Absence of timely financial support hurts small units

There are about 25 million small and medium enterprises in India. This is a gigantic number but some of the problems they face are common. Whether they are in the organised or unorganised sector, one of the biggest problems faced by SMEs is getting finance for their innovation and research and development activities.

If one looks at the website of the Small and Medium Business Development Chamber of India, the SME sector does not seem to get the support it needs from any quarter, be it government departments, banks and financial institutions. This is a handicap when it comes to achieving competitiveness in the national or international markets, says the website.

Finance for its research activities is just one of the problems faced by this segment. “Absence of adequate and timely banking finance, limited capital and knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy, identification of new markets, constraints on modernisation and expansions, non availability of highly skilled labour at affordable cost, follow up with various government agencies to resolve problems,” ……these are some of the stumbling blocks in their path, according to the SME chamber of India.

SMEs have a series of expectations from banks for the next decade, to overcome some of their problems. This was the subject of a panel discussion at the FICCI-Indian Banks' Association conference at Mumbai on Wednesday. The panel consisted of two sections – one constituting SME representatives, and the other banking officials.

R&D Financing

“We need to innovate and we need to have a banker to understand innovation and support it,” said Ms Uma Reddy, Chief Executive, Hitech Magnetics. While most of the SME panel members agreed on the need for R&D financing to help them expand their business, the bankers had their own comments.

“We understand that the need of the hour for SMEs is to be more competitive and to cut costs. For this, they need to spend more money on R&D. But they cannot produce any tangible security – like the kind that the manufacturing sector can provide. In the future, banks will have to look at R&D financing,” said Ms Soundara Kumar, Deputy Managing Director and Group Executive (Stressed Assets Management), State Bank of India.

There were some bankers who expressed their difficulties in financing R&D activity. “It would take a brave Chairman to support research and development financing. The main problem is that it is very difficult to finance R&D,” said Mr Abraham Chacko, Executive Director, Federal Bank.

When SMEs need money, they need to go through multiple layers in a bank before their requisition for money finally gets approved. In SME units, entrepreneurs are the decision takers and are not used to these layers in banks. They find it difficult to explain their business to the bank.

“Banks are not in the business of equity financing. They cannot perform the role of a venture capitalist. It is very important to understand the business (of the SME) before financing it,” said Mr Srinivasan Vardarajan, Executive Director, Axis Bank.

Cluster development

Some SME entrepreneurs feel that cluster development is the way forward but that no bank has recognised the opportunities in cluster management.

Many bankers also expressed their concern about the transparency of financial statements of SME units. They said that many SMEs belong to the unorganised sector where many entrepreneurs do not even know how to create proper financial statements. For bankers to trust SMEs, the latter need to have clean and transparent balance sheets.

Both bankers and SME units suggested appointment of a credit rating agency which would rate the SME unit. Bankers could take reports from them and then finance the units depending on the credibility attached to them. Mr S.C. Sinha, Executive Director, Oriental Bank of Commerce said, “Although the presence of a rating agency will help banks understand SMEs, the inspection part cannot be ruled out because that is as per our banking guidelines.”

Another trend that bankers foresee is the role of the internet to help SME units. “The web will help banks have a role in partnering with the SME units. There is a lot of opportunity to work with SMEs through the internet in the future,” said Mr Chacko.

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