The document discusses SME financing and equity participation. It notes that SMEs are vital for economic development by generating employment and promoting innovation. However, SMEs face issues accessing financing due to lack of collateral and track records. The document explores banks participating in SME equity and quasi-equity investments to help fill financing gaps. It also outlines equity financing models and initiatives in India to promote SME growth, including a National Equity Fund and special lending programs through public sector banks and the government.

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 SME Equity

12. Participation in SME Equity
• 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 SME Equity
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 SME Equity
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 SME Equity
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 SME Equity
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)

17. Initiatives in India

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
Prime Minister'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
Initiatives by 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

22. THANK YOU