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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 

    Community Institute Of Management Studies,Bangalore

    1

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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

    Community Institute Of Management Studies,Bangalore

    2

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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:

    Community Institute Of Management Studies,Bangalore

    3

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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


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