This is a document that covers the MSME financing in India. It explores the financing sources and problems in India. It talks about working capital financing via factoring and reverse factoring, cluster financing, Germany's cluster financing, listing looking at alternativa model of listing of ventures, and Thailand's SME bond markets. It also covers the need for policy redefinition of MSMEs and policy support required.

1. MSME FINANCING
CHALLENGE
Team Strategem
Devansh Doshi
Nikhil Indla
IIFT Delhi

2. Meet a Typical Indian Entrepreneur

3. Who is he?
• Mr Aggarwal is a man in his late 20’s living in Meerut,
Uttar Pradesh
• He is a twelfth pass student
• He works in a sports goods manufacturing company for
the page 7-8 years
• In this time he has acquired detailed knowledge of the
business and made contacts with buyers and suppliers
• He now wishes to set up his own business in the sports
goods manufacturing cluster of Meerut
• He needs INR 75 lakh to get his business off the ground
• He is a first generation entrepreneur from a poor family
with few assets to their name totalling to INR 10 lakhs

4. Financing the Start Up Stage

5. Financing Options
Venture Capital
Funds
• SIDBI Venture
Capital
• ICICI Venture
Capital
Bank Loans
• Nationalized
Banks
• Private Sector
Banks
Development
Finance
Institutions
•SIDBI
•Uttar Pradesh
Financial
Corporation
NBFC
• Shriram Finance
• Mahindra and
Mahindra
Financial
Services
Informal Source
•Friends
•Relatives

6. Problems in Financing Options
Venture Capital
Funds
• Ecosystem is
underdeveloped
• Focus is on
services sector
and geographically
clustered
Bank Loans
• Extensive
documentation
• Banks generally
risk averse and
conservative
• No prior record
Development
Finance
Institutions
• Bureaucratic
functioning and
red tape
• Scale of
operations not big
enough
NBFC
• Unwilling to lend
because of the
absence of
adequate
information
• No creditor
protection under
SARFAESI Act
Informal Source
• Lend on
unfavourable
terms
• Account for nearly
90% of capital
raised

7. Government Initiatives
• Priority sector lending targets
• Credit guarantee Fund Trust for Micro and Small enterprises
• SIDBI
New Policy Initiative
• Norms on tax incentives for VC need to be relaxed
The issue here is to make all these available to Mr.Aggarwal

8. SBI SME Collateral Free Loan
• Eligibility
Micro and Small Enterprises engaged in Manufacturing and Service sector. For Manufacturing sector, original investment in
plant & machinery should be upto Rs 5 crore and for Service sector, original investment in equipment upto Rs 2 crore.
• Purpose
• Working capital needs (Fund Based+ Non Fund Based).
• Term loan for construction of Building, office, acquisition of machines / equipments including expansion and modernization of
the unit.
• Facility
• Cash Credit
• Term Loan
• Letter of Credit & Bank Guarantee
• Quantum of Finance
Total Exposure to the unit : Upto Rs. 1.00 crore (All facilities WC, TL & NFB facilities)
• Interest Rate
Attractive rates of interest*
• Service Charges
• concession in processing and service charges.
• Other charges as applicable.
• Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) Guarantee
• Borrowers eligible under the scheme will be covered under CGTMSEguarantee scheme.
• Security
• Primary Security:- Assets created out of bank finance
• Existing assets of the borrower as per definition of CGTMSE
• No collateral
• No third party guarantee
• Repayment Period
• Working Capital (WC): One year, repayable on demand. Working capital limits will be renewed every two year. However,
performance of the unit and conduct of account will be reviewed annually for continuation of limits.
• Term Loan: Maximum Seven Years including moratorium period.

9. Existing Banking Products
Working
Capital
Capital
Machinery
Finance
Business
Expansion
Finance
Short Term
Loans
Festival
Working
Capital Loans

10. MSME Development Finance Institutions
A new type of NBFCs catering specifically to the MSME
needs
Provide access to priority sector lending
Extend creditor protection under SARFAESI Act

11. Working Capital Financing

12. Options and Problems
NSIC and SIDBI provides finance to procure raw materials and marketing
finance for the short time
• Absence of scale to meet financing needs. SIDBI has a loan portfolio of Rs
53,875 while the gap is estimated at Rs 2.15 lakh crore
Loan products by commercial banks
• Lack of flexibility in repayment schedules that are needed to deal with volatility in
cash flows
Bill discounting by commercial banks
• High cost of discounting
Factoring by NBFCs
• Factoring firms are unpopular because it leads to buyers asking for discounts
NBFCs offer working capital loans
• High transaction costs

