The Financial Express had its round table conference in Hyderabad on small and medium enterprises (SMEs) which brought together industry leaders and bankers to a single platform. The objective was to exchange ideas on key issues confronting the industry and find ways to address them. The panelists included TS Krishnaswamy, general manager of State Bank of India, Shekhar Agarwal, president, Federation of Andhra Pradesh Chambers of Commerce and Industry (FAPCCI), Ramesh Sundaresan, founder and MD of Mars Telecom, K Bhasker Reddy, MD, Creamline Dairy Products, Chandrakant Salunkhe, president of the SME Chamber of India and Arun N, DGM, SME Business Unit, SBI. The panel discussion was moderated by Darlington Jose Hector, resident editor, Bangalore.
Darlington Jose Hector: Welcome to The Financial Express Round Table conference, on the subject of Indian growth story and the SMEs. As we all know, the SME sector in India accounts for roughly about 45% of industrial production and about 40% of exports. It also generates an employment of around 30 million. So, we can gauge the size and the importance of the sector. But the sector today is facing a variety of challenges. And if not tackled properly, these issues can erode the strength of the sector. It is in this back drop that we have in this discussion today. And some of these issues have been long standing. Lack of credit, lack of skilled man power, technology and infrastructure issues, and besides, the omnipresent power problems. With India trying to add momentum to its growth story, we cannot afford to have a sluggish SME sector. Through this Round Table, we will try to address these challenges and at least try to find some solutions that plague this sector. With that, let?s begin this discussion. I would like to invite Shekhar Agarwal to start the proceedings.
Shekhar, you have been associated with the industry for such a long time and we all know some of the issues that plague the industry. Why is that the SME sector, which is extremely important for the growth of the country has been neglected despite several reminders? What according to you are some of the critical issues that the government should address immediately to quell some of these challenges?
Shekhar Agarwal: Thank you. Right from the day you start as a new entrepreneur, a first generation entrepreneur, the scene is challenging. Until, otherwise the person has got good collateral security. Next thing that comes in is infrastructure. China is investing 9% in infrastructure development year after year, whereas India is investing only 4%. And you also mentioned power. Like we say what blood is to the body, power is for the industry. So that is again a very big challenge for the industry. Double digit inflation is another worry. One has to have the global perspective because the world has become a global village.
Hector: Why do you think the government has stepped in, despite several reminders and warning signals? What is the government waiting for?
Shekhar Agarwal: We have two major issues. Land acquisition and the environment. So in the state of Andhra Pradesh, we have suggested to the government to create 40,000 industrial plots for SMEs all over Andhra Pradesh. Also six chemical zones with common effluent pants must be there. And they must also be on the model of plug and play with all the clearances provided and also the connectivity. See nowadays, the industry is not looking for any incentives, but certainly they are looking for infrastructure.
Hector: I will turn to Krishnaswamy here. As as a lender to SMEs, you have come across various kinds of SMEs , entrepreneurs with various demands, some of their expectations are probably too high sometimes, especially, or too low. What would be your advice to them? Also, capital is one the key issues for the SMEs. So what according to you, are some of the aspects that the entrepreneur should keep in mind when trying to raise capital?
TS Krishnaswamy: The government of India and the RBI has directed that banks should double the credit portfolio in five years’ time. But if you actually see, most of the banks and as a cumulative figure also, it is more than doubled even in four years’ time, since the direction was given. Credit to the SME sector has been good. But still a lot of entrepreneurs keep complaining or keep saying that they are not getting credit flow. The various reasons are, number one, they do not know how to approach the banks, they do not know how to prepare themselves and go and get the approvals from the banks. So chambers of Commerce, chartered accountants, all those facilitating people have been talking to them very often on how to guide the entrepreneurs to approach the bank. In fact in the State Bank of India, we have a technical consultancy cell. Officers even help the entrepreneurs to help prepare the project report and present it. So we have been guiding them. Second most important thing is the capital. Debt equity is of course available from banks, but equity capital is something which is very much absent in. Unlike Western and other established markets, where credit history of individuals are built over a period of time, here there is hardly any credit history available for any individual. So some fresh graduates passing out of an engineering college or somebody who has worked with an industry and wants to start an industry of his own, wants to take up entrepreneurship, if he approaches us there is hardly any credit history available. So raising equity capital becomes a problem for him, either he has to fund it himself, there are no venture capital and other things. Of course, now SIDBI has established a venture capital. Even State Bank of India in a small way, they have launched a product whereby upto R10 lakh capital is given as equity capital to first time entrepreneurs who want to set up industries.
In Indian society, fortunately, we have family and various support groups for various entrepreneurs, so borrowing from friends and relatives, capital contributed by relatives and friends, are also reckoned here unlike in western countries.
Hector: You mentioned that there are number of people who help out entrepreneurs for their business plans etc. Do you think entrepreneurs are not making good use of those facilities?
