Solve funding issues to finance SMEs growth plans

The micro, small and medium enterprises are the backbone of economic development in India. They are the incubators for talent, innovation and entrepreneurial spirit, which is essential for the country's development. Indian SME sector contributes 45% of the industrial output, 40% of the country's total exports, employs over 60 million people, creates 1.3 million jobs every year and produces more than 8,000 quality products for the domestic and international markets. With approximately 30 million SMEs in India, around 12 million people are expected to join the workforce in the next three years with the sector growing at a rate of 8% a year.
 
SMEs are present in a variety of sectors including chemicals, plastics & polymers and pharma sectors. The burgeoning importance of SMEs in the manufacturing sector is due to their significant contribution to the key factors of the growing Indian economy. The importance of SMEs in manufacturing sector is mainly due to the quantum of units that fall in this category, forming 90% of the total industrial units in this country. Government is taking several steps to boost manufacturing sector growth as it would lead to job creation and boost the country's economy. National Manufacturing Competitiveness Council has been set up by the government to suggest ways to enhance competitiveness in the manufacturing sector. The government has already announced a National Manufacturing Policy (NMP) that aims at raising the share of manufacturing to 25% of GDP by 2022. The NMP envisages setting up of national investment and manufacturing zones, which are industrial townships, benchmarked to the best manufacturing hubs in the world.
 
The major hindrance in the expansion of SMEs is the unavailability of sufficient and timely funds to finance their growth plans. Banks have been making steady strides to bridge this gap. But the approach followed by banks to funding is restrictive as they create value by controlling and managing risk. In any loan application for a business, a bank has to necessarily evaluate the risks involved, gauge collateral support and the methods to mitigate those risks.  There is a huge amount of paperwork involved and the process is cumbersome. Therefore, it is not always possible for an entrepreneur to satisfy all requirements and conditions the bank might pose. The above listed methods of financing are primarily debt financing, as sources of equity funding remain elusive in India.
 
In case of the SMEs, the access to capital markets is very limited, and they largely depend on borrowed funds from banks and financial institutions. While investment credit is provided by financial institutions, commercial banks extend working capital. In the recent past, with growing demand for universal banking services, term loans and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services.
 
It is imperative for the RBI to issue necessary guidelines to banks on credit flow to the SME sector. Additionally, the Government should strive to create a favourable environment for SMEs that curbs the need for debt and capital. This could be achieved by setting up SME-focussed banks and NBFCs that accord priority to SME sector lending. Additionally, there could be financing schemes for SMEs that might be high on risk, but promise robust returns. Also, there is need for reduction in the interest rates. SMEs continue to pay interest rates of 19-20% for bank loans. There is an urgent need to restructure the loans for SMEs to ensure that the interest rates are lower.
 
Additionally, delayed payments have always been an area of concern for SMEs that contribute to reduced working capital for SMEs. Delay in settlement of dues adversely affects the recycling of funds and business operations of SME units. Most defaulting customers are large enterprises and SMEs are unable to report the same for fear of losing business. To address payment issues, the Government could establish an automated portal wherein SMEs provide details of customers they supply. In case of payment defaults, the Government can send automated reminders to defaulting establishments.
 
As known to all, Budget is an occasion for the government to set new financial and economic goals, give policy directions and allocate financial resources for the same. While presenting the Budget, the Finance Minister announces fresh policies, new schemes, and projects and allocates money for the development of different sectors of the economy, in order to meet the overall objectives of socio-economic growth. Considering the importance of MSMEs to the economy, it is important to address various issues affecting MSME performance in the current recessionary economic climate.
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R Narayan is the Founder and CEO of Power2SME, a B2B buying club for small and medium enterprises