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					 ALLIANCE BUSINESS SCHOOL-FINANCE B




SME Financing
   Group Assignment


         Submitted to
        Dr.Kavita Chavali




         Submitted by
            Group 7
       Anup Kumar Rathi
        Hema Prabha.S
        Himani Sharma
         Manish Gupta
        Shivam Rastogi
        Shruti Shrinivas
        Vijayendra Rao
          Vishal Singh
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Is the government really playing a useful role in the development of MSMEs??



Bring out the summary of the article

According to ASSOCHAM currently 3.5% of public procurements by the government of India and
its various arms are from MSMEs.But the ministry of MSME has recommended at least 20% of
public procurement by government organizations should be from MSMEs. NSIC (National Small
Industries Corporation) chairman HP Kumar sees this 20% recommendation as a great
opportunity for MSEs in the country. The government is the biggest buyer in the country with
sound procurement bills from defence ministry, railways and health ministry. This is a great
opportunity for entrepreneurship in manufacturing sector. But there are various concerns both
in the case of MSMEs and the government’s side that arise for accepting this proposal

Concerns for MSMEs

Additional Investments and Capacity Expansion If the MSMEs have to accept the 20% proposal
there is the need for increased investment in R&D and technology. The broader view is that
MSMEs are ready for such huge investment, which is supported by a study of ASSOCHAM.As
per research; investments by MSMEs in R&D have gone up by 55% in last 4-5 years.

Frequently changing requirements Government in certain cases is not consistent with its
requirements. Recently, Railways came out with a new proposal, which, if implemented could
weed out small supplier firms and allow only those firms with integrated processes in house to
participate. In this case the setting up of a plant to match the proposed requirements would
need an investment of at least 40 crore which the small firms can hardly afford.

Delayed waiver payments MSMEs register with NSIC to be eligible to waiver earnest money
and tender deposit in bidding process of government tenders. But the refunds take longer than
stipulated time and leads to financial difficulties for small businessmen. Rajiv Chawla director of
Jairaj Industries stands victim to such a situation. It took 18 months for Jairaj to obtain the
earnest money and tender deposits spent in the government tenders.

Concerns for government

Quality of supplies Government officials contend that enforcing stringent eligibility criteria for
tenders is necessary because of the importance of end-use. The home ministry has directed




Alliance Business School                                                        Group 7 – Finance B
  3        SME Financing

DGS&D(Directorate General Of Supplies & Disposals) to procure automotive batteries only from
reputed suppliers. This was due to some quality and service hiccups from small suppliers

Formation of Cartels Small firms form cartels while applying for government tenders wherein
every bidder quotes the same price. To make the process transparent the government is
developing a national level e-procurement portal. This will help both government and small
appliers.



What is the focus of the article?

This article focuses on the benefits in store for MSME’s if they do business with the
Government. Government is the biggest buyer of the country. By dealing with MSME’s, they
can effectively contribute to the growth of small scale industries. The article states that the
Ministry of MSME recommended that atleast 20% of public procurement by Government
organizations should be from MSMEs. The level of preparedness of these industries to meet
such large order is a debatable issue. No doubt it would involve a lot of financial constraints for
these industries but they are ready to invest in expansion provided that there is assured
business for them. They would also be willing to undertake more risks. The article also talks
about the various hiccups associated with such a regulation. It may be beneficial in the long run
but in the short run, MSMEs will have to face various problems.

Some of the problems that a few industry experts have highlighted are as follows:

       Frequently changing requirements of Government organizations
       Huge investments required to meet the requirements
       Financial difficulties owing to its registeration with NSIC involving delays in refunds of
         deposit money paid for such registeration
       Delayed payments

The article also looks at the Government’s stand on this. The Government feels that imposing
such eligibility criteria is absolutely necessary in order to weed out those companies that do not
provide quality materials. The imposition of such a regulation would help in bringing about



Alliance Business School                                                        Group 7 – Finance B
  4      SME Financing

more transparency in the procurement process and the key concerns associated with small
suppliers. The article also gives insights regarding the future plans of the Government which
involves the implementation of E-procurement schemes.

How is the case relevant to SME financing?

The case has thrown light on two important issues relevant to MSME financing i.e. working
capital issues and term loan for increasing capacity and R&D activity to improve quality work.

