MSME Financing in India

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This is a document that covers the MSME financing in India. It explores the financing sources and problems in India. It talks about working capital financing via factoring and reverse factoring, cluster financing, Germany's cluster financing, listing looking at alternativa model of listing of ventures, and Thailand's SME bond markets. It also covers the need for policy redefinition of MSMEs and policy support required.

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MSME Financing in India

  1. 1. MSME FINANCING CHALLENGE Team Strategem Devansh Doshi Nikhil Indla IIFT Delhi
  2. 2. Meet a Typical Indian Entrepreneur
  3. 3. Who is he? • Mr Aggarwal is a man in his late 20’s living in Meerut, Uttar Pradesh • He is a twelfth pass student • He works in a sports goods manufacturing company for the page 7-8 years • In this time he has acquired detailed knowledge of the business and made contacts with buyers and suppliers • He now wishes to set up his own business in the sports goods manufacturing cluster of Meerut • He needs INR 75 lakh to get his business off the ground • He is a first generation entrepreneur from a poor family with few assets to their name totalling to INR 10 lakhs
  4. 4. Financing the Start Up Stage
  5. 5. Financing Options Venture Capital Funds • SIDBI Venture Capital • ICICI Venture Capital Bank Loans • Nationalized Banks • Private Sector Banks Development Finance Institutions •SIDBI •Uttar Pradesh Financial Corporation NBFC • Shriram Finance • Mahindra and Mahindra Financial Services Informal Source •Friends •Relatives
  6. 6. Problems in Financing Options Venture Capital Funds • Ecosystem is underdeveloped • Focus is on services sector and geographically clustered Bank Loans • Extensive documentation • Banks generally risk averse and conservative • No prior record Development Finance Institutions • Bureaucratic functioning and red tape • Scale of operations not big enough NBFC • Unwilling to lend because of the absence of adequate information • No creditor protection under SARFAESI Act Informal Source • Lend on unfavourable terms • Account for nearly 90% of capital raised
  7. 7. Government Initiatives • Priority sector lending targets • Credit guarantee Fund Trust for Micro and Small enterprises • SIDBI New Policy Initiative • Norms on tax incentives for VC need to be relaxed The issue here is to make all these available to Mr.Aggarwal
  8. 8. SBI SME Collateral Free Loan • Eligibility Micro and Small Enterprises engaged in Manufacturing and Service sector. For Manufacturing sector, original investment in plant & machinery should be upto Rs 5 crore and for Service sector, original investment in equipment upto Rs 2 crore. • Purpose • Working capital needs (Fund Based+ Non Fund Based). • Term loan for construction of Building, office, acquisition of machines / equipments including expansion and modernization of the unit. • Facility • Cash Credit • Term Loan • Letter of Credit & Bank Guarantee • Quantum of Finance Total Exposure to the unit : Upto Rs. 1.00 crore (All facilities WC, TL & NFB facilities) • Interest Rate Attractive rates of interest* • Service Charges • concession in processing and service charges. • Other charges as applicable. • Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) Guarantee • Borrowers eligible under the scheme will be covered under CGTMSEguarantee scheme. • Security • Primary Security:- Assets created out of bank finance • Existing assets of the borrower as per definition of CGTMSE • No collateral • No third party guarantee • Repayment Period • Working Capital (WC): One year, repayable on demand. Working capital limits will be renewed every two year. However, performance of the unit and conduct of account will be reviewed annually for continuation of limits. • Term Loan: Maximum Seven Years including moratorium period.
