The document discusses the challenges faced by SMEs in emerging markets, particularly regarding access to financing, with approximately 85% experiencing credit constraints and high reliance on informal funding. It outlines government initiatives aimed at improving financial access, such as credit rating schemes, specialized banks, and various support programs to enhance competitiveness and reduce reliance on public support. Additionally, the document highlights the importance of credit scoring for facilitating loans and the implementation of strategies to support the sustainability and growth of SMEs.

1. SME Financing – Issues and
Practices.
Presentation by
Mohammad Thoriq Bahri
Indonesia Delegation

2. 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
Informal sector meets their financial requirements,
WITH OTHER SOURCES AT HIGHER INTEREST RATES.
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

3. SME Financing - Issues
Recent global economic downturn has further
aggravated the problems that already existed
Very few SMEs are able to finance their
expansion through their Cash Flow and have to
explore external sources of funding.

4. 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.
– Lack of equity support from public

5. • GOVERNMENT SUPPORT.

6.  Ministry of Small Scale Industries, Govt. of India has been
promoting use of IT in SME’s, to enhance SME
competitiveness, in view of globalization.
Government Support

7.  Value-added services. viz :
 E-transaction portal
 Supply databases
 Advisory and Infomediary Services
 Market intelligence
 Technology providers
 Information providers
 Linkages with relevant institutions
Linkages to SME’s

8.  Non-availability of institutional finance on affordable and
easy terms is hindering SME’s access to new
technologies.
 Non availability of venture capital to the fullest extent.
Financial Access for SME’s

9.  IFCI
 IDBI
 SIDBI
 ICICI
 SFCs
 SIDO
 NSIC
Financial Access through insitutions for SME’s

10.  Some of its the popular schemes are
 Credit Linked Capital Subsidy Scheme for
Technology Up-gradation,
 Credit Guarantee Scheme,
 ISO 9000 / IS 14001 Certification
 Integrated Infrastructure Development Scheme
Financial Access for SME’s

11.  Recently Government of India has taken a number of
initiatives to help SSI viz.
 Credit Rating Scheme
 SME Fund
 Credit Cards
Financial Access for SME’s

12. • Credit Rating Scheme

13. • SMEs have been depending for a quite long
time on government support, such as
reservation of products, incentives,
concessions, subsidies, government policy,
for collection of dues, labour policies, etc.
I
Why this act?

14.  Credit Rating Scheme
 The scheme has been introduced to encourage the
SSI Units to get their credit rating done, by reputed
third party credit rating agencies.
 The credit rating will facilitate hassle free flow of
credit to SMEs, while enhancing comfort-level of
lending banks.
Financial Access for SME’s

15. • Banker to understand the financials and other
requisite details about the customer to make a
lending decision.
• The credit scoring models are single point indicator
for diverse risk factors as also tool for pricing.
Why Credit Scoring ?

16. Risk of Default in the SME sector is spread amongst a wider
base of borrowers and therefore the pricing would be linked
to the Credit Rating of the constituent considering also the
RBI directives from time to time.
• In view of the severe competition in the market, interest
rates offered at times may have to be lower than the rate
arrived at reckoning the borrower’s credit rating and to be
approved by boards
Pricing

17. • Applied to score the borrower as well as score the
effectiveness of services rendered by the organization (both
sides can be scored)
• Internal assessment as to whether the portfolio is
remunerative
• services, operational efficiency and better control
• Used for predicting /forecasting response, attrition,
retention, recovery
• profitability, collections and provisions
Why credit scoring?

18. • As per Basel II norms, the banks are
required to quantify the risk associated
with each borrower and arrive at the
risk weights by assigning rating.
Why credit Scoring?

