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A Study on Issues In SMEs Financing
CHAPTER : 1
INTRODUCTION
The small and medium enterprises (SMEs) have been accepted as the engine of economic
growth and for promoting equitable development in all over the world. Let there be any
category of countries (developed developing and under developed) the e!istence of SMEs is
inevitable. The ma"or advantage of the sector is its pivotal role through its contribution in
industrial output e!ports and ma"ority in Employment generation at low capital cost. The
labour intensity of the SME sector is much higher than that of the large enterprises.
#n #ndia the SMEs contribution is highly remar$able in the overall industrial economy of the
country. #n recent years the SME sector has consistently registered higher growth rate
compared to the overall industrial sector. %ith its agility and dynamism the sector has shown
admirable innovativeness and adaptability to survive the recent economic downturn and
recession.
Small and Medium Enterprises (SMEs) have played a significant role world over in the
economic development of various countries. &ver a period of time it has been proved that
SMEs are dynamic innovative and most importantly the employer of first resort to millions
of people in the country. The sector is a breeding ground for entrepreneurship. Theimportance of SME sector is well'recognied world over owing to its significant contribution
in achieving various socio'economic ob"ectives such as employment generation contribution
to national output and e!ports fostering new entrepreneurship and to provide depth to the
industrial base of the economy.
Small and medium'sied enterprises (SMEs) are the bac$bone of all economies and are a $ey
source of economic growth dynamism and fle!ibility in advanced industrialied countries as
well as in emerging and developing economies. SMEs constitute the dominant form of business organiation accounting for over *+ and up to + of enterprises depending on
the country. They are responsible for between ,-'-+ net "ob creations in /eveloping
countries. Small businesses are particularly important for bringing innovative products or
techniques to the mar$et. Microsoft may be a software giant today but it started off in typical
SME fashion as a dream developed by a young student with the help of family and friends.
&nly when 0ill 1ates and his colleagues had a saleable product were they able to ta$e it to
the mar$etplace and loo$ for investment from more traditional sources. SMEs are vital for
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economic growth and development in both industrialied and developing countries by
playing a $ey role in creating new "obs. 2inancing is necessary to help them set up and
e!pand their operations develop new products and invest in new staff or production
facilities. Many small businesses start out as an idea from one or two people who invest their
own money and probably turn to family and friends for financial help in return for a share in
the business. 0ut if they are successful there comes a time for all developing SMEs when
they need new investment to e!pand or innovate further. That is where they often run into
problems because they find it much harder than larger businesses to obtain financing from
ban$s capital mar$ets or other suppliers of credit
Common Characteristics of SMEs
(a) Born out of individual initiatives & skills
SME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs3 in
many cases leveraging on a s$ill set. There are other SMEs being setup purely as a means of
earning livelihood. These includes many trading and retail establishments while most
countries continue SMEs to manufacturing services others adopt a broader definition and
include retailing as well.
(b) Greater operational flexibility
The direct involvement of owner(s) coupled with flat hierarchical structures and less number
of people ensure that there is greater operational fle!ibility. /ecision ma$ing such as changes
in price mi! or product mi! in response to mar$et conditions is faster.
(c) Low cost of production
SMEs have lower overheads. This translates to lower cost of production least up to limited
volumes.
(d) High propensity to adopt technology
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Traditionally SMEs have shown a propensity of being able to adopt and internalie the
technology being used by them.
(e) High capacity to innovate export:
SMEs s$ill in innovation improvisation and reverse engineering are legendary. 0y being able
to meet niche requirements they are also able to capture e!port mar$ets where volumes are
not huge.
(f) High eployent orientation:
SMEs are usually the prime drives of "obs in some cases creating up to 4-+. 5obs SMEs tend
to be labour intensive per se and are able to generate more "obs for every unit of investment
compared to their bigger counterparts. 6fter agriculture small and medium enterprisingsector is the largest employment provider.
Key chaen!es face" #y SME sector:
The sector has e!hibited consistent growth over the last few years but it has done so in a
constrained environment often resulting in insufficient resource utiliation and producing
way is less than its real potential.
7oor infrastructure and inadequate mar$et lin$ages are $ey factors that have constrained
growth of the sector. The lac$ of adequate and timely access to finance has been the biggest
challenge. The financing needs of the sector depend on the sie of operation industry
customer segment and stage of development. 2inancial institutions have limited their
e!posure to the sector due to a higher ris$ perception and limited access of SMEs to
immovable collateral. Then there problems related to obsolete technology inefficient
processes procurement resource planning lac$ of access to global mar$ets so on and so
forth.
