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SME Sector - Future Growth Engine

Monday, March 14, 2016
By Clifton Desilva

Clifton Desilva is  Director at Altina Securities

The SME segment is a very critical part of the Indian economy. Besides the fact that it is important from the point of view of employment and exports it assumes quarter significance in the light of the ‘make in India’ campaign launched by the government.

The problems confronting these sectors are inherent in their operations given their structures. The main challenges being their small size, owner driven, lack of quality products, low governance standards, absence of proper accounting systems, employment of unqualified members, succession risks, business risks.

Most of the time the next generations do not share the founders view and so on. All this is further aggravated by the problem of availability of credit and cost of the same. There are several challenges facing the sector but the primary challenges in procuring finance are -First, the flow of credit is limited as while it is part of the priority lending and banks have to lend them, they are reluctant to do so as the probability of NPA’s is high during the downturn.
Second, the cost of borrowing is high as the risk perception is more compelling for banks. Hence debt servicing becomes a challenge given that they do operate on thin margins to begin with and as a corollary their propensity to default becomes higher- Third, unlike their medium and large counter parts these units are not in a position to borrow from international markets as they are too small to draw confidence consequently the support from banks to this sector is hence quite low with less than 10-12% of bank credit going to the SME segment. Most of these non registered enterprises do not even maintain proper books of accounts and are not formally covered under taxation areas. Therefore banks find it difficult to lend to them.

However the small and medium enterprises (SME’s) play a crucial role in the socio-economic growth story of India being the primary drivers of India’s growth story, their contribution to the domestic output is expected to shoot up to 22% by 2020 from 17% at present. Besides this for a country like India where gain fall employment of the masses is the need of the hour. SME’s could be first choice as this sector provides employment to 40% of the workforce. According to the 2013 survey by the National sample survey organization there are 57.7 million small business units mostly individual proprietorship which run manufacturing, trading or services activities. In the sector 70% is represented by agriculture and 30% by manufacturing and services.

The Indian SME sector has been growing exponentially despite the limitations and it has indeed become the backbone of India’s GDP growth. The role of SME in employment generation, innovation and creating entrepreneurial culture has been crucial in fostering competitiveness in the economy and boosting inclusiveness growth contribution. The sector contributes 17% to GDP, 45% share in industrial output 40% share of exports, 80 billion in employment and creates 13 billon jobs every year.

SMEs however can only grow range bound with own funds or pooling the funds of friends and relatives which is generally inadequate for quantum growth.

The government is implementing a special programme to promote and develop infrastructure to improve productivity and competiveness of micro small and medium enterprises. It is generally believed that a large number of micro small and medium enterprises are using outdated technology because of lack of sufficient finance, lack of access to modern technology, absence of in house research and development etc.

For up gradation of technology the government is also implementing micro and small enterprises cluster development programme and preparing diagnostic study report and detailed project report besides taking steps like soft intervention ,hard intervention, common facility  centers and infrastructure development.

Growth funding platform of capital markets though badly required by SMEs was unavailable. A game changing initiative for SME was unleashed in 2010 by the Prime Ministers task force.

Based on the recommendation of the Prime Minister task force SEBI on May 18 2010 laid down the framework for setting up stock exchange / trading platform diverted to SMEs. In line with this framework BSE SME exchange was launched in March 2012, while the NSE SME Platform was launched in September 2012.

In India SME Exchange is at an evolution stage but worldwide it already existed for years.

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