19. • NSIC is the nodal agency for implementing the
scheme
• The validity of a rating shall be for a period of one
year from the date of issue of the rating letter..
• Rating fee as per credit rating orgn and turnover of
small enterprises.
Modalities of the SME Credit Rating Scheme

20. • In the event of the request for Rating being
treated as closed by the Rating Agency due
to non-receipt of the complete information,
50% of the fees received from the Small
Enterprises shall be refunded by the Rating
Agency.
Information by SMEs

21.  .
 SME Fund
 SIDBI : principal financial institution for promoting,
financing and development of industries in the small-
scale sector.
 To improve credit availability SME fund of $ 2
billion has been operational since 2004.
Financial Access for SME’s

22.  Credit Cards
 Laghu Udyami Credit Card (LUCC) Scheme (Small
Enterpreneur’s Credit Card) has been liberalised.
 Credit limit enhanced from $4000 to $20,000 for
borrowers with satisfactory track record.
Financial Access for SME’s

23.  Other Initiatives
 Allocation of more than $100 million towards
Technology Upgradation Fund for Textiles
 Setting up of Knowledge Commission Institutions of
Excellence at IISC, Bangalore
Financial Access for SME’s

24.  Other Initiatives
 Weighted deduction of 150% of expenditure on in-
house research and development facilities of companies,
engaged in biotechnology, pharma, electronics,
telecommunications, chemical, or other notified
products.
 Custom duty exempted on capital goods and raw
materials to a company for R&D project.
Financial Access for SME’s

25. • Public sector banks have been advised to
open at least one specialized branch in
each district.
Specialized SME branches

26. • Credit facilities extended to a single Small
Enterprises, Borrower (i.e. erstwhile SSI),
either by way of Term Loan or Working
Capital or both, without any collateral
security or third party guarantee, will be
covered, if eligible, under SIDBI’s Credit
Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE) Scheme .
•
Collateral Security and Margin Norms

27. • The buyer to make payment on or before the
date agreed on between him and the supplier
in writing
• The agreement between seller and buyer
shall not exceed more than 45 days.
• The buyer fails to make payment of the
amount to the supplier, he shall be liable to
pay with compound interest
Delayed Payment Act, 1998

28. • In case of dispute with regard to any
amount due, a reference shall be made
to the Micro and Small Enterprises
Facilitation Council, constituted by the
respective state government.
Delayed Payment

29. • Scoring by Banks for financing of
SMEs

30. • MANUFACTURING ENTERPRISES
• LOANS FOR FOOD AND AGRO
PROCESSING
• SERVICE ACTIVITIES PROVIDING OR
RENDERING OF SERVICES
• EXPORT CREDIT

31. • Loans to persons involved in assisting the
decentralized sector in the supply of inputs to
and marketing of outputs of artisans, village and
cottage industries.
• Loans to cooperatives of producers in the
decentralized sector viz. artisans village and
cottage industries.
• Loans sanctioned by banks to MFIs for on-lending
to MSE sector as per the conditions.
INDIRECT FINANCE

32. • For working capital limits up to Rs.5 Crores ,
Turnover Method would be applicable as
mandated under Nayak Committee
Recommendations for financing working
capital needs of the SMEs
• At 20% of the projected turnover based on
the assumption of a three month operating
cycle.
Working Capital Assessment

33. • For Small and medium enterprises, a
debt restructuring mechanism for units
in SME sector has been formulated by
Department of Banking Operations &
Development of Reserve Bank of India.
Debt Restructuring Mechanism for
MSMEs

34. • Banks have been advised that the decision
on viability of the unit should be taken at
the earliest but not later than 3 months of
becoming sick under any circumstances.
• The rehabilitation package should be fully
implemented within six months from the
date the unit is declared as 'potentially
viable' / 'viable'.
Decision on Viability

35. • 60 clusters have been identified by the
Ministry of Micro, Small and Medium
Enterprises, Government of India for
focused development of Small Enterprises
sector.
• All SLBC Convenor banks have been advised
to incorporate in their Annual Credit Plans,
the credit requirement inthe clusters
identified by the Ministry of Micro, Small
and Medium Enterprises, Government of
India.
Cluster Approach