MSMEs need to tap the capital markets

Commercial banks cannot provide all the funds needed

The Reserve Bank of India (RBI) has urged micro, small and medium enterprises (MSMEs) to tap the capital markets to raise funds, since they can be an alternative to traditional banking finance. The banking regulator has also said that, as on date, the entry norms are high for MSMEs to enter the capital market, but the SME trading platform, norms for which have been notified by the capital market regulator, would address the issue.

According to K R Ananda, regional director of the RBI in Chennai, MSMEs were primarily dependent on banks for finance. “There is no dearth of bank credit for MSMEs. However, there is a gap between the perceptions of the lenders and the borrowers (MSMEs). While lenders feel that credit for the sector is expanding, borrowers feel that banks are not doing enough for MSMEs.”

Ananda notes that credit flow to MSMEs had more than doubled from Rs 1.27 lakh crore in 2006-07 to Rs 2.57 lakh crore in 2008-09. In September 2009, the total outstanding credit to the sector stood at Rs 323,565 crore, increasing to Rs 369,866 crore in February 2010.

“MSMEs should look at alternatives to bank finance, and especially the capital markets. Currently, the entry norms are high.” However, the new SME listing norms have been notified, and should address this issue.

“FIIs are looking to invest in non-blue chip firms. MSME shares will get better value when their governance standards are as good as large companies,” said Ananda. However, problems such as informal structures, opacity, lack of credit history and weak financial strength will hinder the units in availing of finance through the stock exchange, he added.

Exchanges are also known for their volatility. Analysts feel that SMEs should overcome these difficulties by getting themselves credit-rated by credit rating agencies, maintaining a good credit history and carefully planning IPOs. Also, when the shares of MSMEs are listed on a stock exchange, the units will come under another regulator — Sebi — and they should be prepared for this, according to Ananda

Mahendra Ramdas, convenor of CII-Tamil Nadu MSME Panel and Managing Director of Mahendra Pumps Ltd, notes that according to a Planning Commission estimate, in the next five years the MSME/ unorganised sector’s total working capital and loan requirement would be Rs 2.96 lakh crore.

“Given the small percentage of financing from the formal banking system, this huge credit requirement cannot be met by the banking system alone.” MSMEs should now look at all possible methods of funding, make forays into all areas of business, as there are no alternatives if they don’t open up, he added.

K Srinivas, the promoter of Saffron Capital Advisors Private Ltd, adds, “if you want to make money, you have to take risks.” According to him those who have scalability in business models, create wealth for stakeholders, prepared for responsibility and accountability, performance, compliance and trusteeship can go in for an IPO.

The advantages of an IPO, according to Srinivas, are that it opens up a host of possibilities and opportunities — business expansion, future financing (debt and equity), shareholder wealth, enhanced market value, currency for future acquisitions, employee recruitment and retention, visibility and acceptability, liquidity for stockholders, prestige and business continuity.