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Small and Medium Enterprises (SMEs) are the backbone of making India a developed nation. They are a defibrillator for talent, innovation. Creativity and entrepreneurial spirit are essential for a nation like India to develop economically. Statistics show that the contribution of small and medium-sized enterprises to the volume of industrial production is about 45%, the contribution to the total export of the country is 40%, and, very importantly, they employ more than 60 million people, create 1.3 million annually workplaces. Not only that, small and medium-sized enterprises also produce more than 8,000 high-quality and valuable products for domestic and foreign markets. With an annual growth of 8%, 12 million people are expected to join the more than 30 million SMEs in India, taking development to another dimension.
The potential for the development of SME capital markets:
SME finance has a traditional policy of increasing profitability or we can say bankability, Asian policymakers have not considered the development of SME capital markets important for a long time due to the following reasons:-
1. A banking financial system has been created,
2. capital markets are not yet sufficiently developed,
3. fragile systems of internal control of SMEs,
4. lack of requirements for SMEs and investors for financing on the capital market,
5. Price and size matter for the creation and functioning of SME capital markets.
However, this is a preconceived notion and not supported by clear evidence, advanced technology can make it possible to create SME capital markets at a reasonable cost. Due to less coordination between the many policy makers responsible for the development and finance of the SME sector, this may have hindered the development of capital market financing policies for SMEs. This section assesses the actual intentions of the supply side (regulators, policymakers, market makers, securities firms and investors) and the demand side (SMEs) for the development of the SME market based on the results of intensive surveys and explores possible directions for increasing the opportunities for long-term financing of SMEs .
• Political position on SME capital markets
After examining the supply of SMEs in different countries, more than 80% of respondents believed that the development of the SME capital market is a policy priority at the national level. Three aspects of perception were behind their responses: (ii) awareness of an underserved segment, ie SMEs, in the capital market; (ii) increasing the role of capital markets as part of national growth strategies and (iii) limitations of traditional banking financial systems. After examining the capital growth of the country, more than 80% of the respondents believed that SMEs for long-term financing increase the growth of Asia, which constantly drives the global economy, and this accelerates the growth of SMEs by providing capital for the growth of SMEs, which contributes to the sustainability of national economies. Moreover, they have identified that the constraints of bank financing for SMEs require different ways of financing for SMEs, which is the SME capital market.Their answers for SME market developers are likely to be constructed from a long-term strategic perspective.
1. POLITICAL ACTIONS TO BE TAKEN:
There are several options and approaches at the national level to stimulate the SME policy market. From country to country, these approaches are ranked by politicians according to their priorities. However, in general, all the studied countries considered a comprehensive policy of access of SMEs to capital markets necessary; especially policy measures to develop the investor base for the SME market and promote market literacy for SMEs and investors are the most important actions to be taken by the government to create a functional market. According to a study conducted in the PRC, the creation of a financial and non-financial database of SMEs, including the SME Whitepaper, is considered the top policy to support the transparency of SME markets. In India, policy measures to build a professional base supporting SMEs in the capital markets, such as supporting disclosure by consultants and Chartered Accountants (CPAs), are at the top of the list of actions needed for vibrant SME markets.
2. Critical factors for creating an SME market:-
In India, the top three supply-side priorities were (i) rapid fundraising for SMEs, (ii) simplified listing procedures and (iii) disseminating information on SME capital markets, while they were ranked fourth, third and tenth in demand side. The top three on the demand side were (i) simplified disclosure requirements, (ii) low cost of listing and maintenance, and (iii) simplified listing procedures, while they ranked tenth, fifth, and second on the supply side. The clause on the simplified listing procedure was in the top three between the two parties. The critical factors for establishing an SME market vary across countries due to the different circumstances of SME financing and capital markets. However, these findings suggest a common problem in prioritizing supply-side actions: that is, actions to reduce the cost burden for SMEs of accessing capital markets. Cost is often an issue when establishing an SME market because it is assumed that the size of the market will usually be small.
DEMAND SIDE ANALYSIS
1. Financing instruments: –
• Term Finance
• Online seller Finance
• Pay later
• Cash merchant
• Supply chain financing
• Taxi finance
Here are some of the instruments available for financing SMEs. Although they are unique, they highlight the need for specialized financial products for the unique requirements of a business loan.
2. Willingness to access the SME capital market: –
The debate is whether there should be a dedicated equity financing and bond space for SMEs, independent of the stock market, to build a base of high-quality SMEs that deliver sustainable economic and pro-poor growth at the national level. The demand-side survey assessed their willingness to access the SME capital market. Overall, SME respondents in the countries surveyed would be most likely to use such a specialized market for future financing if it were to be established, with positive responses (overall yes and partial yes) of 77%, 83%, 82% and 54 % in PRC, India (for shares), Republic of Korea (for shares) and Malaysia (for shares), respectively. In the last three countries, they preferred to access the stock market rather than the bond market. The main reasons why they prefer to access the SME market are generally explained in the four countries by (i) greater ease of financing in general, (ii) alternatives to financing other than banks, and (iii) an expected increase in social trust in the company. At the same time, they generally indicated that the main constraints for SME market access are (i) complicated procedures for issuing shares and (ii) expensive costs of shares, such as fees for listing and maintaining their listed shares, as well as the issue of share financing . This suggests that simple procedures and a low-cost structure are key to developing a functional SME capital market, given the potential demands of SMEs.
Need for equity financing
Along with the challenges they face in obtaining loans, SMEs may also be unaware of equity capital, which can be an alternative source of financing. Even mainstream startups need the help of incubators and angel investors, who provide funds to form a formal enterprise. Elite businesses require more capital, which is then served by venture capital funds. The business also requires debt for working capital in addition to equity. In all countries, the SME sector has succeeded largely due to access to finance through various provisions such as government guarantees, credit insurance for export-oriented units and equity financing schemes. These provisions are complemented by an institutional infrastructure for advocacy, technical research, refinancing platforms and easy access to services.
BCB Finance Ltd. (BSE) and EMERGE (NSE) are two stock platforms. Because SMEs are small companies, they are at the early stages of their growth cycle and are also at the extreme end of the risk curve – very high levels of return come with very high levels of risk.
Asia’s largely bank-driven financial systems require narrowing the credit gap as a key policy pillar to improve SMEs’ access to finance. Meanwhile, diversification of financing methods is another key policy pillar to better serve the diverse financial needs of SMEs and expand their financial accessibility, which includes the development of capital market financing for SMEs as a venue for long-term capital growth.
In the course of the discussions, five main elements of the development of the SME capital market are proposed:
(i) demand generation with a focus on targeted segments such as social enterprises and women-led SMEs, developing a low-cost framework for SMEs to access capital
(ii) building an investor base that provides seed venture capital to potential growth-oriented SMEs, facilitated by the venture capital industry;
(iii) strengthening market literacy for potential SME issuers and investors;
(iv) investor protection mechanisms supported by appropriate laws and regulations; and
(v) measures to promote market access for SMEs supported by comprehensive policy support with well-organized policy coordination between regulators and line ministries responsible for SME sector development and access to finance.
The demand study identified the long-term financing needs of SMEs. They seek to access formal finance and diversify long-term financing instruments for sustainable business growth, while wanting to reduce reliance on equity and informal finance.
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