FUTURE OF MSMEs
Micro finance sector consisting of a variety of players that include several Nongovernmental
organizations, cooperatives, Self-Help Groups of various hues, Non-Banking Finance
Institutions-some depending on donor funds and external borrowings and some others operating
with savings, donor resources and external debt is a major player in transforming the informal
economy of the country into a vibrant economy during the post liberalization economy. Apex
institutions like the NABARD, SIDBI and several State Governments realized the potential of this
sector in attaining financial inclusion
Relationship banking focuses more on the customer and the banks that were for a long time
inward-looking and delivering what they were having in their cupboards started looking out at
the customers' needs and preparing products that the customer needs. Although need-based
financing was originally introduced in SME lending in the past, post-reform period abandoned
those strategies and started looking at what the rest of the globe has been doing in the retail
segment that includes the SME sector. Inter-sectoral linkages have also come to occupy their
attention and cross-selling of products was found to be a way forward to improving their profits
and profitability as well as productivity at the some time meeting what the customer needs.
Customer Relationship Management embraced many such interventions and the chapter
discusses structural, economic and cultural issues in adopting these strategies.
Global financial integration being on the threshold has been demanding new financial order
acceptable to all stakeholders. While the Basel I could carry conviction over its Minimum
Capital Requirements (MCR) at 8 per cent of the risk weighted assets and saw most
countries veering round to it within certain set boundaries, Basel II standing on the tripod
of 1) Minimum Capital requirements in the 1988-refined framework; 2) Supervisory review
and 3) Market discipline, did not find ready pickers. The first Accord strengthened the
soundness and stability of the international banking system and enhanced competitiveness
among equally placed internationally active banks. The need for second Accord arose as a
result of changes in the risk profiles of the portfolios the banks have come to handle and
the risks that the adoption of new technologies ushered in. India and China are the two
major economies of the globe that have been drawing the attention of every researcher.
Consistency in growth levels and future opportunities in the Indian economy demands a
robust financial sector. Such robustness is receiving the regulator's attention. But the
compelling urge to embrace the Basel-II is going to affect the two most important sectors
of the Indian economy, viz., agriculture and SME that have the capability to generate
employment on a sustained basis. This paper studies the impacts of Basel II on the SME
sector and argues for re-engineering the credit risk management.
The highly regulated banking industry (especially the commercial side of the industry) was
shocked in the 1970s, not only by a turbulent interest rate environment but also by new,
fierce competitors from the non-banking world. With increased sensitivity to interest rate
fluctuations, borrowers and investors alike, began to scour global markets for the smallest
financial advantage. As rates arose further, deposits began to move out of the raterestricted
banking institutions into higher yielding alternatives:
Disintermediation. Consequently, newer forms of liabilities (jumbo CDs and money market
accounts) as well as assets of increasingly lower quality began to appear in bank's balance
sheets. Banking, thus, began to be transformed from conservative asset management into
aggressive liability management. This in turn dictated the acquisition of financial assets at
higher rates to cover liability costs. This is a traditional fault of the banking industry, forgetting
that the interest rates are not just a function of market conditions but also of risk. Thus, there
is always the inherent danger of reaching out to credits of lesser quality with higher risks to
realize higher returns. Accordingly, from 1988 onwards, is known as the era of Basle Capital
Accord, the primary objective of which was to strengthen the soundness and stability of the
international banking system by creating minimum Risk-Based CAPITAL ADEQUACY
REQUIREMENTS. This was especially for banks with international presence commensurate with
Credit Risk, thereby reducing global systemic risk without unduly comprising the competitive
differences between countries. All this also gave rise to various credit derivative products to
sustain Return on Capital ratios. Securitization became a major tool to make "illiquid assets" of
the banks tradable and marketable. Loans traditionally, are thought to be kept in the books till
maturity. With this new instrument, incremental origination of loans under Retail/consumer
banking could be planned without attendant constraints like, Capital, Cash Flows or Interest
Rate risks.
Most Indian Banks are reformulating their information systems to capture risk events, loan
default rates — sector wise, area wise, like probability of default, loss given default, and
exposure at default. Internal rating capabilities are also in the process of being built; The
country has only a few external rating institutions — most of which are adept at rating issues
and issuers, derivatives etc., (CRISIL-S&P, ICRA, FISCH) with little orientation to SMEs. It is
SMERA and M-ICRA that are exclusively rating the SME sector. The advantages of rating are yet
to be appreciated by the cash-strapped SME sector. A rating estimates the probability as to
whether a company will comply on time and in full their repayment obligations. A rating also
simplifies the comparability of companies and provides statements about future credit
worthiness. Most SMEs fall under retail portfolios of Banks. Almost 50 centres account for nearly
80 per cent of Banks' business. Eleven States account for 80 per cent of the SME sector in the
country. SIDBI's initiative of setting up SME Financial Centres in most clusters in the country
can improve the status of SMEs and could be seen as low-risk entities requiring less capital
provision by Banks. But all depends upon how the regulator allocates weightage for this sector.