13. Working Capital Financing: Mexican
Development Bank Nafinsa’s Way

14. Factoring Exchanges
A platform with the CCIL and MSME stock market needs to be
developed
This electronic platform is an factoring exchange
Receivable bills can be auctioned on an electronic platform
Bank discounting in the range of 10% -12%
He typically have to wait for 90 to 120 days for the payment
Mr. Aggarwal sell products to big companies in bulk

15. Reverse Factoring
Non-payment and legal issues in
recollection can pose problem in factoring
Factors purchase the accounts
receivables of only the larger, most
creditworthy buyers
Buyers need to be registered with the
SMERA that will access their worth
Working with only the registered buyers
reduces both the cost of assessing
accounts receivable risk and the risk of
non-payment itself

16. Redefining MSMEs

17. The New Definition
Type
Micro Small Medium
Employees
Capital (in
Rupees)
Employees
Capital (in
Rupees)
Employees
Capital (in
Rupees)
Production < 25 <50 lakhs 25-200
50 lakhs to
5 crores
201-350
5 crores to
10 crores
Service <20 <40 lakhs 21-150
40 lakhs to
4 crores
151-300
4 crores to 8
crores
Trade <20 < 40 lakhs 21-40
40 lakhs to
3 crores
41-100
3 crores to 7
crores
Reflects the larger picture of capital and one of the prime reasons
for a vibrant MSME sector i.e. employement

18. Policy Support for Growth

19. Growth from Small to Medium (Now)

20. Growth from Small to Medium (Now)

21. Policy Framework for MSMEs in India
Scheme Micro Small Medium
Till 1 year after
becoming Large
Assistance aimed at Improving
Processes, Designs, and
Technology
Yes Yes Yes Yes
Annual Government
Procurement Value
20%
Extended with
a cap
None
Capital Subsidy for
Technological Upgradation
15% 15% 10% 5%
Credit Guarantee for Collateral
Free Loan
1 Crore 1 Crore 1 Crore 50 Lakhs
Training and Technology: Grants
for Clusters
75% 75% 50% 20%
Tangible Assets: Grants for
Clusters
80% 80% 50% 20%
Reimbursement of ISO
certification fees
75%, no cap 75%, no cap 75%, no cap 75%, no cap
SIDBI Support for Loans Yes Yes No No
Existing Addition Left

22. Expansion Capital

23. Options and Issues
Bank Loans
• Reluctant to lend due to information asymmetry
• Require him to maintain accurate accounts which he may not do
Equity Financing
• Lack of awareness and financial literacy
• High transaction costs
• Limited liquidity in SME exchanges
Debt Financing via Bond Markets
• High costs involved in getting bonds rated
• Limited financial literacy

24. Government Initiatives
• SMERA
• ISARC
• Relaxation of norms: SME’s exempt from eligibility norms
applicable for IPO’s and FPO’s under SEBI regulations
• Encourage setting up SME exchanges . For instance :
BSE and NSE have set up SME exchanges
• Launched CLCSS (Credit Linked Capital Subsidy
Scheme) in which 15% capital subsidy is provided for
technology upgradation
• Monitor implementation of MSME policies through SME
Monitoring Cell

25. Bank Loan Products for Clusters

26. Germany’s Cluster Financing Approach
• Focus on funding the existing
clusters rather than developing
infrastructure for a new cluster
• India has 388 clusters
Funding of
Existing
Clusters
• Current focus on financing the
entire institution
• Need to analyse only the viability of
the project
Towards
Project Based
Financing
• Need for expansion capital
• Lower risk than funding a start up
Financing
Addition of
New Services

27. Equity Financing

28. The Advantages of Listing for MSMEs
• Access to capital and future financing opportunities
Favourable terms of debt/ mezzanine finance
• Liquidity /Exit for investors.
Exit and Liquidity for VC/ PE/ Risk Investors.
• Facilitate Acquisitions
Shares are more efficient & cost effective currency
substitute to acquire target cos.
• Employee Stock Options
ESOPs become powerful tool to attract & retain talent.
• Visibility/ Recognition
Visibility on getting listed will improve customer client
credibility.