IMPORTANCE O$ SME SECTOR IN INDIA:
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The development of small and medium enterprises (SME) sector is on the priority of
government agenda. 6s per the results'framewor$ document(82/) for ministry of Micro
small and medium enterprises the mission of the government is to 9promote growth and
development of globally competitive micro small and medium enterprises including $hadi
village and coir industries in cooperation with concerned ministries:departments state
governments and other sta$eholders by providing support to endeavour to achieve a
cumulative growth of ;-+'*-+ in the number of registered enterprises by the end of
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#n the second five year plan an outlay of
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$I$TH $I.E /EAR P0AN (1)2+1))-
#n the fifth five year plan a sum of =?-crores was earmar$ed for the development of village
and small industries. &f this ==
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normative basis. To enhance the supply of ris$ capital to SS# sector a Limited partnership 6ct
was proposed to introduced. To avoid delayed payment by the large units factoring services
through S#/0# was proposed. #n addition suitable legislation to ensure prompt payment has
also been proposed in the policy. 6 new scheme of #ntegrated #nfrastructure /evelopment for
small scale industries was introduced to promote lin$age between agriculture and industry.
NINTH $I.E /EAR P0AN (1))+7557-:
/uring the ninth plan various initiatives were ta$en to strengthen the small industrial units
through technology up gradation modernisation enabling and encouraging them to enhance
quality through introduction of modern management practices providing mar$eting and other
$ey inputs increasing the availability of credit:loans from financial institutions and ban$s
against materials supplied etc.
2ifty integrated infrastructure /evelopment centres (#/@s) were set up during the eight plan
for infrastructure facilities of small industrial units developed in bac$ward and rural areas
out of which == have been approved. The 1overnment has ta$en financial assistance of 8s.
*--- per small industrial unit is being provided to acquire #S& --- or an equivalent
quality certification. The credit provided to the small industrial sector by the public sector
ban$s stood at 8s ?
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Enhancement of e!cise duty e!emption limit for small industrial units from 8s. *- la$h to 8s.
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State 1overnments should ta$e steps to create an investor friendly climate providing a single
window clearance of applications for establishment of industrial units. Labour'intensive mass
manufacturing based on relatively lower s$ill levels provides an opportunity to e!pand
employment in the industrial sector. The policy of progressive de'reservation of industries for
small scale production has reduced the list of reserved industries from about 4-- to =?. This
policy should continue in the
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CHAPTER : 7
RESEARCH DESI6N
791 TIT0E O$ THE STUD/:
6 study on 9The issues in SME financing>.
797 STATEMENT O$ THE PRO0EM
/espite the role of SMEs in the #ndian economy the financial constraints they face in
their operations are daunting and this has had a negative impact on their development and
also limited their potential to drive the national economy as e!pected. This is worrying for adeveloping economy without the requisite infrastructure and technology to attract big
businesses in large numbers.
Most SMEs in the country lac$ the capacity in terms of qualified personnel to manage their
activities. 6s a result they are unable to publish the same quality of financial information as
those big firms and as such are not able to provide audited financial statement which is one
of the essential requirements in accessing credit worthiness from the financial institution.
This is buttressed by the statement that privately held firms do not publish the same quantityor quality of financial information that publicly held firms are required to produce. 6s a
result information on their financial condition earnings and earnings prospect may be
incomplete or inaccurate. 2aced with this type of uncertainty a lender may deny credit
sometimes to the firms that are credit worthy but unable to report their results.
6nother issue has to do with the inadequate capital base of most SMEs in the country to meet
the collateral requirement by the ban$s before credit is given out. #n the situation where some
SMEs are able to provide collateral they often end up being inadequate for the amount theyneeded to embar$ on their pro"ects as SMEs assets' bac$ed collateral are usually rated at
Hcarcass valueG to ensure that the loan is realistically covered in the case of default due to the
uncertainty surrounding the survival and growth of SMEs.
These are some of the factors already ac$nowledged by some researchers as bloc$ing most
SMEs in accessing credit from the financial institution in the country. ence a detailed
research in this direction is necessary.
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79; NEED AND RE0E.ANCE O$ THE STUD/
SMEGs are the =nd largest employment providers in the #ndian economy after agriculture.
6ccording to reports of wor$ing group on SME growth for
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/6T6 FSE/
The data for this study were gathered through the use of primary and secondary data sources.
The primary data source for this study involved the use of questionnaire. The questionnaires
were distributed to SME operators and:or owners for first hand information for processing
towards answering the research questions. The questionnaire was divided into three sections.
