The small and medium enterprises (SMEs) are the backbone to transform India into a developed nation. They are the defibrillators for talent, innovation. Creativity and entrepreneurial spirit which is essential for a nation like India to develop on the economic grounds. Statistics reveal that the contribution of SMEs to the industrial output is about 45%, contribution to the country's total exports is 40% and very importantly employs over 60 million people creating 1.3 million jobs every year. Not only this, the SMEs also generate over 8000 quality and valuable products for the domestic as well as the overseas market.With the growing rate of 8% every year, 12 million people are expected to join over 30 million SMEs in India taking the development to another dimension.
Potential for developing SME Capital Markets:
SME finance has a traditional policy of increasing the profitability or we can say bankability, Asian policy makers had not considered the development of SME Capital Markets significant for a long time due to the following reasons:-
1. Bank-centered financial system established,
2. capital markets yet underdeveloped,
3. fragile internal control systems of SMEs,
4. no demands on SMEs and investors for capital market financing,
5. cost and size matters for establishing and operating SME capital markets.
However this is the opinion formed beforehanded, and is not proven with clear evidence, advanced technology may make possible the creation of SME capital markets with reasonable costs. Due to the less co-ordination between the multiple policy makers responsible for SME sector development and finance may have impede the policy formulation of capital market financing for SMEs. This section assesses the real intention of supply-side (regulators, policy makers, market organizes, securities firms, and investors) and demand-side (SMEs) for developing an SME market, based on the findings from intensive surveys, and explores possible directions on increasing long-term financing opportunities for SMEs.
SUPPLY SIDE ANALYSIS:-
• Policy Stance on SME Capital Markets
After the study of supply side of SME's in different countries more than 80% of the respondants have figured that developing an SME capital market is a policy priority at the national level.There were three dimensions of perception behind their answers: (Ii awareness of the underserved segment, i.e., SMEs, in the capital market space;(ii)increased roles of capital markets as part of national growth strategies; and (iii)limitations of traditional bank-centered financial systems. After studying about the growth capital of the country more than 80% of the respondants have figured that SMEs for long term finance increases the Asia's growth which is continuously driving the global economy and this accelerates the SMEs growth by providing growth capital for SMEs,which contributes to resilient national economies. Moreover, they identified that the limitations of bank financing for SMEs require diverse financing modalities for them,which is an SME capital market. Their answers for the development of SME markets are likely to be constructed from a long-term strategic point of view.
1. POLICY ACTIONS TO BE TAKEN:
To stimulate the SME policy market there are several options and approaches at a national level. Country to Country these approaches are ranked by the policy makers as per their priorities. On the whole, however, all study countries considered a comprehensive policy framework for SME access to capital markets needed; especially policy measures to develop investor base for an SME market and promoting market literacy for SMEs and investors are the most important actions to be taken by the government to realize a functional market. As per the study in PRC the establishment of financial and non financial database of SME, including Whitepaper SME are ranked at the topmost policy which supports the area of SME markets with transparency. In, India policy measures to build the base of professionals that support SMEs in capital markets, e.g., disclosure support by consultants and certified public accountants (CPAs), ranked first as needed actions for active SME markets.
2. Critical Factors to Create SME Market:-
In India, top three priorities in the supply-side were (i) raising funds speedily for SMEs, (ii) simplified listing procedures, and (iii) information dissemination of SME capital markets, while these ranked fourth, third, and tenth in the demand-side. The top three in the demand-side were (i) simplified disclosure requirements, (ii) low cost for listing and maintenance, and (iii) simplified listing procedures, while these ranked tenth, fifth, and second in the supply-side. The item of simplified listing procedures was shared between both sides among top three issues. The critical factors to create an SME market vary among countries due to different circumstances of SME financing and capital markets. However, these findings suggest a common issue in priority actions between the supply- and demand-sides: i.e., actions to reduce cost burden for SMEs to tap capital markets. The cost issue is often touched upon when establishing an SME market because the market size is anticipated to be typically small in scale.
DEMAND SIDE ANALYSIS
1. Funding Instruments:-
• Term Finance
• Online Seller Finance
• Pay Later
• Merchant Cash Advance
• Supply Chain finance
• Taxi Finance
These are some of the instruments provided for funding SME. Though these are unique but these underline the need for tailor-made financial products for unique business loan requirements.
