Finance and Infrastructure are major challenges for SMEs | SupportBiz

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Finance and Infrastructure are major challenges for SMEs

Indian SMEs are diverse and full of potential. However, the issues and challenges that this segment is facing are equally diverse. In order to deal with these challenges great level of advocacy is needed. The Small and Medium Business Development Chamber of India is an industry association which has taken over this responsibility of developing the SME Sector, as well as raising their issues to appropriate authorities on time to time.

In an exclusive interaction with SupportBiz, S. Maheshkumar, Director of Small and Medium Business Development Chamber of India shared his vision about the issues and challenges that Indian SMEs are facing and highlighted some key trends in this market.

Edited excerpts:

What are the key issues that the Indian MSMEs are facing in order to grow to the next level?

The biggest issue that the SMEs are facing is about availing adequate and timely finance at a reasonable interest rate. Others challenges are:

  • High inflation rate leading to high cost of raw materials
  • Inadequate market knowledge
  • Lack of availability of key technology and technological awareness
  • Non-availability of skilled labour
  • Lack of transparency in business operations
  • Ineffective marketing strategy

What are the key demands of this sector, which must get addressed by the policy makers in order to create a motivational environment for entrepreneurship in India?

The key demand of Indian SME sector is the availability of adequate infrastructure, power and finance at reasonable rates. One of the major reasons why Indian SMEs, despite being so competitive, fail to compete effectively in the global market is the unavailability of adequate infrastructure and power, which are the keys for running business operations successfully. Policy makers need to create an enabling environment by providing adequate infrastructure to attract investments in India, most importantly in the SME sector. Further, more emphasis needs to be given to the SME sector, by providing them with special schemes and incentives for new start-ups, young entrepreneurs as well as women entrepreneurs.

Issues like payment cycle or working capital is a major challenge for MSMEs. According to you what steps can be taken to solve this challenge?

SMEs lack the ability to manage their working capital or the payment cycle effectively. SMEs are the suppliers to large Corporates, Government agencies and MNCs. These companies after purchasing goods or services from the SMEs do not adhere to the 90 days payment cycle. SMEs on the other hand find it difficult to recover the payment from these large companies. To resolve this, factoring facility has been started by various banks and other financial institutions. However, SMEs are either not aware of these facilities or do not avail these facilities. It is necessary to create awareness amongst the SMEs and also these facilities should be made available to SMEs at lower rates. Secondly, they need to be educated on cash flow management, mainly because large number of SMEs borrow working capital from banks and use it to purchase assets. This results in their inability to repay their loan resulting into an NPA. Factoring companies can play a major role both by creating awareness amongst SMEs and providing these services to them at reasonable rates.

Similarly, banking institutions have a significant role to play for Indian MSMEs, and collateral free lending is a centre of discussion on this issue. According to you, what are the missing gaps between the entrepreneurs and banking institutions? 

Collateral free loans, typically known as CGTMSE Scheme was jointly initiated by SIDBI and Government of India. It aims to provide loans to budding entrepreneurs to help initiate the business operations. The company applying for loan under this scheme is entitled to get up to Rs 1 Crore without any collateral. The gap between entrepreneurs and the banking institutions lays in the lack of transparency in the SMEs’ operations, which the banks perceive as risks and are not willing to lend to the sector. Collateral ensures security to the bankers in the event of default. ‘Collateral free loans’ aggravates the issue as it exposes banks to a higher risk and hence the banks are often adamant on not to offer the loans under CGTMSE.

Please throw some light on the status of SMEs in the western Indian region including Maharasthra and Gujarat. What are the opportunities and challenges?

SMEs both in Maharashtra and Gujarat have been playing a vital role in the economic development of the states. There are around 1.57 Lakh registered SMEs in Maharashtra, contributing almost 35 per cent to the state's exports and contributing significantly to national employment as well. While there are 4 Lakh registered SMEs in Gujarat, contributing 30 per cent to Gujarat's exports and 7.6 per cent to national employment.  Both the states have wide range of opportunities in the field of manufacturing, automobile and auto-components, pharmaceutical, food processing, tourism etc. Maharashtra specifically offers a competitive advantage over Gujarat in IT solutions and services. It also leads Gujarat in the food-processing industry.

What are the key opportunities on which Small and Medium Business Development Chamber of India is working?

Indian SMEs are growing rapidly. At the same time with the advent of globalisation, the number of challenges faced by SMEs is also increasing. SME Chamber of India will be playing a key role in assisting SMEs to identify emerging business opportunity, adequate risk management, export management, financial management etc. At time when the Indian SMEs have started looking beyond the borders for expansion of their businesses, it is crucial that they are able to manage their international risks and at the same time secure their business operations. The Chamber aims to create awareness amongst the SMEs on how they can manage their international risks, identify new buyers, suppliers and also establish business contacts and form partnerships in other countries.