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Last updated: 05 Jan, 2016  

Rupee.9.Thmb.jpg MSME finance: RBI comes up with new ideas

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Bikky Khosla | 05 Jan, 2016
Lack of institutional finance has always remained the Achilles heel of our micro, small and medium enterprise (MSME) sector -- a recent RBI report again points out this fact. The paper, "Report of the Committee on Medium-term Path on Financial Inclusion" released by the central bank last week views that access to adequate credit, in spite of various policy support measures taken for the sector from time to time, has still remained elusive. Citing International Finance Corporation data, it adds that overall finance gap in the sector stood at a whopping Rs. 21 trillion in 2009-10. I don't think the situation has improved much since then.

The RBI report calls for, among other recommendations, broadening of the present structure of credit guarantee with the participation of private agencies, both public and private, that can provide credit guarantees in niche areas. It stresses on creation and strengthening of specialized institutions such as NBFCs and MFIs that focus on the provision of credit for different types of MSMEs as banks lack adequate skills and time to assess credit-worthiness of MSMEs and their 'one size fits all' approach towards risk assessment is of little good. In addition, the committee also views that the role of counter guarantee and re-insurance companies should be explored.

The study also stresses on introduction of a system of unique identification for all MSME borrowers and the sharing of such information with credit bureaus. These credit intermediaries will, on the one hand, help small enterprises to draw up their financial statements and assess their viability so that they can access finance with greater ease, and on the other hand, they will provide banks with key information so that non-viable enterprises can be identified. The idea sounds good. Banks usually reject small business loan applications based on the generalized notion that SME lending is riskier. But it is also true that small businesses typically lack skills in managing cash flows or preparing financial statements. The proposed mechanism seeks to bridge this gap.

Another suggestion made in the study relates to innovations in SME financing. Citing examples of 'new lending and equity financing initiatives' by organizations outside the banking system, such as Amazon Lending by Amazon, and 'innovative financing structures and instruments', such as supply chain finance (SCF) initiatives by companies like Financial Times and Nestle, the study views that innovative solutions in access to finance can play a big role in propelling the growth of SMEs. It is also recommended that a framework for movable collateral registry for micro and small enterprises may be examined to step up financing to this sector. These possibilities sound worth exploring.

I invite your opinions.
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MSMSE Financing
Prasad | Sun Jan 17 06:35:34 2016
 I repeat and reiterate that the primary cause of MSME failures due to inordinate delays and clever tactics used by larger companies and public sector , including bank tenders , therefore working capital finance given to MSMe s are utilized by Biggies, in reality it's a proxy funding for larger entities , therefore many SMEs remain to be in sick condition by paying huge amount of interest, it may not apply for all , but most of them are in similar vicious circle. though MSME protective rules are available they are not imposed effectively on to larger companies , if you try imposing them , they would still use various other tactics like getting job done without POs , bills are being accepted at later date , supplies are taken but invoices are not accepted , GR is missing etc.., it's more evident for supplies made to third party address. MSME is like an ABHIMANYU in KURUKSHETRA war, Skills are plenty but can't come out of plan made by biggies.sorry to hurt many here , it's not intentional by biggies it's an inevitable call by their managements.

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S Raman | Wed Jan 13 06:45:42 2016
RBI should fix rates for MSME being a priority sector like agriculture. Banks does not pass on rates cuts / entire benefits to MSME. Some public sector banks quoting health rates charges higher rate of interest. They will not also reveal how it has been worked out too. When the bottom line of MSME unit is poor, concessional rate of interest should be applied to nurse the unit. Instead, banks applies higher rates and makes thins bad to worst. Banks should form a Special Review Section to review such units, provide all sorts of assistance including concessional rate of interest and once the unit back to health, they can withdraw other assistance. By this they can save unit from sickness. Further Government should cover all MSME units under Credit guarantee scheme so that banks need not hesitate to consider financing.

Bank loan to MSME
S.Madhavan | Wed Jan 6 12:19:12 2016
It is not fully correct that Banks have apprehension on lending to MSME. But The Real fact is that the shear quantum of supporting / analysis documents and reports to be filled up by the officer / manager is one and the same for small or huge loans. Instead of doing this cumber-sum work to many small borrowers it is easy for an officer/ Manger to disperse a bigger loan amount to few and complete his/her targets.It will be prudent to rope in ex banking professionals or private companies to do the initial vetting of the proposals of small loans say up to 20 lakhs for a fees. This will ease the burden on the officer a lot and as well us ensure adequate distribution of loans to MSME sector . Public sector banks should initiate this in a big way

Interest rates for MSME
K.D.Patel | Wed Jan 6 09:55:15 2016
The article is informative. It requires more information on framework for movable and immovable collateral registry and State Gove leese/registration fees which may be charged only one, as the MSME when changes the Banker for want of low interest rate for survival, all fees are to be paid one again or repeatedly and this is a compelling factor not to change the Financial institute even lower interest rates are available to remain competitive or for survival. Also some fees like commitment charges are also tobe demolished if the bank does not remain competitive,or the same bank may charge interest accordingly.I was the President of Vatva Industries association, an association representing 2500 small and medium factories and observed that this two points resulted in to untimely death of many factories.New ideas on this may be thought of and precipitated to help MSMES.