  9. 9. Existing Banking Products Working Capital Capital Machinery Finance Business Expansion Finance Short Term Loans Festival Working Capital Loans
  10. 10. MSME Development Finance Institutions A new type of NBFCs catering specifically to the MSME needs Provide access to priority sector lending Extend creditor protection under SARFAESI Act
  11. 11. Working Capital Financing
  12. 12. Options and Problems NSIC and SIDBI provides finance to procure raw materials and marketing finance for the short time • Absence of scale to meet financing needs. SIDBI has a loan portfolio of Rs 53,875 while the gap is estimated at Rs 2.15 lakh crore Loan products by commercial banks • Lack of flexibility in repayment schedules that are needed to deal with volatility in cash flows Bill discounting by commercial banks • High cost of discounting Factoring by NBFCs • Factoring firms are unpopular because it leads to buyers asking for discounts NBFCs offer working capital loans • High transaction costs
  13. 13. Working Capital Financing: Mexican Development Bank Nafinsa’s Way
  14. 14. Factoring Exchanges A platform with the CCIL and MSME stock market needs to be developed This electronic platform is an factoring exchange Receivable bills can be auctioned on an electronic platform Bank discounting in the range of 10% -12% He typically have to wait for 90 to 120 days for the payment Mr. Aggarwal sell products to big companies in bulk
  15. 15. Reverse Factoring Non-payment and legal issues in recollection can pose problem in factoring Factors purchase the accounts receivables of only the larger, most creditworthy buyers Buyers need to be registered with the SMERA that will access their worth Working with only the registered buyers reduces both the cost of assessing accounts receivable risk and the risk of non-payment itself
  16. 16. Redefining MSMEs
  17. 17. The New Definition Type Micro Small Medium Employees Capital (in Rupees) Employees Capital (in Rupees) Employees Capital (in Rupees) Production < 25 <50 lakhs 25-200 50 lakhs to 5 crores 201-350 5 crores to 10 crores Service <20 <40 lakhs 21-150 40 lakhs to 4 crores 151-300 4 crores to 8 crores Trade <20 < 40 lakhs 21-40 40 lakhs to 3 crores 41-100 3 crores to 7 crores Reflects the larger picture of capital and one of the prime reasons for a vibrant MSME sector i.e. employement
  18. 18. Policy Support for Growth
  19. 19. Growth from Small to Medium (Now)
  20. 20. Growth from Small to Medium (Now)
  21. 21. Policy Framework for MSMEs in India Scheme Micro Small Medium Till 1 year after becoming Large Assistance aimed at Improving Processes, Designs, and Technology Yes Yes Yes Yes Annual Government Procurement Value 20% Extended with a cap None Capital Subsidy for Technological Upgradation 15% 15% 10% 5% Credit Guarantee for Collateral Free Loan 1 Crore 1 Crore 1 Crore 50 Lakhs Training and Technology: Grants for Clusters 75% 75% 50% 20% Tangible Assets: Grants for Clusters 80% 80% 50% 20% Reimbursement of ISO certification fees 75%, no cap 75%, no cap 75%, no cap 75%, no cap SIDBI Support for Loans Yes Yes No No Existing Addition Left
  22. 22. Expansion Capital
  23. 23. Options and Issues Bank Loans • Reluctant to lend due to information asymmetry • Require him to maintain accurate accounts which he may not do Equity Financing • Lack of awareness and financial literacy • High transaction costs • Limited liquidity in SME exchanges Debt Financing via Bond Markets • High costs involved in getting bonds rated • Limited financial literacy
  24. 24. Government Initiatives • SMERA • ISARC • Relaxation of norms: SME’s exempt from eligibility norms applicable for IPO’s and FPO’s under SEBI regulations • Encourage setting up SME exchanges . For instance : BSE and NSE have set up SME exchanges • Launched CLCSS (Credit Linked Capital Subsidy Scheme) in which 15% capital subsidy is provided for technology upgradation • Monitor implementation of MSME policies through SME Monitoring Cell
  25. 25. Bank Loan Products for Clusters
  26. 26. Germany’s Cluster Financing Approach • Focus on funding the existing clusters rather than developing infrastructure for a new cluster • India has 388 clusters Funding of Existing Clusters • Current focus on financing the entire institution • Need to analyse only the viability of the project Towards Project Based Financing • Need for expansion capital • Lower risk than funding a start up Financing Addition of New Services
  27. 27. Equity Financing
  28. 28. The Advantages of Listing for MSMEs • Access to capital and future financing opportunities Favourable terms of debt/ mezzanine finance • Liquidity /Exit for investors. Exit and Liquidity for VC/ PE/ Risk Investors. • Facilitate Acquisitions Shares are more efficient & cost effective currency substitute to acquire target cos. • Employee Stock Options ESOPs become powerful tool to attract & retain talent. • Visibility/ Recognition Visibility on getting listed will improve customer client credibility.
