small and medium enterprises financial problems

8/14/2019 Small and Medium Enterprises Financial Problems

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SMALL AND MEDIUM ENTERPRISES

FINANCIAL PROBLEMS

Small and Medium Enterprises:

SME (small-to-medium enterprise) is a convenient term for segmenting

businesses and other organizations that are somewhere between the "small

office-home office" ( SOHO ) size and the larger enterprise . The European Union

has defined an SME as a legally independent company with no more than 500

employees.

Hurdles In Small and Medium Enterprises:

The first major hurdle is that the credit availability is low for this sector. It is

estimated that the unorganised sector comprises 95% of the total industrial units,

employing more than 65 million people. Yet only 8% of the total bank credit finds

its way into this sector. Though credit to SMEs fall under the category of priority

sector lending, but with the expansion of the priority sector lending to

accommodate fast growing areas such as home loans, education loan, the

percentage share of credit to SMEs is falling. According to the Third All-India SSI

Census (200102), only 14.2% of the registered and 3.09% of the unregistered

MSEs availed finance from bank.

Arranging collateral security, documentation etc makes clearance of the

loan all the more difficult and as a result the business of the local money lenders


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continues to flourish. Inevitably, many of these small units fall into the vicious

cycle of debt and poverty and eventually many of them perish. Banks therefore

should be encouraged to ensure that all loans upto Rs 5 lakh to MSEs are given

free of collateral and at a low interest rate.

Formal sector has the option to raise huge sum from the money market,

while the unorganised sector doesnt have any such opportunity. In the 11th Five

Year Plan, Planning Commission estimates that in the next five years the total

working capital and loan requirement by the SMEs/unorganised sector would be

2,96,000 crore. Given the small percentage of financing by the formal banking

system, this huge credit requirement cannot be met by the banking system alone.

Need of the hour is venture capitalist approach to be encouraged in the

unorganised sector as it is practiced in the developed countries. Secondly, if

microfinance agencies can be properly regulated and monitored they can serve as

a good avenue of investment for people who are interested in high risk- high

profit investment. At present most, of the micro finance agencies/projects active

in India are either operating with a welfare motive or are too small to make any

impact.

Second major hurdle is the lack of technological innovation and the

knowledge of market demands. This is true particularly in the textiles sector. Most

of the household units still work on obsolete technology because of which not

only the cost of production remains high but the product also fails to meet the

demand of the market in terms of quality. Because of liberalization and opening

up of the economy, the MSEs are now facing stiff competition from imports and


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therefore need technological upgradation to manufacture better quality products

at cheaper rates.

Another major hurdle is the lack of market accessibility for the poor

artisans, weavers, household unit owners, etc. Most MSEs do not have money to

invest in market research and are unable to carry out design and technical

improvements to keep up with market demands. It is because of this lack of

information that the middlemen are able to take advantage of and exploit the

poor artisans, weavers by paying a paltry sum for their products and selling those

products in the international market at exorbitant prices.

Policy Recommendations to Removed the hardles SMEs.

Promoting business innovation and start-ups and promoting creativebusiness activity among SMEs.

Strengthening the business fundamentals of SMEs by facilitating theacquisition of business resources by SMEs and improving the fairness

of transactions involving SMEs, etc.

Smoothing adaptation to changes in the economic or socialenvironments by promoting the business stability and facilitating the

business conversion of SMEs in response to such changes, etc.

Facilitating the financing of SMEs and enhancing the equity capital ofSMEs.


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Importance of Small and Medium Enterprises in Modern Age:

One of the significant characteristics of a flourishing and growing economy

is a booming and blooming small and medium enterprises (SMEs) sector. Small

and medium enterprises play an important role in the development of a country.

SMEs contribute to economic development in various ways: by creating

employment for rural and urban growing labor force, providing desirable

sustainability and innovation in the economy as a whole .In addition to that, a

large number of people rely on the small and medium enterprises directly or

indirectly.

small and medium enterprises financial problems

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