Krishnaswamy: Many banks have a small working cell. There are also consultancy organizations in various states like you have APITCO in Andhra Pradesh. We have consultancy organisations who guide. It is for the entrepreneurs and budding entrepreneurs to take the help of that. If they want to have a specific thing, they charge a fee. Every state has consultancy organisations like that. And banks hold consultations without even charging anything. We give it to people as an add on service. It is the lack of awareness and knowledge that prevent people from approaching them.
Hector: What can be done to improve awareness?
Krishnaswamy: We must conduct entrepreneurship development programmes (EDPs) for final year students in various colleges so that they know about all these facilities available. In many engineering colleges, we are conducting entrepreneurship development programmes. Till two to three years back, one of the biggest problems was that the IT industry was doing so very well, and the campus placements was sucking out all the good people to the IT and the IT-enabled industries. But now with some sort of a recession, we are able to tap some of the final year students from the various colleges, and make them convert at least 5 to 10% as entrepreneurs, through the EDPs conducted at the colleges.
Hector: Arun, just following up on the same point. Sometimes I am told the entrepreneurs rely too much on consultants who are not very accustomed to business. And what happens there is the business plan falls short. Do you sometimes think that the entrepreneurs do not prepare their project reports well before approaching the banks? Also do you think entrepreneurs are sometimes too optimistic about their own business plan?
Arun N: Entrepreneurs in many cases are helped by the chartered accountants who even come up with the project idea and they guide the entrepreneur to come to the bank to do that. And the bank has got its own assessment. We also look at what are all the down sides and try to reduce them. And when we give the credit, we give an adhoc limit to take care of any further emergency or any unexpected requirements. We also tell them that this is the amount of functional equity that you should bring in or this is the amount of market credit you should develop. As you said, sometimes they are too optimistic. They expect machinery to come in within two months. Sometimes, they also go for second-hand machinery. Quite a few entrepreneurs have said that this is cheaper.
Hector: Bhasker Reddy, I will come to you. What has been your experience when you ventured out as an entrepreneur? Do you see a qualitative change in the kind of business environment these days?
Bhasker Reddy: We started two decades back, so the conditions were totally different. It was a real struggle at that time. We had to run from pillar to post to establish or to find out any technology or resources. So that was the scenario. But of late the SMEs are fighting their way. And I am slightly positive on this side. GDP is growing at 8.6%. I am from the agri sector, which has been contributing over 14-15% in the last few years. Accessibility to credit is much better. But still, for start up companies even now for SMEs, the troubles remain, not to that extent but they have to struggle through 20-odd departments to get necessary permissions, even though we have a single window system. Credit for larger industries is obtained at 7-9%, but once you go into the SME sector it is 15-16%.
Hector: Krishnaswamy, the sense I got was that the banks still look at SMEs with skepticism. Do you agree?
Krishnaswamy: I would not say skepticism, as this is one of the areas where the banks are very bullish, because of two things. One is that we have this mandated growth of 20% which we have to achieve so all the banks are very keen on achieving that 20% growth in the SME sector. We want to have SME portfolio in our books. The second aspect is the yield on SME advance is much better than corporate loan or even agricultural loan which is all subsidized. So, it is a very attractive proposition for banks to lend to SMEs because the yield is higher. But at the same time entrepreneurship development has to be there. We need more SMEs. About 20-30 years back, you had industrial estates close to the cities. Now, the cost of land or industrial estates is so prohibitive. While we have this MSME ministry at the central government and the development commissioners and states, state governments over a period of time have not concentrated so much as to develop the MSME sector as much as they support the agricultural and other sectors.
Hector: Salunke, as Krishnaswamy suggested , several of those large scale industrial bodies which are now doing well, started because they had a lot of support from the government side earlier. But these days, somewhere down the line, the SME sector has been left behind. So what do you think the governments can do at the state level as well as the central level to make sure that there is support to this very vital sector?
Chandrakant Salunke: Though SMEs are playing a vital role, the various governments are not giving proper attention. They are not providing proper infrastructure, land or for market assessment development schemes. Recently I think in the budget R2,750 crore was allocated for the MSME ministry. But I don?t think more than R600 crore is utilised for the market development. If we want to become an industrialist, we should not depend on the government. We should depend on the government for infrastructure, power, water etc. We should however depend on banks , private equity, venture capital etc. SMEs should learn to adopt new technology and develop new marketing concepts. China is spending, as per my observations, R40,000 to R45,000 crore for the promotion of this type of industry.
Hector: Power issues are another major source of worry.
What can be done about it, because there seems to be no easy solution around?
Chandrakant Salunke: Power is a major problem. And in Maharashtra there is going to be a nuclear project but the local people are not giving the permission to start that. Similarly, in other states also, in other places in the country, the Prime Minister has also given a statement that our projects are safe. So other kind of projects can be set up by the government of India, and private sector bodies should take the initiative to set up a power project. Our government is looking at 9% GDP growth, but how will they reach that unless they provide proper infrastructure to the industry?