Micro to macro credit norms
A.V. Chandran | Wed Jan 6 07:11:57 2016
Micro to macro credit norms could be reviewed based on plan expenditure and corresponding plan revenue of a unit on quarterly basis up to the close of the year subject to proper and precise reporting to its bankers whereas actual expenditure and corresponding actual revenue for the last three years could also be evaluated. Based on average last three years actual expenditure plus corresponding average actual revenue for the last three years divided by two shall be considered maximum limitation for credit sanction towards current demand duly secured for repayment within stipulated time schedule. If this concept is in practice, the passage of micro to macro credit will encourage financing bank (or institution) and involved firms for its viable working. However for timely repayment interest rate could be reduced to 1% p.a. and for untimely repayment interest rate could be increased to 2% p.a. as this will safeguard the proposed credit transaction reasonably.

Financing micro/small enterprises
It is true that these units cannot maintain the standards to prepare statements and also have technically financial control.They have one major problem ie;labour management.This has a direct effect on financial/adm management.Labours do not stick but use these enterprises as a training centres. Intermediate agency must have control over these areas,govt must provide Insurance on the overall setup.Then there is a chance of picking up.These units can work economicaly viable,end products will be cheaper than major brands.There are many consultancies(expertise)can be engaged to solve these problems.Back to 1968-72,it was worst situation.But govt intervened & solved certain issues,same thing may be thought over.How ever micro/small enterprises are to be encouraged,by providing govt labs-fin , adm ,managements etc,certainly this will be ideal for Rural industrialisation.WHERE THERE IS A WILL THERE IS A WAY.

MSME finance
B.Ranadheer Reddish | Wed Jan 6 05:15:19 2016
We have a highly fragmented MSME. Growth is not in creating more. Existing companies need expand and innovate to next level of technology, productivity, quality and sustainability. This can be done only if large scale risk capital flows in. There is huge capital floating around driving values of safe assets like land, share prises of strong companies to levels where returns of three to four percent will not be possible in future. The salvation lies in attracting this floating capital to the much needed risk capital. How are we going to do this?

RBI Support for MSME
P Ramasubba Reddy | Wed Jan 6 04:47:00 2016
Thanks to RBI for coming up with new ideas. We MSME enterprises are facing lot of problems from Governments & officials AND not from our business (buyers/sellers). We need one & only support from RBI is that a single desk where we can raise our issues & get the solution immediately without roaming around 20 departments. Ex. in Mangampet we have 200 Barite Pulverising units and the one & only supplier is APMDC(Govt) but they have not supplied raw material for 1 year and later APMDC is putting so many conditions which is just crushing us. WHERE TO GO ??? instead of supporting the MSME APMDC is demolishing the units established on their own.

MSME Finance
T S Shrinivaasan | Tue Jan 5 17:27:26 2016
SME sector is very much a neglected sector in India. Small scale Industries in and around Chennai are in the verge of closure. Recent flood further made their survival to a question mark. In the recent flood worst affected are downtrodden and SME sectors only. For Affordable section it is only a mild dent. Corporates because of their knowledge of Insurance are adequately insured and get compensation almost equal to their loss. Though SMEs are also insured, their knowledge of Insurance is very minimal and only their Bankers have taken policies to the extent of mortgage amount. Myself being an Insurance Surveyor and Loss Assessor, have seen very many SMEs are not only under-insured and certain areas are not at all insured. It further shows that insurance penetration is not effective, in spite of privatization. Obviously, Private players eye only on Corporates. SME service sectors position is also very grim. While Bankers seldom finance service sectors, their expansion is very difficult. Whereas, MNC Service Sectors dump foreign equity at a very low rate of interest and try to squash indigenous players. While Government supports MAKE IN INDIA projects, I am afraid if it will pave way for successful SMEs.

To find new ways of financing the smaller and medium enterprises
RAJEEV KUMAR GUPTA-EMAIL | Tue Jan 5 15:28:26 2016
India must allow international financing without any restrictions, which is available at a much lesser rate of interest.The local finance brokers must be removed and the funding must be offered by the funding agency directly.This will bring us$ into the country and also help the industries in a big way.

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