Global Summit for SMEs : Business Partnership Meet - 2002
December 20-21, 2002, New Delhi

Address by Mr P B Nimbalkar, Chairman, SIDBI on SMEs Finance and Regeneration

A very good morning to all of you;

It is a pleasure for me to be with you this morning to deliberate on the vital issue of SMEs Finance and Regeneration. The issue of regeneration of SMEs has been under debate ever since the world economy embarked on the process of globalisation over a decade ago. I would, therefore, like to first share my thoughts on this vital issue and subsequently on SMEs Finance.

SMEs constitute a major part of the industrial activity in most of the economies, irrespective of the level of economic development attained. The contribution of SMEs is substantial in terms of creation of gainful employment, output and exports. The social contribution made by SMEs is even more significant than its economic contribution. SMEs in developing economies are mostly in the unorganised sector and have been the source of livelihood for millions of people. On account of different characteristics, the policy framework required in the developing economies differs significantly from that in developed economies. It is in this context that regeneration of SMEs in developing economies must receive public support.

Globalisation, is the process by which markets and productions in different countries become increasingly interdependent due to the dynamics of trade in goods and services and flows of capital and technology. It is averse to any kind of preferential treatment. To meet the challenges of tomorrow, the future growth has to be in developing economies. The biggest challenge before the world is to provide productive work and a good quality of life to the 2.5 to 3 billion people now living on less than $ 2 a day - and 3 billion people likely to be added to developing countries by 2050. Since agriculture has limited ability to serve growing population in rural areas in majority of the developing economies, the regeneration of SMEs, particularly village, cottage and micro enterprises is of paramount importance.

I would like to outline a possible way of regeneration for deliberation in today's august gathering :

A concerted effort on the global scale is required to bring the village, cottage and micro enterprises in the mainstream from the periphery and to integrate them with the organised sector. In fact, their capabilities should be strengthened to meet these norms. Public policy must support their sustained growth.
The infrastructural facilities in developing economies have not reached to the desired level. This restricts the private initiatives in this sector. Therefore, creation of better infrastructural facilities for SMEs must receive greater priority.
Technology transfer from developed economies for SMEs must be facilitated. The doubts in the minds of SMEs on account of new IPR regime must be cleared. They should not feel vulnerable because of their poor capacity for creating R&D facilities. Developed economies should come forward in extending such facilities.
With growing access to modern means of communication, particularly revolution in the information technology, the sheltered market for the SMEs product is no longer so. SMEs should join hands globally to create a global commodity chain. In this regard, SME mother units in marketing, like mother units in production may be promoted.
There is an urgent need to regenerate SME financing. As the SMEs have been the greenfield for nurturing the entrepreneurial talent, the first generation entrepreneurs should be promoted to have access to the desired finance through the creation of guarantee funds. The finance should not only be timely but also cost - effective.
Some of these measures may already be in place in different parts of the world. I am referring to them here to emphasise their significance so as to face the challenges of tomorrow.
Coming to the issue of SME financing, a recent World Bank study of "Firm Size and the Business Environment" reveals that the Small and Medium Enterprises face more or less common type of problems across the world and there are reasons to believe that the firm size is inversely related to the obstacles they face. For instance, economies of scale and entry cost are market forces that favour large firms. This study conducted through a survey across 80 countries, covering more than 10,000 firms, reveals other major obstacles for business development for small, medium and large enterprises which include wide range of issues like financing, infrastructure, taxes and regulations and stability in policies. In terms of ranking, financing appeared to be the top problem.

In sum, the major findings of the study indicate that small firms report more problems than medium size firms, which in turn face more obstacles than large firms. This calls for a process of support for SMEs by policy makers in an innovative manner.

As the access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. In majority of the economies, while the investment credit to SMEs was being provided by financial institutions, commercial banks extended working capital. In the recent past, with growing demand for universal banking services, the term loan and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services by SMEs.

In the backdrop of emerging needs, the new financial services need to address the challenges of technology upgradation and modernisation, marketing finance, infrastructural facilities, venture capital, micro finance and factoring assistance. In the non-financial services, information dissemination, technical assistance, early warning, human resources development programme, environment management and quality consciousness are required more urgently than ever before.

