Introduction
Small and Medium Enterprises (SMEs) are the backbone in transforming India into a developed nation. They are the defibrillators of talent, of innovation. Creativity and entrepreneurial spirit, which is essential for a nation like India to develop economically. Statistics reveal that the contribution of SMEs to industrial production is around 45%, the contribution to the country’s total exports is 40% and it employs in a very significant way more than 60 million people creating 1.3 million of jobs each year. Not only this, SMEs also generate more than 8000 valuable and quality products for the domestic and foreign market. With a growth rate of 8% every year, 12 million people are expected to join more than 30 million SMEs in India taking development to another dimension.
Potential for the development of SME capital markets:
SME finance has a traditional policy of increasing profitability or, we can say, bankability, Asian policy makers had not considered the development of SME capital markets significant for a long time due to the following reasons:
1. A financial system centered on the bank is established,
2. capital markets still underdeveloped,
3. weak internal control systems of SMEs,
4. no demand on SMEs and investors for capital market financing,
5. Cost and size issues to establish and operate SME capital markets.
However, this is the opinion formed in advance, and not proven by clear evidence, advanced technology can make it possible to create capital markets for SMEs at reasonable costs. Due to less coordination among the multiple policy makers responsible for the development and financing of the SME sector, it may have impeded the formulation of capital market financing policies for SMEs. This section assesses the actual intention of the supply side (regulators, policy makers, market organizations, securities firms and investors) and the demand side (SMEs) to develop an SME market, based on the findings of intensive surveys, and explores possible directions on increasing long-term financing opportunities for SMEs.
SUPPLY SIDE ANALYSIS:-
• Policy stance on SME capital markets
After studying the supply side of SMEs in different countries, more than 80% of the respondents have concluded that developing a capital market for SMEs is a priority policy at the national level. There were three dimensions of perception behind their responses: (ii) awareness of the underserved segment, i.e. SMEs, in the capital market space; (ii) increasing roles of capital markets as part of investment strategies; national growth, and (iii) limitations of traditional financial systems focused on banks After studying the growth of the country’s capital, more than 80% of those surveyed have considered that SMEs for long-term financing increase the growth of Asia, which is continuously boosting the global economy and this accelerates the growth of SMEs by providing growth capital for SMEs, thus contributing to the resilience of national economies that the constraints of bank financing for SMEs require various modalities of strategic financing for them, which is an SME capital market.
1. POLICY ACTIONS TO BE TAKEN:
To stimulate the SME policy market there are various options and approaches at the national level. Country by country, these approaches are ranked by policymakers according to their priorities. In general, however, all study countries considered that a comprehensive policy framework was needed for SME access to capital markets; especially policy measures to develop the investor base for an SME market and promote market literacy for SMEs and investors are the most important actions to be taken by the government to achieve a functional market. According to the study in the PRC, the establishment of a financial and non-financial database of SMEs, including the SME Whitepaper, ranks as the highest policy supporting the area of SME markets with transparency. In India, policy measures to build the base of professionals supporting SMEs in the capital markets, for example support for outreach by consultants and certified public accountants (CPAs), ranked first as actions necessary for active SME markets.
2. Critical factors to create an SME market:-
In India, the top three supply-side priorities were (i) rapid fundraising for SMEs, (ii) simplified listing procedures, and (iii) dissemination of SME capital markets information, while these they ranked fourth, third, and tenth on the list. 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 these ranked 10th, 5th, and 2nd on the demand side. supply side. The issue of simplified listing procedures was shared between both parties among the three main issues. The critical factors for creating an SME market vary between countries due to the different circumstances of SME financing and capital markets. However, these findings suggest a common problem in priority actions between the supply and demand sides: that is, actions to reduce the cost burden for SMEs to access capital markets. The issue of cost is often addressed when establishing an SME market because the size of the market is typically expected to be small in scale.
REQUEST LATERAL ANALYSIS
1. Financing instruments:-
• Term Financing
• Finances of online sellers
• Pay later
• Merchant cash advance
• Supply Chain Financing
• Financing of taxis
These are some of the instruments provided for the financing of SMEs. Although these are unique, they underscore the need for financial products tailored to the unique requirements of business loans.
2. Willingness to access a SME capital market:-
The discussion is about whether there should be a special place of bond issuance and equity financing for SMEs, regardless of the stock market, to create the foundation of high-quality SMEs that drive sustainable economic growth and pro-poor growth through Nacional level. The demand side survey assessed their willingness to access a capital market for SMEs. In general, surveyed SMEs in the study countries are likely to use such a niche market for their future funding if established, with positive responses (mixing yes and some yes) of 77%, 83%, 82% and 54% in the People’s Republic of China, India (by equity), the Republic of Korea (by equity), and Malaysia (by equity), respectively. In the last three countries, they relatively preferred to access a stock market rather than a bond market. The main reasons for their preference for accessing a SME market commonly explained among four countries (i) greater ease of financing in general, (ii) alternative financing besides banks, and (iii) greater expected social credibility of the company . Meanwhile, they commonly indicated that the main constraints to accessing an SME market were (i) complicated procedures for issuing shares and (ii) costly share issuance, such as listing fees and maintaining their listed shares, addressing equity financing. This suggests that simple procedures and a low cost structure are key to designing a functional SME capital market, given the potential demands of SMEs.
Need for equity financing
Along with the challenges they face in accessing credit, SMEs may also lack awareness of capital, which can be an alternative source of financing. Even for the prevailing start-ups, the help of incubators and angel investors who provide funds is necessary for the formation of formalized companies. High-end companies require a larger amount of capital which is then taken care of by venture capital funds. The company also requires debt for working capital in addition to equity capital. In all countries, the SME sector has prospered mainly through access to finance through various arrangements, such as government-backed guarantees, credit insurance for export-oriented units, and equity financing schemes. These provisions are complemented by institutional infrastructure for advocacy, technical research, refinancing platforms, and easy access to services.
BCB Finance Ltd.(BSE) and EMERGE (NSE) are the two equity platforms. Since SMEs are small businesses, they are at the early stage of their growth cycle and also at the tail end of the risk curve: very high levels of return are accompanied by very high levels of risk.
Conclusion
Asia’s largely bank-centric financial systems require narrowing the gap between supply and demand in lending as a central pillar of policy to improve SME access to finance. Meanwhile, the diversification of financing modalities is another fundamental pillar of the policy to better serve the diverse financing needs of SMEs and broaden their financial accessibility, which includes the development of capital market financing for SMEs as a means of providing long-term growth capital.
The discussions suggest five core elements for developing an SME capital market:
(i) demand creation focused on target segments such as social enterprises and women-led SMEs, with the design of a low-cost structure for SME access to capital
markets;
(ii) establishing an investor base that provides seed venture capital for potentially growth-oriented SMEs, fostering the venture capital industry;
(iii) strengthen market education for potential issuers and investors of SMEs;
(iv) investor protection mechanisms backed by adequate laws and regulations; and
(v) facilitation measures for SME market access supported by a comprehensive policy support framework with well-organized policy coordination between regulators and line ministries responsible for SME sector development and access to the foundership.
The demand survey identified the long-term financing needs of SMEs. They seek to access formal financing and diversify long-term financing instruments for stable growth of companies, while they want to reduce dependence on their own capital and informal financing.