  29. 29. MSME Wants • A well functioning secondary market designed especially for MSMEs • Easier for a company to raise funds • Do this without forcing companies to face a complicated set of exchange regulations every day • Management are allowed to focus on running the company instead of dealing with the demands from the financial market
  30. 30. MSME Listing Woes • Due Diligence Assurance Criterion: Companies that list on the platform would require to have received funding or investment from at least one from a list of eligible entities • Some Criterions are less stiff than others • Reducing access to equity capital • IPO grading is optional • Lesser information to investors • Listing is still a little complicated, and expensive. • Companies would be listed on a platform which is open only to institutional investors and have a minimum trading lot of Rs 10 lakh • Need to have participation of retail investors as well
  31. 31. Alternativa in France and Sweden Crowdsourcing + Croudfunding + Crowdtrading
  32. 32. How Alternativa Works The company choses the negotiation frequency of its securities (from monthly to annually) The rating occurs once a month for a week and the platform sets a balanced price A slow rating: two days are devoted to price discovery (securities or valuation by independent experts) Over the next three days, purchase orders and sales are recorded based on the fixed price Alternativa then sets up a balanced price and delivers the securities.
  33. 33. Features • Company chooses how frequently it trades its securities • Low formal demand for disclosure • Company ratings given on the basis of the disclosure of information • Low listing fees and provision of listing services • Investors can choose to trade directly on the market or use traditional brokers • Venture capitalists to liquefy their investments by facilitating exit strategies ensuring liquidity of their assets
  34. 34. MSME Bond Market
  35. 35. Thailand’s SME Bond Market SME Bond Market Thai Bond Market Association TRIS Rating Co. Ltd Fitch Ratings (Thailand) Co., Ltd Bond Electronic Exchange Thai Listed Companies Association Federation of Thai Industries Thai Chamber of Commerce
  36. 36. India’s MSME Bond Market SME Bond Market FIMMDA SEBI ICRA, SMERA, and CRISIL NSE Bond Trading Listed Companies FICCI ASSOCHAM
  37. 37. Financing Troubled Ventures
  38. 38. Debt Restructuring for MSMEs Available • Debt Restructuring • Advanced Debt Restructuring Issues: • Lack of awareness and lack of expertise in dealing with banks Current Scenario • Banks are free to have their own MSME debt restructuring policy • Bank follow a case to case strategy than an across the board strategy
  39. 39. New Policy Initiatives Creation of an independent external intermediary to help MSMEs negotiate and restructure loans with banks Adoption of an across the board strategy than a case to case strategy as it was done in Indonesia during 2008 financial crisis • There can be bureaucratic and corruption issues A safer would be using across the board strategy in only dire situations such as exchange rate fluctuation
  40. 40. The New Model • Banks • Bank Loan Products • Cluster Financing • Venture Capital • Uniform tax incentives • Equity Financing: On the lines of Alternativa • Working Capital Financing: Factoring and Reverse Factoring Exchanges
  41. 41. The New Model • MSME Bond Market • Debt Restructuring • Independent External Intermediary • Across the Board Strategy in bad situations • Government Policy • MSME Development Finance Institution • Redefining MSMEs • Retaining Growth Incentives • Easy Access to Government Schemes
  42. 42. Thank You!
  43. 43. Appendix A Due diligence assurance criteria in the form that the Company should have at least one Alternative Investment Fund or AIF in short (VCF or other category of investors / lenders) should have invested at least Rs. 50 lakh in equity shares of the company; or at least one angel investor who is a member of an association/group of angel investors who fulfill the criteria laid down by the recognised stock exchange, has invested at least Rs. 50 lakh rupees in the equity shares of the company through such association/group; or the company has received working capital or project finance from a scheduled bank and a period of 3 years has elapsed from the date of such financing and the funds so received have been fully utilized; or a registered merchant banker has exercised due diligence and has invested not less than Rs. 50 lakh rupees in equity shares of the company which shall be locked in for a period of 3 years from the date of listing; or a QIB has invested not less than Rs. 50 lakh in the equity shares of the company, which shall be locked in for a period of 3 years from the date of listing; or a specialized international multilateral agency or Company defined under section 4A of the Companies Act, 1956 has invested in the equity capital of the company;

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