The Small and Medium enterprises i.e. SME sector is the future of India. However, the lack of access to appropriate form of capital or funding is one of the biggest hurdles to the growth in the SME sector.
But times have changed. Lenders to small and moderate enterprises are in for a wonderful chance of profiting up to a whooping INR 50,000-crore.That’s an opportunity no lender would want to miss.
Recent CRISIL research on the models of financing done for SME’s i.e. small and medium-sized enterprises in India, reveals that it is possible for banks to increase their lending to the SME’s by INR 50, 000 crore.
Towards the acceptable banking practice of financing 75% of incremental working capital requirements of SMEs, on an average, only 60% of the projects were funded between 2006-07 and 2008-09.
These SME’s met the bulk of their residual funding needs from their own funds.
AV RealtyCorp is a firm specializing in financial and investment management services. Varun Joshi, one of the founding partners of AV Realty says “long standing perception that the enterprises are over-leveraged is debunked by the study of the SME's working Capital. “When it comes to increasing funding support to these SME’s, study has indicated that there is a greater scope for urban bank branches as opposed to the semi-urban or rural areas.”
The study primarily analyzed the composition of the balance sheets.
The SME’s considered in the study clearly showed how 74% growth in the balance sheet was contributed by the growth in current assets whereas 26% of the remaining contribution was by augmentation in fixed assets.
When it comes to working capital, banks are permitted to fund up to 75% of the incremental requirements viz increase in current assets and current liabilities- of borrowers. As Increase in Balance-Sheet Size indicates, banks can fund 75% of increase in current assets (74%) less increase in current liabilities (21%).
Anubhav Tamhane, one of the founding partners of AV Realtysays “while banks can fund up to 40% of SMEs’ incremental working capital requirements, the actual funding provided by banks was only 25%. This reveals a significant incremental funding opportunity (IFO) — the difference between the actual bank funding and the maximum permissible levels — of 15% of SMEs’ incremental working capital requirements.”
It clearly indicates a really huge incremental funding opportunity (IFO) which is the difference between actual funding by the bands and the maximum permissible levels i.e. 15% of SME’s incremental working capital requirements.
When it comes to size, the size of funding requirements for small and medium enterprises is much smaller. To obviate the difficulty of limited size, initiatives of pooled securitization of receivables/lending to SMEs have been launched by several countries. AV Realty in India and London has been running SME loans securitization program.
The prime motive of AV Realty to take up this initiative was to encourage entrepreneurship, which is precisely why they have introduced a number of initiatives to increase the choice of finance for start-up and growth businesses.
SMEs have numerous problems when it comes to capital or funding. They lack adequate knowledge, exposure and entrepreneurial skills. They also lack the ability to expand their market beyond local shores. They lag in technology, relying on traditional methods and processes.
Difficulty in accessing funding, inadequate cash-flow management and insufficient assets and collateral are common problems among SMEs.
It’s a well known fact that SME’s are the backbone of all economies and they bring in financial sustainability. AV Realty plans to achieve financial sustainability by helping the SME’s raise the adequate funds.
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