 "India's MSME sector growing faster than overall GDP: Michel Botzung")
IFC is among the top equity investors in India in terms of number of deals. In 2012-13, it invested $1.4 billion in India, of which over $900 million was in loans, nearly $350 million in equity, and $150 million in other products such as guarantees and PPP mobilisation. Michel Botzung, Principal Operations Officer at IFC's India office, who initiated the corporation's work on banks' non-financial services for SMEs, and has been instrumental in integrating its SME work in investment deals, explains, in an e-mail interaction with T E Narasimhan, the corporation's approach to SMEs. Edited excerpts:
How does India's SME sector compare with its counterparts in other countries, in terms of maturity?
The micro, small and medium enterprise sector is crucial to India's economy. A recent IFC study on MSME finance in India indicates there are 29.8 million enterprises in various industries, employing 69 million people. This sector accounts for 45 per cent of Indian industrial output and 40 per cent of exports. Although 94 per cent of micro, small and medium firms are unregistered, the contribution of the sector to India's GDP has been growing consistently at 11.5 per cent annually, which is higher than the overall GDP growth of 8 per cent.
Do Indian SMEs face a more adverse business environment than their counterparts in other comparable countries?
Limited access to infrastructure such as power, water, and roads increases operational costs for these businesses and makes them uncompetitive. Inadequate access to support infrastructure discourages these units from adopting newer technologies, where available. Small enterprises consider challenges in access to finance as one of the biggest constraints in growth. An IFC 2012 study on MSME finance also suggests that the multiple growth constraints (like those mentioned above) can be largely linked to inadequate access to finance.
Micro and small enterprises largely comprise first-generation entrepreneurs, who have had a limited structured training on resource planning, capital management and labour management. As a result, lack of managerial competence often shows in poor book-keeping and a limited knowledge of formal financial institutions, which further inhibits the growth of these enterprises. Most of these smaller firms are fragmented, and as a result, are unable to organise themselves in order to reduce procurement costs from large enterprises or streamline the output supply chain.
Why are financial institutions, especially banks, averse to lending to this sector?
There are a couple of reasons. IFC is working at addressing these issues. First, products and services for MSMEs often need significant collateral to back them up as a way to manage both the risk in this sector, as well as the transaction cost of serving this segment. However, the majority of entrepreneurs do not have access to sufficient levels of collateral. IFC has partnered with the Indian government's central collateral registry, Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), to expand its ambit to include movables, which will address the lack of collateral needed to access credit for small businesses that have few immovable assets.
Second, financial institutions also have limited access to relevant credit information on MSMEs. IFC is leveraging its global experience with credit bureaus to grow the use of credit information for SMEs in South Asia. This will include supporting existing credit bureaus to increase use of non-traditional credit information (such as utility bills) to develop a comprehensive credit picture for small business owners.
What kind of non-financial support does IFC offer Indian SMEs?
To improve access to finance for SMEs, IFC works with financial institutions to help them introduce or grow their SME operations. This is done by assisting these large institutions in formulating strategy, market segmentation, building sales and delivery channels, instituting credit risk management mechanisms, new product development (like non-financial services for SMEs for example), and management information systems so that they are able to scale up their financing for SMEs in a sustainable manner.
To build skills of small entrepreneurs, IFC offers advice centred on addressing the managerial skills gap through its proprietary training and information tools. Since 2008, ICICI, India's largest private sector bank, is using IFC's SME Toolkit online platform to provide non-financial services and information to smaller enterprises. IFC has also partnered with the National Institute for Entrepreneurship and Small Business Development, a training arm of the Indian ministry of micro, small and medium enterprises to deliver a country-wide training of trainers who will then run tailor-made programmes for small enterprise owners.