2. Willingness to Access an SME Capital Market:-
The disscussion is about whether there should be special equity financig and bond issuance venue for SME's, regardless of stock exchange market, is needed for creating the base of high quality SME's that drive sustainable economic growth and pro-poor growth at National level. The demand-side survey assessed their willingness to access an SME capital market. On the whole, the SME respondents in study countries are likely to utilize such a specialized market venue for their future funding if established, with positive answers (combined yes and somewhat yes) of 77%, 83%, 82%, and 54% in the PRC, India (for equity), the Republic of Korea (for equity), and Malaysia (for equity), respectively. In the latter three countries, they relatively preferred to access an equity market rather than a bond market. The major reasons of their preference to access an SME market commonly explained among four countries (i) increased easiness of funding overall, (ii) funding alternative besides banks, and (iii) increased social credibility of the company expected. Meanwhile, they commonly indicated that the major constraints to access an SME market were (i) procedures to issue stocks complicated and (ii) issuing stocks costly such as listing fees and maintenance of their listed stocks, addressing equity finance. This suggests that simple procedures and low cost structure are key for designing a functional SME capital market, given the potential demands on SMEs.
Need for equity financing
Alongwith the challenges faced in accessing credit, SMEs may also lack awareness of equity which can be an alternate source of financing. Even for start-ups that are prevalent, the aid of incubators and angel-investors providing funds is necessary for the formation of formalised venture. High-end ventures require a larger amount of capital which is then served by venture capital funds. The venture also requires debt for working capital apart from the equity capital. Across the countries, the SME sector has thrived majorly on the back of access to financing through various provisions such as Government-backed guarantees, credit insurance for export oriented units and schemes for equity financing. These provisions are supplemented by institutional infrastructure for advocacy, technical research, refinancing platforms and an easy access to services.
BCB Finance Ltd.(BSE) and EMERGE (NSE) are the two equity platforms. Since SMEs are small companies, they are at the initial stage of their growth cycle and are also at the extreme end of the risk curve- very high levels of return are accompanied by very high levels of risk.
Conclusion
Asia's largely bank-centered financial systems require the reduced supply-demand gap in lending as a core policy pillar to improve SME access to finance. Meanwhile, the diversification of financing modalities is another core policy pillar to better serve various financing needs of SMEs and expand their financial accessibility, which includes the development of capital market financing for SMEs as a venue for providing long-term growth capital.
The discussions suggest five core elements to develop an SME capital market:
(i) demand creation focusing on target segments such as social enterprises and women-led SMEs, with designing a low cost structure for SME access to capital
markets;
(ii) establishment of investor base that provides initial risk capital for potential growth-oriented SMEs, with fostering the venture capital industry;
(iii) strengtheningmarket literacy for potential SME issuers and investors;
(iv) investor protection mechanisms backed by proper laws and regulations; and
(v) facilitation measures for access to an SME market backed by a comprehensive policy support framework with well-organized policy coordination among regulators and line Ministries responsible for SME sector development and access to finance.
The demand-side survey identified SMEs' long-term funding needs. They are seeking to access formal finance and diversify long-term funding instruments for stable growth of business while wishing to diminish the dependency on their own capital and informal finance.
Potential for developing SME Capital Markets:
SME finance has a traditional policy of increasing the profitability or we can say bankability, Asian policy makers had not considered the development of SME Capital Markets significant for a long time due to the following reasons:-
1. Bank-centered financial system established,
2. capital markets yet underdeveloped,
3. fragile internal control systems of SMEs,
4. no demands on SMEs and investors for capital market financing,
5. cost and size matters for establishing and operating SME capital markets.
However this is the opinion formed beforehanded, and is not proven with clear evidence, advanced technology may make possible the creation of SME capital markets with reasonable costs. Due to the less co-ordination between the multiple policy makers responsible for SME sector development and finance may have impede the policy formulation of capital market financing for SMEs. This section assesses the real intention of supply-side (regulators, policy makers, market organizes, securities firms, and investors) and demand-side (SMEs) for developing an SME market, based on the findings from intensive surveys, and explores possible directions on increasing long-term financing opportunities for SMEs.
SUPPLY SIDE ANALYSIS:-
• Policy Stance on SME Capital Markets
After the study of supply side of SME's in different countries more than 80% of the respondants have figured that developing an SME capital market is a policy priority at the national level.There were three dimensions of perception behind their answers: (Ii awareness of the underserved segment, i.e., SMEs, in the capital market space;(ii)increased roles of capital markets as part of national growth strategies; and (iii)limitations of traditional bank-centered financial systems. After studying about the growth capital of the country more than 80% of the respondants have figured that SMEs for long term finance increases the Asia's growth which is continuously driving the global economy and this accelerates the SMEs growth by providing growth capital for SMEs,which contributes to resilient national economies. Moreover, they identified that the limitations of bank financing for SMEs require diverse financing modalities for them,which is an SME capital market. Their answers for the development of SME markets are likely to be constructed from a long-term strategic point of view.
