ADFIAP

International CEO Forum VIISustainable SMEs through Value Chain

Financing

SME Best Practices & Financing Models

-Equity Financing

Mr. B.P. Singh, Dy. MD, IDBI Bank Ltd., India

Structure Of Presentation

Importance of SME- Banking & Economy

SME Financing Issues
Participation in SME Equity
Initiatives in India

Importance of SMEs
Banking & Economy

Importance of SMEs
Small and Medium Enterprises (SMEs) are vital for
development of a country
Helps reshaping the productive sectors
Generates employment
Creating an environment for entrepreneurship
Promotes innovation

Globally, SMEs contribute over 90% of Business Enterprises

and 50-60% of Total Employment.
(UNIDO Report 2009-10)

Importance of SMEs
In Europe, Japan and the USA, 99% of the enterprises
belong to the small business segment
Employment generated through Small businesses is more
than 50% in the EU and approximately 40% in the USA
(World Retail Banking Report 2010)

Importance of SMEs
In Europe (2002-2007), number of SMEs grew by 11%,
and number of employees went up by 9% vis--vis 4% and
3% respectively for the larger enterprises
Globally, SME business accounts almost one-third of retail
Net Banking Income (NBI), though it comprises less than
10% of total retail banking portfolio.
(World Retail Banking Report 2009-10)

SME Financing - Issues

SME Financing - Issues

Approx. 85% of SMEs in emerging markets suffer from credit
constraints
Approx. 70% of all emerging-market SMEs do not use any
formal credit
This means informal sector meets their financial requirements,
though at times with stringent conditions
Nearly 23.7% of SMEs disappear in two years and nearly
52.7% of SMEs exit the market in four years due to business
failure, bankruptcy, or other reasons
(Estimates IFC 2010)

SME Financing - Issues

Recent global economic downturn has further aggravated
the problems that already existed
Some of the key issues are:
Financing assumes material role in SMEs experiencing
high growth prospects including opportunities for takeover
Very few SMEs are able to finance their expansion through
their Cash Flow and have to explore external sources of
funding
In credit filtration process SMEs are at a disadvantage

SME Financing - Issues

Lack of successful track record of SMEs creates a
perception of greater credit risk among the banks
SMEs lack the substantial asset base (collateral) to provide
as security against bank loans
More pronounced for SMEs in the services sector

Limited exposure to Direct Equity financing sources

Paucity of private equity investors for SMEs
Reluctance by SME to dilute their share holding

Participation in SME Equity

Participation in SME Equity

Equity financing for SMEs is a complex issue

SMEs need a range of financing vehicles at different stages
of their development
Seed Money to start up the company generally comes from
friends, professional contacts and family

Participation in SME Equity

Role of Banks
Banks are redefining SME financing by engaging in equity
and quasi-equity investments
Leveraging on their understanding of the SME sector and
their access to capital
Banks are attempting to carve out profitable roles for
themselves in the rapidly growing emerging markets by
directly taking equity exposure

Participation in SME Equity

Role of Banks
Banks are also passively participating as investors in SME equity
funds
Some banks also;
Provide Advisory Services
Act as meeting point for overseas investors

Banks need to acquire & develop skill sets to understand the SME
sector, particularly in the area of risk assessment
These risks may be addressed through partnerships that leverage the
complementary strengths of the bank and its partners

A number of models that take these strengths into account have

emerged around the world

Participation in SME Equity

Exit Mechanism Issues
Like any investment, liquidity of the investment for both
buying and selling is crucial
Due to certain underlying risks and less number of investors,
SME equity is relatively illiquid
Traditional stock exchange platforms and
mechanisms are not suitable to promote trading

trading

Participation in SME Equity

Exit Mechanism Probable Solutions
Dedicated SME stock exchanges, or at least separate
trading windows with different rules
Suitable mechanisms would be required for exit from
stressed entities
Possibly under the ambit of specialized SME Asset Reconstruction
Companies (ARCs)

Initiatives in India

Initiatives in India
Government has initiated a National Equity Fund (NEF)
NEF provides equity support to entrepreneurs (Tiny & Small
Scale Industries) for:
Setting up new projects
Undertaking Expansion, Modernization, Technology upgradation,
Diversification
Rehabilitation of viable sick units

Assistance from NEF helps SSIs

Strengthens their equity base
Improves their eligibility for receiving term financing

Initiatives in India
Public Sector Banks have been advised to achieve a minimum
20% y-o-y growth in credit to the SME sector
Capacity-building programs are offered with an objective of
developing competitive small business practices, policies and
strategies.
This includes Training initiatives to achieve the competitiveness of
SMEs through innovation, technology transfer, etc.

Business incubation efforts to encourage the spirit of

entreprenuership

Initiatives in India
Prime Minister's MSME Task Force
Constituted in September 2009 by Prime Minister of India
Purpose:
To highlight the concerns and issues relating to MSMEs
To suggest relief and stability measures for MSMEs,
especially in the aftermath of the recent economic
downturn

Initiatives in India
Initiatives by Govt. of India
Few note worthy measures include:
1.

Extension of stimulus package, for a further period of

one year, beyond March 31, 2010

2.

Creation of a Special fund to be utilized exclusively for

lending to the micro enterprises

3.

Providing collateral free loans upto Rs. 100 lakhs under

Credit Guarantee Scheme

THANK YOU