Section 6 concentrated on the bio data of the respondent firms such asJ
K6ge of the firm
K2orm of ownership
KAature of the firm
KAumber of employees of the firm
K6verage monthly turnover of the firm
These helped us in identifying the type of SME we were dealing with whether or not they
were Micro Small or medium enterprise.
Section 0 of the questionnaire consisted of various questions geared towards answering the
ob"ective of the study. These questions loo$ed at the constraints faced by SMEs when
accessing credit other financing options available to these SMEs and how cheap the cost of
finance is in the opinion of these SMEs among others.
The final section also loo$ed at the future of these SMEs whether or not they plan to remain
a going concern in the foreseeable future through the e!pansion of their business to other
regions of #ndia when assisted financially.
The secondary data were obtained from reviewing "ournals and literature relevant to the
sub"ect matter of this research. Aewspaper source and official policy documents of
government of 1hana with relevance to the sub"ect were also consulted. The electronic search
siteJ www.google.com was employed e!tensively for up'to'date materials on the topic.
The primary data formed the cru! of this study because it afforded the opportunity in
obtaining at first hand relevant relevant responses.
S6M7LE S#E
Sample Sie of SMEs that classified SMEs intoJ
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KMicro enterprise (< to wor$ers)
KSmall enterprise (
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CHAPTER +;
DATA ANA0/SIS AND INTERPRETATION
The contribution of SME s is presented in Table'
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TA0E 7 SME $inance 6a&
2irms Small Medium Large Nery large
+ with ban$ loans =- ;- *= **
M9 Ha=ar"+Dreimeier an" D9 Ste=art> 755*9
Micro> Sma ? Me"i%m Enter&rises> Ministry> 6o'ernment of In"ia> 751;9
TA0E 2
Units in the SSI an" Tiny
Sector
Ty&e of Units Re!istere" Unre!istere"
Tota Units S%r'eye" *5>157 ),>2;1
SSI Units 2)7>452 (15595@- ;2>,*4 (15595@-
Tiny Units =ithin SSI 247>755 ()94@- ;2>,75 ())95@-
Micro> Sma ? Me"i%m Enter&rises> Ministry> 6o'ernment of In"ia> 751;9
TA0E * Maor So%rces of EBterna $inance
Sie Informa ans EBterna 0on!+term No eBterna
e%ity cre"it finance
Micro
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8ole of Small and Medium Enterprises in #ndia
The most commonly used definitions MSMEs relate to either sie of employment and:or
quantum of capital investment :fi!ed assets. #n #ndia the criteria for classification has been
shown in table given below.
TA0E ,
In'estment 0imits for Micro> Sma an" Me"i%m
Enter&rises
Cate!ory In'estment (Pant ? Machinery- Ser'ice
Micro Enterprises Less than =.* Less than <Small Enterprises Less than *- Less than =-Medium Enterprises Less than
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6lso to help answer the question whether or not SMEs have challenges in accessing credit in
#ndia as contained in the ob"ectives in chapter one the below hypothesis were formulated and
tested using test of proportionJ
oJ Aot more than *-+ of SMEs face challenges when accessing credit
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&ur 7 value can be calculated asJ
7 O 7( ! U *-)
0y appro!imating the binomial to the normal distribution we had
7 O 7 U *- ,4-.* : (,4-.*-.
(n O *- has been reduce to ;.* due to continuity correction)
This implies
7 O 7 ( U ?.*) O < 7( V ?.*)
O< -. (read from the Standard Aormal Table)
O-.--
Decision:
Since the 7 value ( p O -.--) W the level of significance we re"ect o
Conc%sion:
The small 7 value of -.-- which is far less than the level of significance gives us enough
evidence to conclude that more than *-+ of SMEs face challenges accessing credit.
The data collection for this study was done basically through the usage of questionnaire. %e
targeted a population of =- SMEs and distributed the questionnaires among them. &ut of the
=- questionnaires circulated
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despite the assurance given in writing that all information given would be treated
confidentially.
K&thers also complained about the time given them to provide answers to the questions.
6ccording to them it was too short and as a result their inability to complete answering thequestions
Ta#e I
$re%ency Distri#%tion of $orms of Partici&ant SMEs
$orm $re%ency Percenta!es (@- C%m%ati'e (@-
7rivate Ltd @ompany
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Services ?
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Maor Constraint to the !ro=th of SME
The above shows participants ran$ings of the ma"or problems facing the growth of their
businesses in order on importance. *- or ;+ of the participant ran$ed lac$ of finance as the
ma"or constraints to the growth of their business followed by high utility tariffs which
recorded
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292 $actors Contri#%tin! to SMEs Constraints
The inability of SMEs in #ndia to readily have access to credit from the countryGs financial
institutions (ban$s) can be attributed to a lot of factors. Schiffer and %eder (
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25%
75%
Frequency
-ranted Credit
.enied Credit
The above pie chart shows a number of participant SMEs who in one way or the other has
been granted or denied access to credit from financial institutions. 2rom the chart above *+
of the total respondents say they have been denied access to credit whilst =*+ of them
responded Ao to the same question.