We, at Small Industries Development Bank of India (SIDBI), have taken certain innovative initiatives to meet the emerging financial needs of small scale industries in India. In order to encourage SSIs for taking up technology upgradation and modernisation, SIDBI had launched Technology Development and Modernisation Fund Scheme as far back as 1995 to facilitate the quality upgradation of SSI units and acquisition of the ISO 9000 series certification at competitive rate of interest.

Besides, the Government of India has launched sector specific technology upgradation and modernisation schemes such as Technology Upgradation Fund Scheme for Textile and Jute Industries and Tannery Modernisation Scheme. Credit Linked Capital Subsidy Scheme for technology upgradation of the SSIs has also been launched in the identified 14 products/sub-sectors which, inter alia, include leather and leather products, food processing, information technology (hardware), drugs and pharmaceuticals. We are the nodal agency for these schemes. SIDBI, in association with United Nations Asia Pacific Centre for Transfer of Technology promoted Technology Bureau for Small Enterprises which acts as a platform for SMEs in obtaining the services of technology information, match making, finance syndication and business collaborations. This Bureau is poised to emerge as the Technology Bank for the small industries sector.

With a view to promoting innovation and incubation for SSIs, SIDBI has launched a National Programme on Innovation and Incubation for Small Industries in association with reputed technical institutes. Under the programme two Innovation and Incubation centres - one at Indian Institute of Technology, Kanpur and second at Birla Institute of Technology, Ranchi have been established.

The problem of delayed realisation of sale proceeds by SMEs is, I think, universal. We have tackled this problem through a bills discounting scheme under which SIDBI sanctions exposure limits to large mother units for purchases of parts, components, sub-assemblies and accessories from small scale units and enables the small scale suppliers to realise their sale proceeds immediately. Factoring services also assist the small units in managing their receivables.

Venture capital has emerged as an innovative source of financing for the novel projects. SIDBI has launched several State level venture capital funds for the small scale units in the software / information technology industry. SIDBI has, so far, contributed to the corpus of 15 such funds in various States besides a National Venture Fund for Software and IT Industry. With the objective of upscaling its venture capital efforts and project the small industries on a global stage, SIDBI has also entered into a Memorandum of Understanding with the Small Enterprise Assistance Funds of USA.

In order to address the marketing related problems of SSIs, SIDBI has launched a Marketing Development and Assistance Fund Scheme, with a separately earmarked corpus for women entrepreneurs. Under the scheme, financial assistance is provided for setting up infrastructure which would promote marketing of SSI products e.g., showrooms, retail outlets, warehouses, etc., besides intangible marketing activities such as branding, advertisements and participation in trade fairs.

With a view to bridging the gap between credit needs and credit supply to the poor, particularly rural poor with emphasis on women, SIDBI launched its Micro Credit scheme in 1994. Encouraged with success of the pilot scheme in alleviating the poverty and empowerment of women, particularly in rural areas, SIDBI launched a separate Fund, viz. "SIDBI Foundation for Micro Credit (SFMC)" with an initial corpus of Rs. 1 billion. The assistance out of the fund is extended to the poor with thrust on women through micro finance institutions. We are examining the feasibility of hiving off the foundation as an independent legal entity.

Recognising the need to facilitate the flow of hassle free credit to small entrepreneurs, particularly the first generation entrepreneurs, Government of India and SIDBI have launched a Credit Guarantee Fund Scheme for Small Industries. The scheme facilitates the collateral free lending by eligible institutions upto Rs. 2.5 million. I believe that such funds need to be promoted in other countries as well.

The world economy is fast moving towards services which are inherently suited to SMEs. The future belongs to emerging businesses which could be set up mostly by young first generation entrepreneurs who may not have the backing of collateral or family assets. A totally new approach in finance is required in case such entrepreneurs are to blossom in future. I would, therefore, like to call upon the bankers to adopt a practical approach on SME financing for their regeneration which should not be guided by collaterals alone.

Lastly, I would like to say that if we need to attain the high growth targets, a world without poverty and hunger, there is no alternative but to regenerate and revamp the SMEs. We have to create capital to give benefits of growth spread all over the world which can generate employment. For this purpose, all facilities to SMEs should be given in the form of a level playing field. Boundary-less market will sweep aside businesses which are not globally competitive. At the same time, the businesses which enjoy comparative advantages, are forward looking, and can attune themselves to the changing environment, will have tremendous opportunities. SMEs need to rediscover and regenerate themselves to integrate with the world markets. Let us join hands in this noble effort in a coordinated manner.

Thank you.