To help create a stimulating and enabling environment that promotes SME growth, IFC works with governments to introduce reforms that make it easier for SMEs to operate. For example, IFC worked in Bihar to simplify business tax for small and large enterprises. It resulted in enhancing the number of tax payers filing e-returns to 92,000 by September 2013 (at the closure of the project), from a base of 149 only in 2009 when the intervention started. This has been possible by the introduction of a payment gateway which the team recommended, that allows over 40 banks to accept tax payments. The revenue from small tax payers alone increased from Rs 300 million in 2008 to Rs 1,550 million in 2013.
How does India's SME sector compare with its counterparts in other countries, in terms of maturity?
The micro, small and medium enterprise sector is crucial to India's economy. A recent IFC study on MSME finance in India indicates there are 29.8 million enterprises in various industries, employing 69 million people. This sector accounts for 45 per cent of Indian industrial output and 40 per cent of exports. Although 94 per cent of micro, small and medium firms are unregistered, the contribution of the sector to India's GDP has been growing consistently at 11.5 per cent annually, which is higher than the overall GDP growth of 8 per cent.
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Limited access to infrastructure such as power, water, and roads increases operational costs for these businesses and makes them uncompetitive. Inadequate access to support infrastructure discourages these units from adopting newer technologies, where available. Small enterprises consider challenges in access to finance as one of the biggest constraints in growth. An IFC 2012 study on MSME finance also suggests that the multiple growth constraints (like those mentioned above) can be largely linked to inadequate access to finance.
Micro and small enterprises largely comprise first-generation entrepreneurs, who have had a limited structured training on resource planning, capital management and labour management. As a result, lack of managerial competence often shows in poor book-keeping and a limited knowledge of formal financial institutions, which further inhibits the growth of these enterprises. Most of these smaller firms are fragmented, and as a result, are unable to organise themselves in order to reduce procurement costs from large enterprises or streamline the output supply chain.
Why are financial institutions, especially banks, averse to lending to this sector?
There are a couple of reasons. IFC is working at addressing these issues. First, products and services for MSMEs often need significant collateral to back them up as a way to manage both the risk in this sector, as well as the transaction cost of serving this segment. However, the majority of entrepreneurs do not have access to sufficient levels of collateral. IFC has partnered with the Indian government's central collateral registry, Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), to expand its ambit to include movables, which will address the lack of collateral needed to access credit for small businesses that have few immovable assets.
Second, financial institutions also have limited access to relevant credit information on MSMEs. IFC is leveraging its global experience with credit bureaus to grow the use of credit information for SMEs in South Asia. This will include supporting existing credit bureaus to increase use of non-traditional credit information (such as utility bills) to develop a comprehensive credit picture for small business owners.
What kind of non-financial support does IFC offer Indian SMEs?
To improve access to finance for SMEs, IFC works with financial institutions to help them introduce or grow their SME operations. This is done by assisting these large institutions in formulating strategy, market segmentation, building sales and delivery channels, instituting credit risk management mechanisms, new product development (like non-financial services for SMEs for example), and management information systems so that they are able to scale up their financing for SMEs in a sustainable manner.
To build skills of small entrepreneurs, IFC offers advice centred on addressing the managerial skills gap through its proprietary training and information tools. Since 2008, ICICI, India's largest private sector bank, is using IFC's SME Toolkit online platform to provide non-financial services and information to smaller enterprises. IFC has also partnered with the National Institute for Entrepreneurship and Small Business Development, a training arm of the Indian ministry of micro, small and medium enterprises to deliver a country-wide training of trainers who will then run tailor-made programmes for small enterprise owners.
To help create a stimulating and enabling environment that promotes SME growth, IFC works with governments to introduce reforms that make it easier for SMEs to operate. For example, IFC worked in Bihar to simplify business tax for small and large enterprises. It resulted in enhancing the number of tax payers filing e-returns to 92,000 by September 2013 (at the closure of the project), from a base of 149 only in 2009 when the intervention started. This has been possible by the introduction of a payment gateway which the team recommended, that allows over 40 banks to accept tax payments. The revenue from small tax payers alone increased from Rs 300 million in 2008 to Rs 1,550 million in 2013.