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Lack of proper books of accounts, absence of a cost-effective and innovative credit rating mechanism suited for SMEs, and failure to embrace technology are some of the reasons that deprive formal credit to the Micro, small and medium-sized enterprises (MSMEs), felt the members of a panel discussing ‘Keeping Your Business Well Funded’, at the SME Conclave.
The panel, which comprised members from the banking and financial sector, credit rating agency and small industry body, deliberated on the financial challenges faced by the MSME sector and various solutions to address the issue.
Credit gap
Today, the credit demand of the SME sector is estimated at ₹37-lakh crore. The formal sources contribute only ₹16- lakh crore, leaving a credit gap of ₹20-25-lakh crore.
“SMEs are not getting their due share of bank credit because they lack professionalism in maintaining the books of accounts and meeting the underwriting requirements of the bank,” said K Srinivasan, Senior Vice-President and Head of CV/CE Business, Federal Bank.
Noting that the SME sector is a crucial driver of India’s economic growth, the banker said that most of the credit applications of SMEs get rejected during the appraisal stage since banks are unable to assess their financial ability due to inadequate information.
“A credit rating system and little more professional conduct of business will enable SMEs get the type of treatment they deserve from the banking system,” he added.
Credit rating
Noting the credit rating is an expensive process, T Raj Sekar, Director, SME Ratings, CRISIL, said banks generally insist on rating large exposures and not SMEs with less than ₹50 crore turnover because pricing does not work for them. “But we have products as low as ₹5,000, which are scoring models based on bank statements and GST returns, and we have the experience of grading more than one lakh SMEs,” said Rajsekar.
K Saraswathi, Secretary General, Madras Chamber of Commerce and Industry, said that the concept of ‘small is beautiful’ has become a disadvantage for SMEs since one person alone is left to handle a whole gamut of operations.
“SMEs have grown horizontally but not vertically because the SME policy definitions have limited their mind to remain small, and there is a need for policy level change,” she added.
Noting that compulsions such as priority sector lending will not induce investors, K Sivaramakrishnan, Zonal Sales Manager, Aditya Birla Finance Limited, said that as an NBFC lender, his investment is determined by the diversified options for investment and not compulsion.
“Risk perspective and investor perspective are some of the indices under which I diversify my portfolio into different baskets,” he added.
Radhika Merwin, Senior Deputy Editor, BusinessLine , moderated the discussion.
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