Hector: Agarwal, is there something that the government can do here?
Shekhar Agarwal: Let us consider first in India and then come to Andhra Pradesh. We have got a generation capacity of maybe around 16,000 mw. And in the last five years plan if you see, we are much behind what we had targeted. We are working with the government so that we have dedicated feeders to improve quality of power. And in the last couple of years, the industry was facing a acute power shortage during the summer. In Andhra Pradesh, power cuts are in place and power is cut for 4 hours everyday. So industries which consume 60-65% power, find it difficult. The government has commissioned a study of 24×7 power for industries. They will make the report available within the next four months.
Hector: Ramesh, your opinion here, on the communication and technology side of things. How difficult is it for you to hold on to skilled people, because skill development is another issue in the SME segment. Sometimes what happens is unskilled people join the SME sector , probably not in your industry, but I other small scale industries. And when they become skilled, they go on to greener pastures. What has been your experience, in this scheme of things?
Ramesh Sundareshan: Our experience has been with particular reference to the IT industry, in a product development environment we are really pitted against the best companies in the country. Especially in an IT sector, in a product development environment, you need talent meeting your international requirements. We are constrained by challenges of scale, constraints of technology as a start up company etc.
The key has been as we go to the product cycle life map, how do you map the same to the career graph of the engineer that is helping you to develop these products. That is the most important mapping. Firstly most of these SME segments that I have seen, the technology has been opportunity driven, far leaving the product map itself. Most often the companies themselves don?t have a plan for the initial opportunity for which they are coming in the first place. So how do you map them. And how do you sell that company vision to the employees , that is the biggest challenge. The third is , in scale, especially when you see all the companies growing at a faster pace, and big companies in India recruiting 2000 to 3000 for each of them, you as a small entrant in that particular space, how do you get the best from the big companies. Unfortunately, this is where the ecosystem of the SME segment is not really very supportive. That has been a challenge for us.
Hector: If the cover of the STPI goes away, do you think that companies like yours are going to be hit hard by that?
Ramesh Sundareshan: That?s a very interesting question. There are a lot many ways the trade associations and the governments can help us. One of the fundamental reasons why, especially cities like Hyderabad, IT has grown very well, was because of the successful STPI scheme that has been there for a decade or more. I can tell you from my experience that this has been a major contributing factor for small scales to be competing against big companies even for opportunities overseas. So this vital advantage that small companies had is gone for now, secondly certain sections of the STPI are still available which I believe will not really be contributing to the lot of growth of the SMEs which to an extent it has been doing in the last decade or so. Second thing is that, government can do more than just tax subsidies. Government can do much more than subsidizing. From an IT stand point we often get pitched against big companies in India and probably foreign countries for contracts ranging from probably Rs 10 lakh to say Rs 100 crore. Only this afternoon I was having a discussion with the UID authorities in Hyderabad. It is an excellent opportunity for the government to help small companies.
Hector: Ramesh, did you find land acquisition to be a hurdle?
Ramesh Sundareshan: The cost of land is important for a start-up company. In the start-up days, you need to have infrastructure where you can really start executing projects and developing projects at an international level. It will be difficult to invest in huge infrastructure and land in the formative days. But there could be a lot of incubation services that could be provided to these companies where they could operate for six to nine months and complete their own product cycle and start getting some revenue. That is one way of helping these companies to kick start their activities without really having to invest a lot of amount. The other way could be in terms of certain government policies as per the I-T Act.
Hector: Krishnaswamy, let me bring you in here. Too many concerns then for the SME sector…
Krishnaswamy: Yes, it is a great cause of concern. SMEs cannot be treated like the other industries either in India or in the developed world. SMEs need to be treated differently with kid gloves, because they are all toddlers and they are likely to face rough weather in the initial stages. But the rules and the guidelines which are applicable to big industries are also made applicable to the SMEs. Whether it is by the Reserve Bank or the government or anybody, the same type of rules apply. For example, SMEs are likely to face problems in the initial growing years. They are likely to find that their cash flow is not as originally projected. There will be some default, some delay in repayment. Banks have provisions for restructuring these loans giving them longer period. Initially, they plan to repay the loan in five years time but after one or two years they will find that they need seven years instead of five years. So restructuring is taking place.
The laws which are applicable to developed countries should not be made applicable. You should have a different set of rules and guidelines for SMEs if you have to encourage credit flow. Should we not have liberalised rules for SMEs? That will encourage credit flow and entrepreneurship.
Hector: If there are no more remarks I would look to end this debate here. I thought it was a fairly good, lively discussion that we had today. Thank you panelists. Hope each of you enjoyed the debate as well. On FE?s behalf, I would like to thank our media partners, UTV Bloomberg, our sponsors SBI and also our knowledge partners, SME Chambers of India. Thank you very much for your time. Thank you.