findings
Government facilitates access to international capital market for MSMEs
The financial structure is rebalanced through long maturity bonds
Low-cost and collateral-free credit is extended
MSMEs in India have no access to international capital-market bonds
Recommendations
Recognize credit rating: The Ministry of MSME and the CGTMSE must recognize the credit rating given by the credit-rating agencies
Facilitate access to international capital markets: CGTMSE should provide assurance against default for issuance of international capital-market bonds for the highest credit-rated MSMEs. The bonds such issued will come in without any collateral and at a much cheaper rate than the PLR in the traditional lending system
Italy

Funding Structure: Reciprocal Guarantee Societies
Findings
Reciprocal Guarantee Societies (RGSs) issue certificates to improve the creditworthiness of MSMEs
These certificates enable the MSMEs to seek loans from the banks at rates applicable for better credit-rated organizations
The RGSs ensure that the credit rating of the borrowing MSME improves within stipulated time
They also offer advisory and technical assistance to MSMEs and foster their partnerships with banks
The loans are disbursed to MSMEs as per their existing credit ratings
No organization exists which can guarantee the improvement of credit rating of the borrower and thereby get the loan disbursed at a lower cost
Recommendations
Assist MSMEs to improve their credit rating: Reciprocal Guarantee Societies must be set up, may be even through Industry Associations with good track record
RGSs must work towards improvement of credit-worthiness of the MSMEs, even as they ensure that they are not deprived of cheaper loans when they need it the most.
Argentina

Funding Structure: Equity and Management Capital
Findings
Canadian venture capital industry plays a major role in extending not just equity but even managerial support and other resources to the MSMEs
Brazil has implemented a “New Ventures Program” along with World Resources Institute, which aims to build competitiveness and promote long-term sustainability by providing skill-development, social networking and environmental benefits to the MSMEs.
Presently, the private & state-government venture funds as well as other organizations like SIDBI provide equity financing only
Recommendations
Mentoring & hand-holding MSMEs: The organizations like SIDBI, State Government venture funds, etc. must not only fund the MSMEs with equity financing but also provide sufficient hand-holding and implementation help through private partnerships
Canada
Brazil

Technology Upgradation: Access to Foreign Technologies
Findings
Italy is a member of PIN-SME association, which brings together several small technology businesses on a single platform
MSMEs in Italy benefit as they get an access to the newer technologies at affordable rates from the member countries
MSMEs of member countries are also able to gain access to EU-funded projects
Indian MSMEs do not get a platform where they can network with MSMEs from other countries and get an access to newer and affordable technologies
Recommendations
Provide opportunities for international partnerships: For the industries/ clusters, where Indian MSMEs have an inherent competitive edge, the Ministry of MSME should create platforms through institutions like NSIC or even private partnerships where they can network with MSMEs from other countries.
This will not only provide an opportunity to Indian MSMEs to gain access to latest low-cost technologies, but will also enhance foreign trade
Italy

Technology Upgradation: Assistance from Large Firms
Findings
National Strategic Framework (NSF) 2007-2013 in Italy focuses on :
Instituting long term relationship between large enterprises & MSMEs
Enhancing dialogue between the research sphere and the small businesses
No effort or long term strategic plan for encouraging large enterprises to assist and mentor small businesses
Recommendations
Involve large enterprises in development of MSME clusters: The Ministry of MSME in India should implement a long-term strategic plan and facilitate MSMEs to build long-term relationship with large enterprises & research supply institutes
The Ministry of MSME, through PPP model, must incentivize the larger organizations in adopting clusters which are mainly into B2B/ ancillary business, to improve their technology absorption
Italy

Technology Upgradation: e-Governance & e-Procurement
Findings
e-Procurement facilities including online certification is available
Online alerts are sent to MSMEs whenever new business opportunities arise
Has a complete electronic trade data-management system
As a part of the e-Governance initiative, all the information related all policy changes, trends & new technologies is available online
No e-procurement & trade data management system available
Unavailability of online information and processes for legal jurisdictions
Recommendations
e-Governance & e-Procurement, a must for easier compliance: Online mechanisms should be provided to MSMEs to carry out all the necessary transactions for conducting business in domestic and international markets
Online access to rules and regulations, electronic methods for registration and electronic applications for government schemes, certificates, licenses and realization of incentives should be provided to the MSMEs
Brazil