29. MSME Wants
• A well functioning secondary market designed especially
for MSMEs
• Easier for a company to raise funds
• Do this without forcing companies to face a complicated
set of exchange regulations every day
• Management are allowed to focus on running the
company instead of dealing with the demands from the
financial market

30. MSME Listing Woes
• Due Diligence Assurance Criterion: Companies that list on the
platform would require to have received funding or investment
from at least one from a list of eligible entities
• Some Criterions are less stiff than others
• Reducing access to equity capital
• IPO grading is optional
• Lesser information to investors
• Listing is still a little complicated, and expensive.
• Companies would be listed on a platform which is open only to
institutional investors and have a minimum trading lot of Rs 10
lakh
• Need to have participation of retail investors as well

31. Alternativa in France and Sweden
Crowdsourcing + Croudfunding + Crowdtrading

32. How Alternativa Works
The company choses the negotiation frequency of its
securities (from monthly to annually)
The rating occurs once a month for a week and the
platform sets a balanced price
A slow rating: two days are devoted to price
discovery (securities or valuation by independent
experts)
Over the next three days, purchase orders and sales
are recorded based on the fixed price
Alternativa then sets up a balanced price and
delivers the securities.

33. Features
• Company chooses how frequently it trades its securities
• Low formal demand for disclosure
• Company ratings given on the basis of the disclosure of
information
• Low listing fees and provision of listing services
• Investors can choose to trade directly on the market or use
traditional brokers
• Venture capitalists to liquefy their investments by facilitating exit
strategies ensuring liquidity of their assets

34. MSME Bond Market

35. Thailand’s SME Bond Market
SME
Bond
Market
Thai Bond
Market
Association
TRIS
Rating Co.
Ltd
Fitch Ratings
(Thailand)
Co., Ltd
Bond
Electronic
Exchange
Thai Listed
Companies
Association
Federation
of Thai
Industries
Thai
Chamber of
Commerce

36. India’s MSME Bond Market
SME
Bond
Market
FIMMDA
SEBI
ICRA,
SMERA, and
CRISIL
NSE Bond
Trading
Listed
Companies
FICCI
ASSOCHAM

37. Financing Troubled Ventures

38. Debt Restructuring for MSMEs
Available
• Debt Restructuring
• Advanced Debt Restructuring
Issues:
• Lack of awareness and lack of expertise in dealing with banks
Current Scenario
• Banks are free to have their own MSME debt restructuring
policy
• Bank follow a case to case strategy than an across the board
strategy

39. New Policy Initiatives
Creation of an independent external intermediary to
help MSMEs negotiate and restructure loans with
banks
Adoption of an across the board strategy than a case
to case strategy as it was done in Indonesia during
2008 financial crisis
• There can be bureaucratic and corruption issues
A safer would be using across the board strategy in
only dire situations such as exchange rate fluctuation

40. The New Model
• Banks
• Bank Loan Products
• Cluster Financing
• Venture Capital
• Uniform tax incentives
• Equity Financing: On the lines of Alternativa
• Working Capital Financing: Factoring and Reverse
Factoring Exchanges

41. The New Model
• MSME Bond Market
• Debt Restructuring
• Independent External Intermediary
• Across the Board Strategy in bad situations
• Government Policy
• MSME Development Finance Institution
• Redefining MSMEs
• Retaining Growth Incentives
• Easy Access to Government Schemes

42. Thank You!

43. Appendix A
Due diligence assurance criteria in the form that the Company should have at
least one Alternative Investment Fund or AIF in short (VCF or other category of
investors / lenders) should have invested at least Rs. 50 lakh in equity shares
of the company; or at least one angel investor who is a member of an
association/group of angel investors who fulfill the criteria laid down by the
recognised stock exchange, has invested at least Rs. 50 lakh rupees in the
equity shares of the company through such association/group; or the company
has received working capital or project finance from a scheduled bank and a
period of 3 years has elapsed from the date of such financing and the funds so
received have been fully utilized; or a registered merchant banker has
exercised due diligence and has invested not less than Rs. 50 lakh rupees in
equity shares of the company which shall be locked in for a period of 3 years
from the date of listing; or a QIB has invested not less than Rs. 50 lakh in the
equity shares of the company, which shall be locked in for a period of 3 years
from the date of listing; or a specialized international multilateral agency or
Company defined under section 4A of the Companies Act, 1956 has invested
in the equity capital of the company;