&ut of the
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Ta#e .I
$re%ency Distri#%tion of $actors that Hin"ers Partici&ants SMEs Access to Cre"it
$actors $re%ency Percenta!es(@- Ranin!
/efault on 7revious Loan < ? * Ao Security: collateral
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$re%ency Distri#%tion of the 0e'e of Interest rates on 0oans
Meas%re $re%ency Percenta!es(@- C%mm%ati'e (@-
E!tremely igh
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0oom et al.(
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6mong the various sources in Table N# which is also presented in the graph *,+ out of the
total respondents ran$ed their ma"or sources of funding from the Aon'0an$ 2inancial
#nstitutions followed by =*+ getting their financing from ban$ loans. The third ran$ed
sources of funding for SMEs operation are from families and friend with
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would li$e to e!pand their business to other cities within the country should their financing
needs be met. ,-+ of the respondents showed interest in that direction as indicated in Table
(Q).
Ta#e 3
Distri#%tion of Partici&ants SMEs Esta#ishin! More ranches in the Maor Cities in
In"ia
Ranin! $re%ency Percenta!es(@- C%mm%ati'e (@-
Strongly 6gree ;< ,- ,-
6gree =; ?* ,
Aot Sure ? ;
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This seems to remain a dream for them as the funds to underta$e such an e!pansion pro"ects
are difficult to access because of the stringent criteria of the ban$s. The only sure way of
getting such an amount to embar$ on these e!pansions is mainly through the ban$s and the
listing onto the Stoc$ E!change which most of the SMEs are not qualified. This leaves the
ban$s as the only viable source and even then because of the duration given in repayment of
loan which is mostly up to two years (see Table Q#) such facility will not be appropriate for
investing into business e!pansion.
Ta#e 3I
$re%ency Distri#%tion of 0oan Re&ayment Distri#%tion
$actors $re%ency Percenta!es(@- C%mm%ati'e (@-
Fp to < year ; = =
Fp to = years
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@hapter';.
2indings Suggestions 6nd @onclusion
$in"in!s
Pro#ems in De#t Ca&ita
The responses of the MSMEs are shown in the table below. MSMEs face the ma!imum
problem due to requirement of collateral. This is followed by problems faced due to a low
chance of obtaining debt capital for business. #nsufficiency of funds for business does not
pose a problem faced in raising debt capital.
Ta#e : De#t Ca&ita +Pro#ems face" #y entre&rene%rs of MSMEs
Pro#ems in De#t Ca&ita A'era!e Ratin!
< #nsufficient 2unds
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C(art 0itle
Series 3
The findings of the statistical test indicated that Entrepreneurs of MSMEs face problems in
raising debt capital and problems are faced by them does not differ age'wise location'
wiseand gender'wise. The summaried findings have been presented in table ? given below
Conc%sions
This study highlights the important role of MSMEs in the #ndian economy. The problems
faced by MSMEs in raising capital are first stated in the literature survey and later vindicated
through the survey of MSMEs. The study gives the perspectives of MSMEs in the #ndian
conte!t. #t shows that the ma!imum problem in raising debt capital is faced due to
requirement of collateral and that the chances of obtaining debt financing by MSMEs is low.
2urthermore this study shows that all entrepreneurs of MSMEs irrespective of their location
age and gender face problems.
The findings of this study are in line with previous studies that have highlighted the relative
and absolute importance of MSMEs (/un C 0radstreet =--4). 6lso previous studies such as
@ull et. al. =--* depicts the position of small and medium enterprises (SME)3 showing that
they have access to lesser ban$ credit than larger enterprises.
6s per the data from Ministry of Micro Small C Medium Enterprises 1overnment of #ndia
the MSMEs sector has registered a consistently higher growth rate than theoverall manufacturing sector. MSMEs constitute an important segment of #ndiaGs industrial
production with a contribution to ??+ of its e!ports. 0ut though MSMEs are being touted as
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the priority sector within the economy they continue to face problems pertaining to finance.
%hen it comes to ban$s they have a very traditional way of lending to this segment against
collateral and MSMEs end up being under financed as compared to larger enterprises. #n view
of the contribution of MSMEs to the #ndian economy their problems in raising debt capital
should be addressed in earnest.
@hapter' * Learning E!perience
0ibliography