Productive SME lending of the future lies in the post-harvest operations in the farm sector.
There are tremendous opportunities in financing agri-clinics manned by qualified management
and Agriculture graduates. These Agri-clinics carry mobile equipment, mobile testing
laboratories to test the genuineness of the agricultural inputs like seeds, fertilizers, pesticides
etc. Repairs to tractors, motors and pump sets, diesel engines, micro irrigation equipments etc.,
are carried out by service centres set up by entrepreneurs in the SME segment. Depending on
the size of the area served the investment in such service centre varies from Rs. 5 lakhs to Rs.
25 lakhs. Such loans qualify for guarantee from the Credit Guarantee Trust Fund. Farm sector
offers cross-selling opportunities in SME segment.
The impact of WTO and its agreements are on every economic activity be it agriculture,
manufacturing, trading or services. Following is the summary of the impacts:
♦ World markets are opening up due to lowering of tariffs and dismantling of other restrictions in
developed and developing countries. Enlightened and awakened entrepreneurs have greater
opportunities to benefit for their comparative advantages.
♦ Domestic markets will face an increasing threat because of lowering tariffs leading to freer
entry of foreign goods and because of larger number of foreign companies establishing their
manufacturing bases with state-of-art facilities.
♦ Export markets will become tougher because of competition among developing nations having
similar comparative advantages.
♦ The WTO regime will benefit those countries more, which show enormous negotiating skills in
the on-going dialogue. India is currently on a strong wicket on this score. The Government
that is in constant touch with the industry would stand to a significant advantage.
Opportunities for SMEs:
♦ Access to global markets
♦ Access to better technology
♦ Access to greater funding through FDI/Joint ventures Challenges
before the SMEs under WTO regime:
♦ Removal of Quantitative Restrictions — this would lead to liberal import of goods and thus
result in additional competition.
♦ Quality of goods — under a regime where better quality of goods imported from other
countries would be available to the consumer, Indian SMEs would have to ensure that their
products meet with international standards in order to remain competitive.
♦ Outdated technologies — Most of the SMEs use outdated technologies either because of lack of
knowledge or lack of capital. These deficiencies would have to be made good.
♦ Infrastructure — several SMEs are facing problems with basic infrastructure facilities like bad
roads, unreliable power supply, high pollution etc.
♦ This chapter gives examples of a few industrial sub-sectors that have put in place strategies to
reduce the adverse impacts of the WTO Agreements.
Micro finance sector consisting of a variety of players that include several Nongovernmental
organizations, cooperatives, Self-Help Groups of various hues, Non-Banking Finance
Institutions-some depending on donor funds and external borrowings and some others operating
with savings, donor resources and external debt is a major player in transforming the informal
economy of the country into a vibrant economy during the post liberalization economy. Apex
institutions like the NABARD, SIDBI and several State Governments realized the potential of this
sector in attaining financial inclusion
Relationship banking focuses more on the customer and the banks that were for a long time
inward-looking and delivering what they were having in their cupboards started looking out at
the customers' needs and preparing products that the customer needs. Although need-based
financing was originally introduced in SME lending in the past, post-reform period abandoned
those strategies and started looking at what the rest of the globe has been doing in the retail
segment that includes the SME sector. Inter-sectoral linkages have also come to occupy their
attention and cross-selling of products was found to be a way forward to improving their profits
and profitability as well as productivity at the some time meeting what the customer needs.
Customer Relationship Management embraced many such interventions and the chapter
discusses structural, economic and cultural issues in adopting these strategies.
Global financial integration being on the threshold has been demanding new financial order
acceptable to all stakeholders. While the Basel I could carry conviction over its Minimum
Capital Requirements (MCR) at 8 per cent of the risk weighted assets and saw most
countries veering round to it within certain set boundaries, Basel II standing on the tripod
of 1) Minimum Capital requirements in the 1988-refined framework; 2) Supervisory review
and 3) Market discipline, did not find ready pickers. The first Accord strengthened the
soundness and stability of the international banking system and enhanced competitiveness
among equally placed internationally active banks. The need for second Accord arose as a
result of changes in the risk profiles of the portfolios the banks have come to handle and
the risks that the adoption of new technologies ushered in. India and China are the two
major economies of the globe that have been drawing the attention of every researcher.
Consistency in growth levels and future opportunities in the Indian economy demands a
robust financial sector. Such robustness is receiving the regulator's attention. But the
compelling urge to embrace the Basel-II is going to affect the two most important sectors
of the Indian economy, viz., agriculture and SME that have the capability to generate
employment on a sustained basis. This paper studies the impacts of Basel II on the SME
sector and argues for re-engineering the credit risk management.
