The Small and Medium Enterprise sector (SME) contributes to more than 45% of the GDP besides 45% to the total manufacturing output and 40% to the exports. The Annual Repo of Ministry of MSME 2015-16 states that MSME require about INR 44 trillion of which 35 trillion is debt demand and 9 trillion for equity. The 4th All Indian survey of MSME’s indicates about 90% of their financial requirements is met through informal sources. Public sector reach and access to finance for MSME is limited.. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by Govt. of India and SIDBI, was expected to drive credit based on the viability of the project rather than on collateral. However, data indicates that less than 6% of the loans were disbursed to start-ups and Small and tiny businesses. Many a needy entrepreneurs could not access the credit as on several parameters such as DSCR, leverage, etc, their business plans fell short of the traditional lending norms.
Government’s latest initiative like Startup India and Standup India need more pronounced support for IP, scaling up and capacity building. Amongst alternate platforms of SME finance, Peer-to-peer (P2P) lending and merchant finance show huge promise. Peer to peer lending platforms have succeeded growing rapidly by using technologies, eliminating the middlemen and allowing the borrowers and lenders to communicate directly. P2P institutions adopt an online reverse auction approach. Most marketplace lending platforms do not require collateral which is a boon especially for service-oriented businesses. SMEs can also benefit from the fact that their performance on these platforms can be driven by various non-conventional data points. What regulatory changes are required to drive development of P2P lending. US administration under President Obama has implemented Regulation A+ route for crowdfunding. Regulation A+ provides an exemption for US and Canadian issuers seeking up to USD 50 Million in a 12-month period from filing reports with the SEC. Since these securities are unrestricted they can be traded in the secondary market. Listing on India’s SME Exchange would cost about 0.49 per cent of the total offered amount which is one of the cheapest for SME Exchanges worldwide. It is likely that an Indian adoption of Regulation A+ could prove to be even more economical for SMEs. To encourage P2P lending spread governments across the globe are pursuing innovative changes on personal tax front. UK laws now allow earnings to be treated as personal savings allowance and exemption from tax up to GBP 1000 for basic tax payers and GBP 500 for higher tax payers is allowed. This allows them to net off losses from loans if any.
E-commerce giants in India such as Amazon, Flipkart, ShopClues and so on have been aiming at expanding their sellers base by providing a range of services, including financial support. SMEs who supply for e-commerce platforms can now receive loans for working capital requirements either from financial institutions or sometimes from the e-commerce platform itself. To promote India GI and cultural products government can consider special purpose programs by rerouting marketing subsidies offered at various level to all major platforms. Such an initiative would help increase the reach and profitability of many India centric product companies.
Aishwarya Nair, BCom (Professional), CIMA, Junior Consultant (Finance)