1. POLICY ACTIONS TO BE TAKEN:
To stimulate the SME policy market there are several options and approaches at a national level. Country to Country these approaches are ranked by the policy makers as per their priorities. On the whole, however, all study countries considered a comprehensive policy framework for SME access to capital markets needed; especially policy measures to develop investor base for an SME market and promoting market literacy for SMEs and investors are the most important actions to be taken by the government to realize a functional market. As per the study in PRC the establishment of financial and non financial database of SME, including Whitepaper SME are ranked at the topmost policy which supports the area of SME markets with transparency. In, India policy measures to build the base of professionals that support SMEs in capital markets, e.g., disclosure support by consultants and certified public accountants (CPAs), ranked first as needed actions for active SME markets.
2. Critical Factors to Create SME Market:-
In India, top three priorities in the supply-side were (i) raising funds speedily for SMEs, (ii) simplified listing procedures, and (iii) information dissemination of SME capital markets, while these ranked fourth, third, and tenth in the demand-side. The top three in the demand-side were (i) simplified disclosure requirements, (ii) low cost for listing and maintenance, and (iii) simplified listing procedures, while these ranked tenth, fifth, and second in the supply-side. The item of simplified listing procedures was shared between both sides among top three issues. The critical factors to create an SME market vary among countries due to different circumstances of SME financing and capital markets. However, these findings suggest a common issue in priority actions between the supply- and demand-sides: i.e., actions to reduce cost burden for SMEs to tap capital markets. The cost issue is often touched upon when establishing an SME market because the market size is anticipated to be typically small in scale.
DEMAND SIDE ANALYSIS
1. Funding Instruments:-
• Term Finance
• Online Seller Finance
• Pay Later
• Merchant Cash Advance
• Supply Chain finance
• Taxi Finance
These are some of the instruments provided for funding SME. Though these are unique but these underline the need for tailor-made financial products for unique business loan requirements.
2. Willingness to Access an SME Capital Market:-
The disscussion is about whether there should be special equity financig and bond issuance venue for SME's, regardless of stock exchange market, is needed for creating the base of high quality SME's that drive sustainable economic growth and pro-poor growth at National level. The demand-side survey assessed their willingness to access an SME capital market. On the whole, the SME respondents in study countries are likely to utilize such a specialized market venue for their future funding if established, with positive answers (combined yes and somewhat yes) of 77%, 83%, 82%, and 54% in the PRC, India (for equity), the Republic of Korea (for equity), and Malaysia (for equity), respectively. In the latter three countries, they relatively preferred to access an equity market rather than a bond market. The major reasons of their preference to access an SME market commonly explained among four countries (i) increased easiness of funding overall, (ii) funding alternative besides banks, and (iii) increased social credibility of the company expected. Meanwhile, they commonly indicated that the major constraints to access an SME market were (i) procedures to issue stocks complicated and (ii) issuing stocks costly such as listing fees and maintenance of their listed stocks, addressing equity finance. This suggests that simple procedures and low cost structure are key for designing a functional SME capital market, given the potential demands on SMEs.
Need for equity financing
Alongwith the challenges faced in accessing credit, SMEs may also lack awareness of equity which can be an alternate source of financing. Even for start-ups that are prevalent, the aid of incubators and angel-investors providing funds is necessary for the formation of formalised venture. High-end ventures require a larger amount of capital which is then served by venture capital funds. The venture also requires debt for working capital apart from the equity capital. Across the countries, the SME sector has thrived majorly on the back of access to financing through various provisions such as Government-backed guarantees, credit insurance for export oriented units and schemes for equity financing. These provisions are supplemented by institutional infrastructure for advocacy, technical research, refinancing platforms and an easy access to services.
BCB Finance Ltd.(BSE) and EMERGE (NSE) are the two equity platforms. Since SMEs are small companies, they are at the initial stage of their growth cycle and are also at the extreme end of the risk curve- very high levels of return are accompanied by very high levels of risk.
Conclusion
Asia's largely bank-centered financial systems require the reduced supply-demand gap in lending as a core policy pillar to improve SME access to finance. Meanwhile, the diversification of financing modalities is another core policy pillar to better serve various financing needs of SMEs and expand their financial accessibility, which includes the development of capital market financing for SMEs as a venue for providing long-term growth capital.
The discussions suggest five core elements to develop an SME capital market:
(i) demand creation focusing on target segments such as social enterprises and women-led SMEs, with designing a low cost structure for SME access to capital
markets;
(ii) establishment of investor base that provides initial risk capital for potential growth-oriented SMEs, with fostering the venture capital industry;
(iii) strengtheningmarket literacy for potential SME issuers and investors;
(iv) investor protection mechanisms backed by proper laws and regulations; and
(v) facilitation measures for access to an SME market backed by a comprehensive policy support framework with well-organized policy coordination among regulators and line Ministries responsible for SME sector development and access to finance.
The demand-side survey identified SMEs' long-term funding needs. They are seeking to access formal finance and diversify long-term funding instruments for stable growth of business while wishing to diminish the dependency on their own capital and informal finance.
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