Usually MSMEs face following types of problems when it comes to financing their
requirements:

       Government to provide stimulus to MSMEs, buy goods and services from them. But
       when it comes to payment they delay like anything. Sometimes this period span a
       period of 3 to 10 months. This affects the operating cycle of these MSMEs and results in
       to liquidity crunch which in turns affects their top line and bottom-line.
       Government generally follows bidding system o source goods and services form MSMEs.
       These firms bid according to their capacity. But red tapism and bureaucracy has slowed
       down the refunding process. In case the bid is not accepted by the government,
       refunding takes place almost 12-18 months after the bidding. It makes the day to day
       functioning of MSMEs difficult.
       To weed out inefficient firms from the bidding government organizations have increased
       the threshold for initial bidding security amount. Given the limited resources available
       to MSMEs it becomes difficult for them to bid for these projects.



Some of the issues and the needs concerned to the SME financing and credit policies with
regards to the government are as follows:




Alliance Business School                                                        Group 7 – Finance B
  5      SME Financing




Alliance Business School   Group 7 – Finance B
  6        SME Financing



Anil Bhardwaj, Secretary General of FISME has mentioned that the public procurement
mechanism has the potential of generating a huge demand of goods and services produced by
MSMEs. However, to realize the potential it is essential that steps are taken in the following
areas:

      a. Need for simultaneously pressing for e-procurement system to induce transparency and
         greater disclosures of the procurement processes.
      b. Need for ensuring prohibition of bundling of orders and putting unrealistic entry barriers
         to crowd out MSMEs.
      c. Need to develop a mechanism in association with Ministry of MSME so that the
         following principles of Competition Policy be ensured. (e.g. filing of cases against anti-
         competitive procurement practices with support of Ministry of MSME).

If the government takes initiative and implement steps, the public procurement mechanism will
have a benign impact on large number of MSMEs. It will provide them support in the midst of
adverse economic condition

General analysis of the article

Reasons that led government to the 20% ordinance

         Small enterprises in the country have been hit badly by the global as well as domestic
         demand slowdown

         Indian companies have reduced production due to non-availability of funds and lower
         demand, leading to a fall in raw material requirement — majority of which is supplied by
         MSMEs.

         Risk aversion of banks tends to rise during such periods and MSMEs bear the brunt of
         banks’ cautiousness in terms of lending.

         The government purchases less than 1% of its requirement from MSMEs.Its purchases
         are based on prices rather than quality. Big enterprises have a price advantage due to
         their scale of operation.
         There exists is a guideline to all ministries to buy goods and services preferably from
         MSMEs, but since it is voluntary, most purchases are based on competitive bidding at
         the lowest price.



Alliance Business School                                                        Group 7 – Finance B
  7      SME Financing



Benefits to MSME s out of government procurement

       To expand the supplier base of MSMEs which also gives an opportunity to new players
       to enter into the market

       The payment in government buying is assured upon supply of goods and services.

       MSMEs get advances easily against confirmed government orders.

       With orders in hand, MSMEs take the risk of expanding their capacities and invest more
       in their companies.


Precautionary steps to be taken to realize the potential of public procurement

       Need for simultaneously pressing for e-procurement system to induce transparency and
       greater disclosures of the procurement processes.

       Need for ensuring prohibition of bundling of orders and putting unrealistic entry barriers
       to crowd out MSMEs.

        Need to develop a mechanism in association with Ministry of MSME so that the
       following principles of Competition Policy be ensured. (e.g. filing of cases against anti-
       competitive Procurement practices with support of Ministry of MSME).




Alliance Business School                                                      Group 7 – Finance B
  8      SME Financing

References

http://www.financialexpress.com/news/govt-mulls-mandatory-20-purchases-from-msmes/432262/0

http://smetimes.tradeindia.com/smetimes/news/top-stories/2009/Jun/26/public-procurement-must-
for-msmes-growth-fisme9087.html

http://www.imsme.org/Uploads/MediaTypes/Documents/Four_shtr_MSME_Agenda.pdf

http://economictimes.indiatimes.com/Opinion/India-Emerging/Government-procurement-pie-Windfall-for-
MSMEs/articleshow/5053280.cms?curpg=2




Alliance Business School                                                             Group 7 – Finance B