{"id":40700,"date":"2023-06-30T09:36:38","date_gmt":"2023-06-30T09:36:38","guid":{"rendered":"https:\/\/www.smeraonline.com\/newweb\/?p=40700"},"modified":"2023-06-30T10:53:31","modified_gmt":"2023-06-30T10:53:31","slug":"sme-credit-challenges-and-smera-solutiona","status":"publish","type":"post","link":"https:\/\/www.smeraonline.com\/newweb\/index.php\/2023\/06\/30\/sme-credit-challenges-and-smera-solutiona\/","title":{"rendered":"SME credit: challenges and SMERA solutions"},"content":{"rendered":"\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t
\n\t\t\t\n\t\n<\/svg>\t\t<\/div>\n\t\t\t\t\t
\n\t\t\t\t\t
\n\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t
\n\t\t\t
\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t
\n\t\t\t
\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t\t
\n\t\t\t
\n\t\t\t\t\t\t
\n\t\t\t\t
\n\t\t\t

SME credit: challenges and SMERA solutions<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t

Small entrepreneurs usually have inspiring backstories. Their ascent to the top after enduring multiple challenges and setbacks is worth reiterating especially when countries need strong domestic markets to tide over economic downturns. Read on then\u2026<\/span><\/p>

\u00a0<\/span><\/p>

A 15-year-old would sell newspapers in Bengaluru for just Rs 250 a month. Now in his 30s, he is the co-founder of an advertising and media promotion company with a turnover of Rs 4.5 crore.\u00a0<\/span><\/p>

\u00a0<\/span><\/p>

An entrepreneur couple attempted to create something new with\u00a0chikoo<\/em>\u00a0(Sapodilla). They launched their own company that produced wine from\u00a0chikoo<\/em>\u00a0extracts, the first of its kind.<\/span><\/p>

\u00a0<\/span><\/p>

India\u2019s economic history is replete with such absorbing stories \u2014 businesses that started with a unique idea and zero inventories. Relentless dedication is their only capital. They take a leap of faith, backed by community support and initial investments from family savings. As mentioned above, eventually it\u2019s these businesses called Micro, Small and Medium Enterprises (MSMEs) that stabilise economies during business-cycle recessions.<\/span><\/p>

\u00a0<\/span><\/p>

A third of India\u2019s GDP comes from the MSME sector, which accounts for roughly 63 million MSMEs and approximately 30% of the country\u2019s GDP (Source: Mint).<\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t

The struggles\u2026<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t

Yet, these business entities often struggle for validation. Many MSMEs are either proprietorships or partnerships and hence are not registered under the Companies Act and resultantly lack any distinguishment. Their heterogeneity remains unacknowledged.\u00a0<\/span><\/p>

\u00a0<\/span><\/p>

Moreover, their capacity for consistent capital generation, adaptability in the face of changing markets, and operational integrity are often viewed with scepticism. Consequently, they are deprived of a constant access to finance by lending institutions.\u00a0<\/span><\/p>

\u00a0<\/span><\/p>

Since SMEs frequently rely on a small number of partners and contracts, particularly when acting as suppliers to larger businesses, volatility and risk levels are thought to be higher in the sector. For instance, when a global automaker was mired in crisis, some MSMEs that depended on the company\u2019s operations missed bank payments owing to liquidity issues. While the company did not default, the MSMEs were labelled as NPLs by their banks, even though they paid their debts later.<\/span><\/p>

\u00a0<\/span><\/p>

Any movements, be it in domestic or international markets, impact them in some way. For instance, not too long ago, engineering exporters in India\u2019s MSME segment sought government intervention to address the issue of escalating steel prices. They pointed out that affordable rates are essential to make them a competitive force in global markets.\u00a0<\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t

Government\u2019s reassuring support<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t

Of late, the Indian government has extended support to these business entities by announcing several MSME-specific schemes:<\/span><\/p>

\u00a0<\/span><\/p>

\u00b7 Prime Minister Employment Generation Programme<\/span><\/p>

\u00b7 National SC-ST-HUB<\/span><\/p>

\u00b7 Entrepreneurship and Skill Development Programme<\/span><\/p>

\u00b7 Market Promotion & Development Scheme<\/span><\/p>

\u00b7 Scheme of Surveys, Studies and Policy Research<\/span><\/p>

\u00b7 Technology Upgradation and Quality Certification<\/span><\/p>

\u00b7 Marketing Promotion Schemes<\/span><\/p>

\u00b7 Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship<\/span><\/p>

\u00b7 Infrastructure Development Programme<\/span><\/p>

\u00b7 Scheme of Information, Education and Communication<\/span><\/p>

\u00b7 Scheme of Fund for Regeneration of Traditional Industries\u00a0<\/span><\/p>

\u00a0<\/span><\/p>

The Statista<\/span><\/em>\u00a0reports: \u201cAs of February 2023, almost 13.8 million micro-enterprises were registered on the Indian government\u2019s Udyam registration portal accounting for 96% of the MSME sector. Small and medium enterprises occupied around three and 0.28% respectively. There was a total of more than 14 million MSMEs registered on the platform.\u201d<\/span><\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t
\n\t\t\t

Is that enough?<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t\t\t

Yet, despite these schemes intended to serve as growth drivers, they need SME credit for expansion. In business terminology, SME credit or SME loans cater to the financial needs of emerging business entities. At different stages of the business cycle, SME credit helps acquire raw materials, increase investments in machinery, and meet working capital requirements.\u00a0<\/p>

That said, granting SME credit is not a straightforward process especially when lenders and SME investors assess an SME\u2019s creditworthiness. Lenders and banks ask for a thorough checklist like audited financial statements, complete accounting records, and business plans. Transaction costs increase when lenders support SMEs to procure these documents.<\/p>

Secondly, the quality of collateral impacts an SME\u2019s ability to secure financing. High-quality collateral in the form of real estate could increase the chances of loan approval. Generally, lenders prefer stable collateral that has low depreciation and is easy to liquidate. Low-quality collateral could translate into higher interest rates and stringent conditions for repayment. Lenders factor in the sector associated with the business entity, its prospects, and ability to repay the loan.\u00a0<\/p>

Additionally, lenders and SME investors evaluate the industry and market trends in which an SME operates. They gauge the target audience, growth potential, consumer response to the product, its differentiator, and the economic scenario prevalent then. Also, they assess whether the business entity has the heft to survive the competition and keep up with regulatory changes.\u00a0<\/p>

For sure, cash flow becomes a key consideration in SME lending along with the business\u2019s capacity to generate consistent returns and make the most of favourable market scenarios.<\/p>

The other aspects include:<\/p>