SME Times News Bureau | 23 Feb, 2012
Majority of small and medium enterprises (SMEs) rely on debt as a mode of financing for their long-term financial needs due to reasons like lack of options in the equity market, a survey said.

“Lack of options to explore equity financing, absence of exit route and a lower cost of debt are the key reasons why the Indian MSMEs have been looking at debt as the main source of funding their business operations,” stated Chandrajit Banerjee, Director General, CII.

However, proposed launch of the SME Exchange is expected to give a fillip to the options for exploring equity finance, such as IPOs, Venture Capital, Private Equity etc, he added.

The CII survey conducted on 114 small and medium units said that nearly  63 percent of Indian MSMEs use debt financing for their long term financial needs.

"CII is organizing a series of Investor meets across the country to introduce MSMEs to avenues for equity financing and the impending need for a shift towards a more robust capital structure, resulting in more transparency and accountability,” confirmed Ramesh Datla, Chairman, CII National MSME Council. "This would also help MSMEs adopt best practices of corporate governance," he added.

The CII survey also shows that nearly 85 percent MSME entrepreneurs are using bank overdraft facility or cash credit facility, while the rest are using ECB (External Commercial Borrowings), Commercial Paper or bonds. On the other hand, the very few that are using equity are mostly reliant on common stock.

Cost of credit is a major worry area, as revealed by the survey, as many of the MSMEs feel that exorbitant interest rates are going to have a negative impact on many of the business processes, such as capacity expansion.

The resultant impact would trickle down to the bottom line, which is going to slide downwards, with 80 percent of the respondents claiming their bottom-line would head south. With dwindling profits it becomes increasingly hard to invest money in developing new products or allocate funds for branding and improving the current products. On average 57 percent of the respondents think that in coming months this aspect of their business would suffer as well.

The statistics are also not helped by the fact that nearly 90 percent of the respondents believe that the current interest rate regime in India is worse than those facing their counterparts around the world.

According to the CII survey, Indian MSMEs on average have been paying an interest of 13.75 percent on their term loans with a standard deviation of 1.39 whereas the average interest rate on working capital has been 13.79 with a standard deviation of 1.52. The range for both types of loans was 11.5 percent - 18 percent, on the higher side for MSMEs.

The recent spate of pro MSME policies launched by government is going to have some positive effect on both the amount of credit disbursed and the cost to be paid for the credit. Nearly 33 percent of the respondents believe that this will induce more lending at a lower cost, while 37 percent believed that things would remain the same.

"Certainly the recent policies should encourage the lenders to lend more as the risk of NPA (Non Performing Assets) is greatly reduced,” it was added.