Small and medium enterprises (SMEs) are the backbone of India’s transformation into a developed country. They are the heartbeat of talent and innovation. India needs creativity and an entrepreneurial spirit to grow economically. According to statistics, SMEs contribute about 45% to India’s industrial output and 40% to its total exports. They also employ over 60 million people each year, creating 1.3 million jobs. SMEs produce over 8000 valuable and quality products for both the Indian and overseas markets. This is in addition to the fact that 12 million people will join the over 30 million SMEs in India, taking India’s development to a new dimension.
Potential for developing SME Capital Markets:
SME finance is a traditional strategy of increasing profitability or bankability. Asian policymakers have not considered the development of SME Capital Markets significant for an extended period due to the following:
1. Bank-centered financial system established,
2. Capital markets still underdeveloped
3. The fragility of the internal control systems in SMEs
4. No capital market financing requirements for investors and SMEs.
5. Cost and size are essential factors in establishing and operating an SME capital market.
This is a pre-handled opinion and not supported by evidence. However, advanced technology could make it possible to create SME capital markets at reasonable prices. The lack of coordination between multiple policymakers responsible for SME development and finance could have impeded the policy formulation for capital market financing for SMEs. Based on extensive surveys, this section examines the true intentions of the supply-side (regulators and policymakers, market organizers, securities firms, and investors) to develop an SME marketplace. It also explores potential directions for increasing long-term financing options for SMEs.
SUPPLY SIDE AnalySIS:
* Policy Stance on SME Capital Markets
More than 80% of respondents have concluded that the development of an SME capital marketplace is a national policy priority. More than 80% of respondents have completed that SMEs provide long-term finance to Asia, which in turn drives the global economy. This accelerates the growth of SMEs and contributes to the resilience of national economies. They also identified the need for alternative financing options for SMEs due to limitations in bank financing. This is called an SME capital market. They are likely to look at the long-term strategic perspective when developing SME markets.
1. POLICY ACTIONS THAT MUST BE TAKEN
There are many options available to stimulate the SME market policy market at a national level. These approaches vary from country to country and are ranked according to their priority. However, the majority of study countries agreed that a comprehensive policy framework is needed to allow SME access to capital markets. The government should take the necessary actions to create an investor base and promote market literacy among SMEs and investors to make a functioning market possible. According to the PRC study, the establishment of financial and other databases of SME’s including Whitepaper SME was ranked as the most crucial policy that supports transparency in SME markets. India policy measures to increase the number of professionals who support SMEs in the capital market, such as disclosure support by certified public accountants (CPAs) and consultants. These are important actions for active SME markets.
2. Key Factors for Creating an SME Market
The top three priorities for India’s supply-side were (i) raising funds quickly for SMEs, (ii) simplified listing procedures and (iii) information dissemination to SME capital markets. These ranked fourth, third, and tenth respectively on the demand-side. Simplified disclosure requirements, low listing and maintenance costs, and (iii) simplified listing procedures were the top three priorities on the demand side. These were ranked tenth through fifth on the supply side. Simplified listing procedures were shared by both sides of the top three issues. Due to the different conditions of SME financing, capital markets, and other factors that are critical to creating an SME market, the key elements can vary between countries. These findings show that there is a common problem in prioritizing actions between the demand- and supply sides—specifically, efforts to lower the cost for SMEs to access capital markets. Because the market is expected to be small in size, it is essential to consider the cost issue when setting up an SME market.
1. Funding Instruments:-
* Term Finance
* Online Seller Finance
* Pay Later
* Merchant Cash Advance
* Supply Chain Finance
* Taxi Finance
These are just a few of the tools available to fund SMEs. These are not the only tools available to support SMEs, but they highlight the need for custom-made financial products to meet unique loan requirements.
2. Willingness to Access an SME Capital Market
Dissensions are about whether special equity financing and bond issuance venues should be available for SMEs. This is necessary for the creation of a base of quality SME’s that can drive sustainable economic growth as well as pro-poor growth at National levels. According to the demand-side survey, respondents indicated their willingness and ability to access SME capital markets. The majority of SME respondents from the study countries indicated that they would use a specialized market venue to fund their future financing if it is established. This was reflected in positive answers of 77%, 83%, and 82% in the PRC (for equity), India (for equity), and Malaysian (for equity), respectively. They preferred accessing an equity market over a bond market in the three latter countries. They cited four main reasons for their preference to access an SME marketplace: (i) greater ease of funding overall, (ii) alternative funding options to banks, and (iii). they increased the social credibility of the company. They also indicated that they found the main obstacles to accessing an SME market to be (i) complicated procedures for issuing stock and (ii) high costs of issuing stock such as listing fees, maintenance of listed stocks, and equity finance. Given the demands placed on SMEs, this suggests that simple procedures and a low-cost structure are crucial to creating a functional SME capital market.
Equity financing is required.
SMEs may not be aware of equity, which could provide an alternative source of funding. This is in addition to the difficulties associated with accessing credit. For formalized venture formation, even for established start-ups, it is essential to have angel investors or incubators provide funds. Venture capital funds are used to finance high-end ventures. Apart from equity capital, the experience will also require debt to provide working capital. Access to financing via various provisions, such as Government-backed Guarantees, credit insurance for export-oriented units, and equity financing schemes, has helped the SME sector thrive in all countries. These provisions are complemented by an institutional infrastructure that allows for advocacy, technical research, and refinancing platforms, as well as easy access to services.
EMERGE (NSE) and BCB Finance Ltd. (BSE) are two of the equity platforms. SMEs are small businesses that are in the early stages of their growth. They also have the highest risk of losing capital.
Asia’s heavily bank-centered financial system requires a reduced supply-demand gap for lending to increase SME access to financing. Diversification of financing modalities, which is a core policy pillar, is another way to better serve SMEs’ financing needs and improve their financial accessibility. This includes capital market financing for SMEs as a means of providing long-term growth capital.