The highly regulated banking industry (especially the commercial side of the industry) was
shocked in the 1970s, not only by a turbulent interest rate environment but also by new,
fierce competitors from the non-banking world. With increased sensitivity to interest rate
fluctuations, borrowers and investors alike, began to scour global markets for the smallest
financial advantage. As rates arose further, deposits began to move out of the raterestricted
banking institutions into higher yielding alternatives:
Disintermediation. Consequently, newer forms of liabilities (jumbo CDs and money market
accounts) as well as assets of increasingly lower quality began to appear in bank's balance
sheets. Banking, thus, began to be transformed from conservative asset management into
aggressive liability management. This in turn dictated the acquisition of financial assets at
higher rates to cover liability costs. This is a traditional fault of the banking industry, forgetting
that the interest rates are not just a function of market conditions but also of risk. Thus, there
is always the inherent danger of reaching out to credits of lesser quality with higher risks to
realize higher returns. Accordingly, from 1988 onwards, is known as the era of Basle Capital
Accord, the primary objective of which was to strengthen the soundness and stability of the
international banking system by creating minimum Risk-Based CAPITAL ADEQUACY
REQUIREMENTS. This was especially for banks with international presence commensurate with
Credit Risk, thereby reducing global systemic risk without unduly comprising the competitive
differences between countries. All this also gave rise to various credit derivative products to
sustain Return on Capital ratios. Securitization became a major tool to make "illiquid assets" of
the banks tradable and marketable. Loans traditionally, are thought to be kept in the books till
maturity. With this new instrument, incremental origination of loans under Retail/consumer
banking could be planned without attendant constraints like, Capital, Cash Flows or Interest
Rate risks.
Most Indian Banks are reformulating their information systems to capture risk events, loan
default rates — sector wise, area wise, like probability of default, loss given default, and
exposure at default. Internal rating capabilities are also in the process of being built; The
country has only a few external rating institutions — most of which are adept at rating issues
and issuers, derivatives etc., (CRISIL-S&P, ICRA, FISCH) with little orientation to SMEs. It is
SMERA and M-ICRA that are exclusively rating the SME sector. The advantages of rating are yet
to be appreciated by the cash-strapped SME sector. A rating estimates the probability as to
whether a company will comply on time and in full their repayment obligations. A rating also
simplifies the comparability of companies and provides statements about future credit
worthiness. Most SMEs fall under retail portfolios of Banks. Almost 50 centres account for nearly
80 per cent of Banks' business. Eleven States account for 80 per cent of the SME sector in the
country. SIDBI's initiative of setting up SME Financial Centres in most clusters in the country
can improve the status of SMEs and could be seen as low-risk entities requiring less capital
provision by Banks. But all depends upon how the regulator allocates weightage for this sector.
Productive SME lending of the future lies in the post-harvest operations in the farm sector.
There are tremendous opportunities in financing agri-clinics manned by qualified management
and Agriculture graduates. These Agri-clinics carry mobile equipment, mobile testing
laboratories to test the genuineness of the agricultural inputs like seeds, fertilizers, pesticides
etc. Repairs to tractors, motors and pump sets, diesel engines, micro irrigation equipments etc.,
are carried out by service centres set up by entrepreneurs in the SME segment. Depending on
the size of the area served the investment in such service centre varies from Rs. 5 lakhs to Rs.
25 lakhs. Such loans qualify for guarantee from the Credit Guarantee Trust Fund. Farm sector
offers cross-selling opportunities in SME segment.
The impact of WTO and its agreements are on every economic activity be it agriculture,
manufacturing, trading or services. Following is the summary of the impacts:
♦ World markets are opening up due to lowering of tariffs and dismantling of other restrictions in
developed and developing countries. Enlightened and awakened entrepreneurs have greater
opportunities to benefit for their comparative advantages.
♦ Domestic markets will face an increasing threat because of lowering tariffs leading to freer
entry of foreign goods and because of larger number of foreign companies establishing their
manufacturing bases with state-of-art facilities.
♦ Export markets will become tougher because of competition among developing nations having
similar comparative advantages.
♦ The WTO regime will benefit those countries more, which show enormous negotiating skills in
the on-going dialogue. India is currently on a strong wicket on this score. The Government
that is in constant touch with the industry would stand to a significant advantage.
Opportunities for SMEs:
♦ Access to global markets
♦ Access to better technology
♦ Access to greater funding through FDI/Joint ventures Challenges
before the SMEs under WTO regime:
♦ Removal of Quantitative Restrictions — this would lead to liberal import of goods and thus
result in additional competition.
♦ Quality of goods — under a regime where better quality of goods imported from other
countries would be available to the consumer, Indian SMEs would have to ensure that their
products meet with international standards in order to remain competitive.
♦ Outdated technologies — Most of the SMEs use outdated technologies either because of lack of
knowledge or lack of capital. These deficiencies would have to be made good.
♦ Infrastructure — several SMEs are facing problems with basic infrastructure facilities like bad
roads, unreliable power supply, high pollution etc.
♦ This chapter gives examples of a few industrial sub-sectors that have put in place strategies to
reduce the adverse impacts of the WTO Agreements.
No comments:
Post a Comment