SMEs a viable growth option

Mumbai, May 17 | Updated: May 18 2006, 05:30am hrs
Small and medium enterprises (SMEs) have developed as an attractive growth option, says a report released by Crisil.

The study shows that SMEs present a strong financial profile when compared with their larger cousins on several debt protection parameters.

It also says that though SMEs do not fare well on the profitability front (possibly because of competitive pressures), the impact of poor profitability is offset by much better debt-equity levels.

The study also indicates that SMEs differ widely in performance and credit quality. So the performance and credit quality of an individual SME cannot be judged on the basis of conclusions drawn by evaluating SMEs in general.

Explaining the nature of their business, the study says that the SME sector, which lacks entry barriers such as brand equity or technology, is exposed to significant competitive pressures.

These pressures partly account for the sectors low profitability margins. Low bargaining power of SMEs with customers and suppliers also affects profitability and cash flows significantly.

Finally, the report focuses on the need to take into consideration the wide divergence in performance of SMEs. This divergence can be adequately captured in a complete analysis of the business and management risks associated with individual SMEs.