1.
Financing options available to
MSMEs-II
Part 10
MSME Financing - Key Issues and Solutions

2.
Financing options available to MSMEs
SME exchange
GOI and regulators have initiated several measures to address the low level of
MSME financing through the capital markets. In March 2012, post issuance of
SEBI guidelines, both BSE and NSE have set up institutional trading platforms
in the SME segment to allow MSMEs to list and raise equity capital through
venture funds, private equity and wealthy individuals, without initial public
offerings.
The listing process in this platform can be completed within a month and this
also involves lower costs compared to regular IPO route. Besides offering a
suitable platform to raise capital, it also provides easier entry and exit options
for investors. It also offers better visibility and wider investor base while
offering tax benefits to long term investors. The platform offers relaxed
compliance and cost effective listing to SMEs.

3.
Financing options available to MSMEs
Since this facility involves minimum regulatory procedures to be followed, it
has already encouraged a host of MSMEs to tap the BSE’s SME platform. A
total of 70 companies with a collective market capitalization of Rs.8,200 crore
now trade on these platforms. There companies are from various sectors like
trading, manufacturing, steel, textile and finance spread across the geography
of India. (CHECK THE FIGURES. I THINK THEY ARE HIGHER)

4.
Financing options available to MSMEs
Export lines of credit
This financing option supports export oriented segments such as leather,
gems and jewelry, etc. EXIM Bank has launched several initiatives for the
benefit of such exporters - Export lines of credit to overseas financial
institutions, regional development banks and foreign governments and their
agencies and buyers credits (BC) to foreign corporates.
Line of credits serve as a market-entry mechanism to Indian exporters and
provide a safe mode of non-recourse financing option to Indian exporters.
LOCs and BCs are particularly relevant for Indian MSME exporters as the
payment risk is borne by Exim Bank without the need for insurance from
Export Credit Guarantee Corporation.

5.
Financing options available to MSMEs
Microfinance
Leading national financial institutions like the SIDBI, the NABARD and the
Rashtriya Mahila Kosh (RMK) have played a significant role in making micro-
credit an important movement. These groups also adopt a variety of
approaches. However, most of these organizations tend to operate within a
limited geographical range.

6.
Financing options available to MSMEs
Electronic bill factoring exchange
In a recent move, RBI permitted the setting up of an exchange-based trading
platform (Trade Receivables Discounting System) to facilitate financing of bills
/invoices raised by MSMEs to corporate buyers including government
departments and PSUs. This initiative was taken to make the MSMEs capable
of converting their trade receivables into liquid funds.
Despite the many policies and measures to provide financial assistance to the
MSMEs, they continue to face difficulties in raising timely and adequate credit
at reasonable cost. This has led to the emergence of alternative sources of
financing, some of which have been detailed below.

7.
Financing options available to MSMEs
Factoring
Under this mode of finance, the MSME sells or assigns its accounts
receivables to a finance company (a factor) at a discount to meet its
immediate funding requirement. This method of financing evolved so as to
minimize the adverse effect of delayed payments by large scale customers on
the operations of MSMEs. Factors buy the right to collect on invoices raised
against any sales by the MSME and releases 80-90% of the invoice value to
the firm. The Indian factoring market is still at a nascent stage. There are
approximately 10 factoring companies in India, and the oldest among them
are Canbank factors and SBI Global Factors.

8.
Financing options available to MSMEs
Supply chain finance
Supply chain finance is fast emerging as another route to facilitate MSMEs
access to enhanced working capital from bank and non-bank sources. This
mode of financing enables MSMEs, which are suppliers to large OEMs to
receive short-term credit against the volume supplied during the payment
receivable period.

9.
Receivable Financing
Receivable Financing
It is the devised scheme by SIDBI to mitigate the receivables problem of
suppliers belonging to Micro, Small and Medium Enterprises (MSMEs) and
improve their cash flow / liquidity.
The scheme helps the MSMEs in
1. Quicker realization of receivables.
2. Discounting at competitive rates.
3. Efficient Cash Management.

10.
Receivable Financing
How does it work?
SIDBI helps mitigate the problem of delayed payments to MSMEs in respect of
their credit sales to large purchaser companies by offering them finance
against bills of exchange / Invoices arising out of such sales.
What is the Scope of Coverage?
The scheme covers discounting of bills of exchange/invoices arising out of sale
of indigenous components / parts / sub-assemblies /accessories
/intermediates by an MSME unit. Services provided by an enterprise in the
services sector (eligible service provider) to a Purchaser Company are also
covered.

11.
Receivable Financing
Description of Transactions under the Scheme
Limits are sanctioned to well-performing Large Corporates / Purchaser
Companies with sound financials for covering their purchases of components
/ sub-assemblies / parts / accessories and services obtained from MSMEs and
MSME sellers for early realization of dues from large Corporates by
discounting the bills

12.
Receivable Financing
i. MSME suppliers draw Bills of Exchange on Purchaser companies against
supplies made/ services provided by them and the Bills of Exchange are
accepted by the Purchaser companies.
ii. Whereverbill of exchange is not furnished by the large Corporates, based
on acceptance on the Invoices and proof of delivery challan/ Goods
Received Note, discounting is done as per agreed terms between the
Corporates and SIDBI.
iii. On a selective basis, in respect of large Corporates, with good repayment
track record with SIDBI, a platform has been created with NSE viz.
NTREES where, E- discounting is allowed

13.
Receivable Financing
iv. These Bills/ Invoices are discounted by SIDBI within the sanctioned limit
and payment effected (after deducting the applicable discount / retaining the
retention margin) directly by way of RTGS / NEFT to the working capital
account of the MSME supplier/ service provider.
v. On the due date, the Purchaser makes payment to SIDBI either through
RTGS or by cheque. vi. The limits are reviewed / renewed every year.

14.
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