Lack of adequate finance and in the right quantum leads to liquidity pressures and slows growth for SMEs. Understanding some of these nuances may allow improving the synergies between lending agencies and the SMEs would allow for better need-based funding, observes Amitabh Verma, Head – Small and Medium Enterprise, DBS Bank, India.
SMEs are the driving force for any economy. They typically propel growth and this is a major attraction for any financial institution to partner them. This not only allows them to “get in early,” but also allows them to slowly expand the range of solutions as these companies grow. Financial institutions have begun to realise that while financing remains at the forefront of this, the need for SMEs vary from simple working capital and cash management to easy reconciliation, advisory on FX and various other ancillary areas leading to improved efficiencies.
SMEs being at the forefront has its downsides too. This leads them to take the first shocks of any economic downturn. This exposes these companies to the relatively higher default risk if they are not able to withstand downturns. An ability to assess the intrinsic strength of these companies becomes crucial for financial institutions to finance. Lack of easy means to make these assessments often makes lending approaches conservative.This impacts the timing and quantum of funds made available to SMEs starving them of the much-needed fuel for growth.
This brings us to the heart of this discussion. What makes it so difficult for financial institutions to make lending decisions and what could be the way forward to mitigate some of these challenges so that the sector can reap the benefits of full range of solutions from these institutions?
Inadequate financial disclosure:
SMEs often provide financial information in a manner which is not very detailed and transparent. This is a result of lack of professional finance expertise within the smaller SME set-ups and these functions being run in an ad hoc manner. This makes financial evaluation difficult and brings in need to look at parameters and factors which go beyond financials such as promoter integrity and track record. These are not easy to obtain and is sometimes a deterrent. A network which provides useful information on the company and promoters can mitigate some of these risks. Rating agencies have begun to rate SMEs on a broad range of financial and non-financial parameters and these have begun to provide pointers. Acceleration in the growth of the eco-system which gives credible information will provide greater confidence.
SMEs are typically family run and they don’t always put in place a credible succession plan. Lenders get worried that any risks related to the owners/promoters can leave the company very vulnerable and they often shy away from seemingly good entities. Putting in a well thought through succession plan and “key man” insurance are some initiatives which can allow the company to pursue its growth path even if some unforeseen situations derail the original plans.
Lack of suitable skill sets:
SMEs are relatively unknown and it is not always easy to find the most suitable people. Also, the ability of SMEs to pay is relatively low and there is a fair amount of double-hatting. This brings associated risks including those of errors, inefficiencies and frauds. Investing some time in putting a robust internal audit mechanism and hiring/training the right resources can add immense value to the companies. This may be difficult to assess in the short term, but the track record would show for itself as the company continues its growth journey over a period of time. Getting the relationship managers to meet a wider team can give the level of confidence about the depth of management support.
Lack of finance often renders SMEs incapable of incorporating newer technologies. A low technology results in low productivity, which makes these enterprises uncompetitive. These enterprises also are often unaware about new technologies, or the technology financing schemes. Financial institutions are reluctant to fund these enterprises that are technologically backward and thus they are often caught in vicious circle. Finding ways to invest in suitable technology could provide a win-win solution.
Inadequate market linkages:
SMEs often have a challenge in commanding the best procurement and selling price as they are often small as compared to their buyers and suppliers. They may be relatively less disadvantaged if they are cluster-linked or are ancillary to the larger enterprises. Participating and joining round tables and industry associations would provide them with adequate knowledge and strength to compete.
A stronger SME which understands and plays according to market dynamics is much more likely to withstand pressures better.
Lack of adequate finance and in the right quantum leads to liquidity pressures and slows growth for SMEs. Understanding some of these nuances may allow improving the synergies between lending agencies and the SMEs would allow for better need-based funding. SMEs should also not look at just financing when they deal with these institutions. The full range of solutions on cash management, trade services, forex services and technology including internet banking platforms are today an integral part of offerings. Institutions which can provide these services in a customised manner would be the best fit for a win-win situation.