Governance challenge is paramount as most of these units are owner driven as very few are listed and hence do not resemble professional companies. Hence for these units management tends to be family driven and while there is commitment from the promoter as there is personal stake involved, absence of professionalism impedes talent both at the recruitment and retention stages. Concomitantly the accounting practices remain opaque which also puts stress on the finance side.
The second challenge is on the operational side where the SMEs end up being vendors for the large companies. While the usual issue on payments is chronic resulting in their receivables book being high, they tend to face the backlash of an economic downturn as not only does demand slowdown for them but also receivables mount in the face of growing inventories. Both ways they are at a disadvantage which reflects in their financial performance. Corporate results analyzed by size always reveal a sub-optimal performance from the SMEs.
Third, given their location and size, they face infrastructure challenges in terms of availability of electricity, water, roads, transport etc. Hence while they play a very important part in our industrial production as well as exports, cost of operations remain high making them less competitive.
Fourth, a related issue is quality maintenance which affects their ability to compete especially when exports are concerned. Where they are ancillary to large industry standards are maintained. But otherwise, with few funds to improve quality of products or build brands, their products or services tend be under pressure.
Last, and probably, the most important impediment is procuring finance. Given their size and governance structures, banks tend to be wary of lending even though they have to lend to them as part of priority sector. But invariably these units have to pay higher interest rates. Therefore SMEs are impacted from the point of view of both procuring credit and the cost of funds. Further, given their size they are unable to access the euro market which large companies do to lower cost of capital.
What are the solutions? The government has launched the Make in India campaign identifying 25 odd sectors largely in manufacturing followed by services in the last year or so. The thrust is on enabling business with focus on both foreign investment and SMEs. This is through a series of incentives and concessions provided to ensure that they are able to grow at a reasonable rate. SMEs are a large constituent of the manufacturing sector and also dominate the services sector in areas like transport, trade, hospitality, tourism etc.
Second, a very interesting scheme on subsidy to SMEs for getting a credit rating exists which help these units procure credit at a lower rate if the credit rating is good. As the credit rating looks at all aspects of diligence of the company, banks feel more confident of them when lending. While last year’s budget did scale down the subsidy it is hoped that it will be revived in FY17.
Third, the launching of the SME exchanges is an important step which helps them raise funds from the market. This act automatically addresses issues of governance, profitability, cost structures and leads to creation of professional units.
Last the RBI’s decision to have a receivables exchange is commendable as it does enable them to procure finance against unpaid bills with no recourse.
Quite clearly while the problems afflicting SMEs are quite deep rooted, the government has taken progressive steps to address them while the RBI, SEBI and other market participants alike banks, credit rating agencies and stock exchanges will the major players driving these initiatives as these SMEs grow and enter the LME segment progressively. Given their number as well as contribution to manufacturing output, exports and employment, this segment cannot be ignored. In fact, as the organized large scale sector has not been able to absorb the growing population in a meaningful manner, SMEs appear to the right way of leveraging on the demographic dividend in the country. Hence focus on SMEs has to be an integral part of national economy strategy.