Role Banks Can Play to Support Growth of SMEs
The Indian economy is reviving after going through a sustained period of challenges. The new government has set the positive momentum and we see some of the challenges easing.
Going forward, the decisive mandate of the government should be to create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as gradual economic recovery during the course of the year. Ensuring a sustained and healthy pace of growth will, however, require much more. Measures to provide a strong fillip to a sagging economy and improving business sentiment will top Finance Minister Arun Jaitley’s agenda in the months to come. To improve and fulfil India’s long-term growth potential, it is imperative for the government to exercise fiscal discipline, lower inflation, improve bank asset quality and revive manufacturing.
As the economy recovers, investment demand and the need for credit will pick up. It is recognised that the existing banking structure in India is elaborate and has been serving the credit and banking services’ needs of the economy. However, the flow of credit to the small and medium enterprise (SME) sector in India hasn’t kept pace with the growth of credit to non-SME sector. By its sheer size, the SME market presents a huge opportunity for both public and private sector banks. For a segment that contributes nearly 12 percent of India’s GDP, 45 percent of its manufactured production, and 40% of its exports, it remains largely unorganized due to lack of access to financing by banks. Moreover, SMEs are the primary source of employment opportunities for new entrants to the labour force. This is certainly true of India, but is probably true in most countries of the world, including the developed countries.
SMEs face a wide variety of funding related challenges. From onerous documentation for a loan to lack of “reputation”
SMEs offer growth opportunity but on the flip side there are associated risks as well. The key to financing SMEs has been understanding or “Know Your Customer” and to provide solutions which are aligned to the growth plan of SMEs. Beside the standard asset and liability products, DBS offers several customized trade-related offerings aimed at importers/exporters or dealer finance program that caters to dealer/distributor of big corporates for bulk purchase. Apart from plain vanilla products like letter of credit, inward bill collection, and buyers’ credit, industry specific micro-products are another way of providing that “extra value add on” to an SME.
For DBS, financing SMEs has been an exciting opportunity, and an experience that has been quite satisfactory till date. With more SMEs coming under the umbrella of organized finance, this segment is expected to provide significant opportunities to the banking sector and for DBS in the years ahead.