Technology Upgradation: Low cost ICT solutions
Findings
Brazil has SME Metasys, which has the objective to provide MSME with a complete and low cost ICT solution specially designed to improve their efficiency.
This robust solution, which uses open source software and does not require special skills for its installation and operation.
Lack of knowledge about low-cost Information & Communication Solutions, which leads to loss of opportunities
Recommendations
Promote low-cost ICT solutions: The Ministry of MSME in India should facilitate MSMEs in procuring complete and low-cost ICT solutions to improve their capacity and productivity.
Awareness of these tools should also be increased among the MSMEs
Brazil

Technology Upgradation: Support for R&D
Findings
In Italy, Science & Technology Parks, Business Innovation Centers, Integrated Centers for Entrepreneurship Development and Incubators support innovation and transnational technology transfer with MSMEs
in UK, tax relief is available to MSMEs, who invest in research and development (R&D) under the MSME scheme
No Government policy to include national technology excellence centers for the training & technical assistance to MSMEs
Recommendations
Create and promote an innovation and R&D culture: The Government sector institutions at the cutting edge of research and innovation can be opened up for use by MSME innovators, who otherwise struggle in getting funding and technology to convert their ideas to successful product launches.
A method may be designed where the cost of such research help can be offset by taking a percentage of the successful projects through royalties, even as the IP belongs to the innovator MSME.
Italy
UK

MSME Policies: Cluster competitive programme
Findings
Division of labour between the different firms within the same local context comprising of large number of firms individually specialized in just one or a few stages of the production process, in a reciprocal arrangement and at the same time competing in the market with finished products.
These reduce the cost of production due to standardization of components and technologies in the same/ similar sectors
Extensive availability of productive resources (technical skills) at the local level make these clusters competitive in the international market.
No effective cluster competitiveness programme which can focus on providing value-added end-to-end solutions.
Recommendations
Develop integrated cluster competitiveness programs: The cluster competitiveness program should be revamped. Rather than giving the authority of these clusters to associations, which may or may not be competent, it should be given to bodies, which understand the value chain of the respective industry.
These bodies must provide end-to-end solutions, which are benchmarked globally in terms of competitive technology and effective training.
Italy

MSME Policies: Support for New Exporters
Findings
Export policies are designed to guide & encourage the development of sectoral partnerships.
Technical assistance is provided to assist in designing and implementing export strategies.
In “Support for New Exporters” programme, the MSME Under-secretariat provides advice to MSMEs located throughout the country on launching export operations including analyzing and diagnosing problems, training, and tutorials for designing and implementing a strategic export plan.
Monetary support is available for the new exporters but nothing in terms of educating, training and assisting MSMEs in designing the export plans
Recommendations
Enable and then subsidize: Special training should be extended to the MSMEs, who enter the international trade to avoid any problems during the process. Only the MSMEs which undergo these programs should be offered subsidies for foreign travel required for trade and export promotion
Argentina

MSME Policies: Effective Implementation of Schemes
Findings
US legal framework promotes transparency in contracts, protection of intellectual property, and the regulation of fraud. The U.S. Small Business Administration ranks as one of the most effective public sector agencies in the world for the promotion of MSMEs.
In the past, Ministry of MSME has launched several policies and schemes for the benefit of the MSMEs. However, no reports are available in the public domain which informs about their reach and the effectiveness.
A study conducted recently by Milagrow showed that 70-80% MSMEs are still unaware of the existing schemes provided by the Ministry.
Recommendations
Measure the effectiveness of the policies: The Ministry of MSME should implement and measure the effectiveness of its various schemes at the ground level through third-party organizations
US

MSME Policies: Offsets in Government Procurement
Findings
The offsets provided by different countries to MSMEs in government procurement
Canada: 43%
Germany: 35%
United States: 33%
No offset has been provided by Indian Government till yet. Although, a proposal in this respect has been made
Recommendations
Provide reservation for procurement from the MSME sector: Offsets should be provided to the MSME sector in the procurement done by the government and public sector units
To determine the exact offset that should be provided to MSMEs, another comparative study is being done by Milagrow to analyze the procurement policies of nations across the world. The study will be released shortly
Canada
US
Germany

