ISB Updates

Symposium on SME Financing Challenges

The Centre for Analytical Finance (CAF), at the Indian School of Business (ISB), Hyderabad hosted a symposium on SME Financing Challenges at the Taj Land’s End hotel in Mumbai on 9th November, 2011.

The motivation behind the symposium was academic research, some of it done by CAF, which has found that small and medium enterprises (SMEs) in India face severe credit constraints in both formal (bank) and informal (trade credit) financing. Since SMEs are considered to be the engines of growth in any developing economy, this is an issue of vital importance for the Indian economy.

The symposium featured two panel discussions. The first one was on improving bank credit for SMEs. The panelists included SMEs – VK Agarwal (President, FISME), bankers – SS Mundra (ED, UBI) and SS Kohli (Director, IDFC), regulators – Usha Thorat (Director, CAFRAL and ex-Deputy Governor, RBI) and credit raters – Sachin Nigam (Director SME, CRISIL). The discussion was moderated by Prof. Rajesh Chakrabarti of ISB. Mr. Agarwal started the discussion by noting that, given the heterogeneity of SME firms, a ‘one size fits all’ approach could not work. Risk perception among bankers was too high, he felt. He suggested that new institutions modeled on SIDBI could be a potential solution. The bankers felt that accounting systems in SMEs were not up to the mark and it became difficult for banks to evaluate loan applications. Lack of core capital was another issue plaguing SMEs. Also, their experience suggested that SMEs would add unnecessary capacity during boom times at the behest of their larger clients. Panelists noted the need for better credit appraisal of SMEs and Mr. Nigam pointed out that CRISIL is working very hard in the SME space to ameliorate some of the information problems. Finally, Mrs. Thorat said that research needed to be done on how SME clusters are financed as opposed to single firms, and how RBI regulations on NPAs have affected lending.

The second panel focused on alternative financing sources for SMEs. Panelists represented NBFCs – Rakesh Kapoor (MD, IFCI Factors) and Sucharita Mukherjee (CEO, IFMR Capital), investors – Chaitanya Pande (Head, Fixed Income, ICICI Prudential AMC), exchanges – Ravi Tyagi (NSE SME initiatives) and banks – SK Das (Bank of Baroda) and Amit Shah (Citi). The moderator was Sankar De, Executive Director of CAF. The discussion focused on how methods like factoring and securitization could be used to improve SME financing. Ms. Mukherjee spoke about IFMR’s experience with securitization of MFI loans, and how the model might be extended to securitizing SME loans. Mr. Pande noted that past sales of SME loan pools have been received well in the market, though such issues have dried up recently. Mr. Tyagi spoke about the NSE’s proposed SME exchange and how that could help SMEs get access to much-needed risk capital. Finally, Prof. De spoke about the idea of trade credit securitization whereby receivables owed by large firms to SMEs could be securitized and traded on exchanges, thus bringing trade credit financing into the market system. This idea could potentially reduce working capital investments and lead to clean-up of SME balance sheets.

The symposium concluded with the formation of working groups in the areas of bank financing and alternative sources, which will take forward the discussion on the solutions mooted during the symposium.