The government may have come out with various recommendations to rejuvenate small and medium enterprises, but experts say more measures may be needed to overcome various structural hindrances to easing the funding problems of this traditionally cash-heavy sector.

To help the SME industry, which is thought to have been affected directly by demonetisation of 86% of the currency in circulation in November last year, the government has told banks to identify SME lending as a separate asset class and announced tax benefits to encourage small firms to shift to digital payments means.

Bankers said digitisation of payment will help. “The biggest problem banks have had with SME lending is that we have historically found it difficult to gauge their cash flows and predict their repayment behaviour,” said Ritesh Pai, Country Head of digital banking at Yes Bank. “Digitisation of payments will help us gauge his credit worthiness better and that seems to be the direct movement now from the government.”

But then, experts said there needs to be many more measures to ease the funding problems of the industry. A major problem faced by SMEs is delayed payments and bouncing of cheques, which makes these entities capital starved in many cases, said R Narayan, Founder of Power2SME, an online player that helps small companies access loans from banks and NBFCs.

“Resolution of cases related to bouncing of cheques takes anywhere between 1-2 years and that means the money is stuck for so long which means a lot for a small enterprise,“ he said. “We need a mechanism from the government to mandate resolution of such cases within 30 to 60 days and that will be a big game changer for SMEs.”

Narayan said banks have slowed lending in this space since 2011 when bank lending to NBFCs stopped being covered under their priority sector obligations.“Since banks do not have specialisation of lending to these customers, if this norm could be revived we could see more capital in SME lending space,” he said.

Lendingkart, another online lending company focused on SME space, called for further incentives for banks and NBFCs to create fast, easy and reasonable loan options for SMEs across the country.

“To attract larger institutional players and create liquidity for SME loans, the government could possibly provide an institutional framework akin to `bank in a box’ systems,” said Harshvardhan Lunia, Chief Executive Officer of Lendingkart.

“SME loans could be recognised as a separate asset class and listed accordingly,” he said.

Source: Economic Times