MSME Policies: Encouragement for Green Businesses
Findings
Sweden focuses on the environment driven business development.
The design for environment has been successful and has resulted in 13 projects through the participation of 122 MSMEs
7% MSMEs have comprehensive systems for energy saving in Sweden as compared to 4% in EU.
50% MSMEs apply at least simple energy saving measures as compared to 29% for the EU
No policy related to encourage MSMEs which are involved in doing eco-friendly businesses
Recommendations
Encourage Environmental Compliance at an early stage: The Ministry of MSME should encourage those MSMEs, which are involved in clean and green businesses by providing enhanced subsidies than available to large business.
Stringent norms should be implemented to analyze the working of the MSMEs and incentives should be provided to them to develop and sustain their operations and products
Sweden

Role of Supporting Organizations: Effectiveness
Findings
In Brazil, the supporting organizations work on effectiveness measurement along with Government
Office of Small and Medium Enterprises, in Canada, is working within the government to ensure the procurement system treats MSMEs fairly
In India, the goals and targets of supporting organizations are neither highly specific nor monitored effectively
According to a recent study conducted by Milagrow, “More than 97% acknowledge or choose to avoid giving direct answer on corruption & bribery”
Recommendations
Government Funded Support Organizations must have effectiveness targets measured by a third party: The supporting organizations should effectively work on specific targets and their working should be transparent.
The effectiveness of these organizations should also be based on the feedback from the MSMEs in the respective areas through a third party.
Canada
Brazil

Role of Supporting Organizations: PPP Model
Findings
In Brazil, APEX & SEBRAE are two organizations which are private and have taken responsibility from Government in their respective sectors through an act of law and are functioning only for MSME development.
SEBRAE is a private sector non-profit organization focusing on the SME development. It is a union of public sector and private sector and Brazil’s main fostering and research entities. Its been created by law and the Govt. and the business community have come together for common purpose.
All the supporting organizations are mainly controlled by government officials or the organs of the government and the Ministry
Recommendations
Encourage PPP to develop the MSME Sector: To enhance the performance and effectiveness of the supporting organizations in the MSME sector, the Ministry should establish a Public-Private Partnership model
Brazil

Infrastructure: Incubators’ Assistance on Softer Aspects
Findings
With approximately 400 incubators and a well-developed incubation ecosystem, Brazil leads one of the most successful incubation movements in Latin America, through innovation and adaptation of incubator models to suit indigenous needs.
The incubators hardly exist in India and those which do, mainly focus on providing meager infrastructural resources only
Recommendations
Encourage Incubation with best in class practices: The incubation centers set by the Ministry of MSME should extend support on the softer aspects, to the MSMEs beyond the infrastructural resources, like networking & management assistance, etc.
Brazil

Marketing Assistance: Advertisement & Promotions
Findings
In Brazil, the supporting organization Apex assists the MSMEs to market their products and services.
Apex has also launched a portal, which is dedicated to promote MSME products only.
SEBRAE, in Brazil, has 6 channels, which are dedicated to the MSME sector. These channels show MSME focused programs &news and also provide TV advertising options to MSMEs at special rates.
More focus on quality and export orientation than promoting/ selling the products in domestic markets
Recommendations
Incentivize promotion of MSME products through organizations like DAVP: The Ministry of MSME should incentivize organizations who advertise MSME dedicated channels & programs. It must also use the clout of DAVP to get special media buying rates for MSMEs.
Brazil

Training & Development: Programs for Common Needs
Findings
Government of Mexico has implemented a program that provide subsidized training and technical assistance to SMEs.
It starts with analyzing the constraints faced by MSMEs & then come out with a comprehensive package of integrated training & business support services required.
They involve best in class organizations in identification of training needs, management and then executing the training programs.
Mainly tool-room based technical training is provided.
Some quality-development training has been proposed but not effectively implemented yet.
Recommendations
Provide best in class training and have an industry and ‘management function’ wise plan: Similar structured and need-based training programs with constant feedback and control mechanisms should be implemented by Ministry of MSME to check the effectiveness
The Ministry should also facilitate training programs for newer technologies and best practices, which are undertaken by large organizations to enhance their productivity and competence.
Mexico

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