Access to finance in time and in adequate measure has been made out as a key factor affecting the healthy growth of the sector by several studies and several committees appointed by the Reserve Bank of India and the Government of India (Nayak, Kapoor, High Level Committee, Abid Hussain, S P Gupta, etc.) at different points of time, despite including them under the priority sector category. SMEs are going to be the centre of financing activities of all commercial banks in the years to come.
The main changes in the banking sector that will influence are:
a. Globalization intensified competition and the profit orientation in the sector;
b. The ups and downs of some sectors, bubbles as some economists refer to, like in the aqua, IT, real estate, lately, even in retail business sector, tend to make the banks more focused on profitability of their operations;
c. Implementation of capital adequacy norms and Basel II norms
d. This being so, some of the concerns and anxieties that found expression in several committee reports as also the directions for financing in future are summarized for easy understanding as follows:
e. Large corporate can and do approach capital markets for finance having regard to the lower costs involved-bank lending to corporate and particularly the well reputed ones will obviously drop and there is a limit to retail lending and, hence, the gravitation to SME by banks
f. Financing SME, though desirable and perhaps necessary for banks to earn decent returns on capital, yet is not easy
g. Lack of financial data; intrinsic weakness of the financial structures and slender resources of the promoters in terms of money and/or knowledge of markets adds to challenges in risk management while lending to SMEs
h. For SMEs, availability is more important than cost of credit- this factor has been mindlessly exploited by the banks and SFCs in the past to their own detriment as evidenced by preponderance of NPAs in the SME portfolio of most banks
i. An innovative approach is called for on the part of the banks/SFCs in their own interests and as a means to sustain a major employment generating sector of the economy
j. Analysis of balance-sheets, working out ratios and assessing credit based on arbitrary norms was relevant in an era of credit rationing. Though these are not irrelevant even today, when quality of credit is as important as growth it is necessary that the traditional approach to credit analysis and assessment is modified
k. A new system needs to be developed taking into account the limitations of the SMEs to produce reliable balance-sheets and other financial data which in any case being historical ones provide limited guidance to what will happen in future
l. It will be stating the obvious to say that under-financing an operation leads to industrial sickness and the ratio-based approach to SMEs has contributed significantly to NPAs in the SME segment
m. Financing a unit on the basis of cash flow statements to the extent of deficits suggests itself as a method to meet the needs of SMEs fairly and adequately without too many demands on the limited knowledge and financial resources of the promoter.
n. The suggested approach assumes a well thought-out business plan from the SME, willingness on the part of the promoters to maintain proper books of account to record sales, purchases and expenses as also an open mind on the part of bankers to finance the cash deficits and refrain from over controlling the activities of the SME. There should be clear recognition on the part of the bank and the SME that they are partners with a shared goal of profitable operations.