02 Jul 10 Wooing the SMEs
The financial sector is actively wooing the SMEs in India. SMEs constitute the bottom of pyramid that is large, has a high potential, but has been neglected for a long time.
According to the latest annual report of the Ministry of Micro, Small and Medium Enterprises, SMEs account for almost 90% of industrial units in India. They constitute about 45% of the manufacturing output and 40% of the total exports of the country, and employ about 59 million people.
Even more than the size of the sector, what is interesting is the rate at which the SMEs are growing. Here is one datapoint – according to a recent D&B – SMERA survey, the auto component SMEs grew at an average rate of 35% over the last two years. Around two-third of them are planning to expand capacity, 45% are planning to modernise their operations and over half are planning to foray into new markets in the next two years. D&B, in association with SMERA is in the process of creating a database of SMEs in different sectors.
Little wonder, then, that SMEs are hogging the limelight.
As far as banks are concerned, the SME sector offers better margins as well as a larger number of opportunities for lending than the large companies. The demand for credit from large borrowers is falling, and moreover, they negotiate the margins down to wafer thin levels.
All key banks now have a separate section on their websites for the SMEs. The private sector banks are at bit of a disadvantage here, as the SMEs have historically preferred public sector banks. According to the above survey, two-thirds of the auto SMEs preferred banking with public sector banks. The private sector banks are therefore working doubly hard to reach out to the SMEs.
For general insurance companies, over 60% of the corporate business comes from the SMEs. The market is untapped and the chances of large claims are low – which means higher profitability. Again, as in the case of the banks, the attractiveness of large companies as customers has waned, due to high competition for their business and huge discounts demanded by the customers.
The SMEs in general face significant financial challenges. Lack of institutional funding is of course the most cited one. With the financial intermediaries competing for their business, I imagine they will be in a much more comfortable place going forward.