SMEs, Trade Finance and New Technology

Presentation on
SMEs, Trade Finance and New Technology

Saikat Sinha Roy & Suraj Das
saikat.sinharoy@gmail.com
saikat.sinharoy@jadavpuruniversity.in
Workshop on
How Digital Innovation can help SME Access to Finance in Asia

jointly organised by ADBI, Tokyo & NCB, Bangkok
October 29-30, 2018
Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 1
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development
Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee
the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.
Outline of the presentation
 SMEs – rather MSMEs – in India

• Growth and Patterns of Change – large heterogeneity
• Challenges are many depending on this heterogeneity
 Trade Finance: one such challenge
 Digitisation: does it minimise these challenges & make the

“heterogeneous” sector financially inclusive?
 Conclusions

Definition of Small Industries in India
• Manufacturing Enterprises are the enterprises engaged in the

manufacture or production of goods pertaining to any industry specified
in the first schedule to the Industries (Development and Regulation) Act,
1951 or employing plant and machinery in the process of value addition
to the final product having a distinct name or character or use. The
Manufacturing Enterprises are defined in terms of investment in Plant &
Machinery.
• Service Enterprises are the enterprises engaged in providing or
rendering of services and are defined in terms of investment in
equipment.

Policy initiatives
• The policy focus for the development of SSIs in India has been to ensure the
economic viability of the small scale industries so that they would compete in
the market without handicaps (Planning Commission, 1956), as a result
measures introduced to improve the competitive strength of small scale
producers.
• Temporary measures initially for protection from competition from large
industries, eventually became continuum of measures (Tendulkar and Bhavani,
1997).
• The policy initiated through reservation of items exclusively to be produced by
the SSIs, eventually the number of items in the reserved list was increased and
it reached a peak around 1970s with around 800 items reserved exclusively for
the SSIs (Raj and Sen, 2016).
• The SSI reservation policy reversed post 1991, with the number of items in
the reserve list falling to single digit figure in recent times.
YEAR INVESTMENT LIMITS ADDITIONAL CONDITIONS
Employment of less than 50/100 persons with or

1950 Up to Rs 5 lakhs in fixed assets
without power
1960 Up to Rs 5 lakhs in Plant & Machinery Employment condition was dropped
1966 Up to Rs 7.5 lakhs in Plant &Machinery No condition
1975 Up to Rs 10 lakhs in Plant & Machinery No condition
1997 (Dec) Up to Rs.300 lakhs in Plant &Machinery* No condition
1999 (Dec) to 2006 Up to Rs 100 lakhs in Plant & Machinery No Condition

Existing definition of MSME
Manufacturing Sector
Enterprises Investment in plant machinery
Micro Enterprises Does not exceed 25 lakh rupees
Small Enterprises More than 25 lakh rupees but does not exceed 5 crore rupees
Medium Enterprises More than 5 crore rupees but does not exceed 10 crore rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed 10 lakh rupees:
Small Enterprises More than10 lakh rupees but does not exceed 2 crore rupees
Medium Enterprises More than 2 crore rupees but does not exceed 5 core rupees
Proposed changes in definition in 2015
Manufacturing Sector Existing Definition Proposed Definition
Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed 25 lakh rupees Does not exceed 50 lakh rupees
Small Enterprises More than 25 lakh rupees but does not More than 50 lakh rupees but does not exceed
exceed 5 crore rupees 10 crore rupees
Medium Enterprises More than 5 crore rupees but does not More than 10 crore rupees but does not exceed
exceed 10 crore rupees 30 crore rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed 10 lakh rupees: Does not exceed 20 lakh rupees:
Small Enterprises More than 10 lakh rupees but does not More than 20 lakh rupees but does not exceed 5
exceed 2 crore rupees crore rupees
Medium Enterprises More than 2 crore rupees but does not More than 5 crore rupees but does not exceed
Wednesday, October 31, 2018 exceed 5 core Department
rupees of Economics, Jadavpur University,
15 coreKolkata rupees 7
Some stylized facts:
Growth Patterns in Small Business
• The Micro, Small and Medium Enterprises (MSME) sector, as the sector is
called now, has emerged as a vibrant sector of the Indian economy over
the last six decades. It contributes significantly in the economic and social
development of the country by fostering entrepreneurship and generating
largest employment opportunities at comparatively lower capital cost.
• MSMEs are complementary to large industries as ancillary units and this
sector contributes to the inclusive industrial development of the country.
• The MSMEs are widening their domain across sectors of the economy,
producing diverse range of products and services to meet demands of
domestic as well as global markets.

Growth Patterns in Small Entreprises
Table: Contribution of MSMEs in Country’s Economy at Current Price
Year MSME GVA Growth (%) Share of Share of

(Rs.Crore) MSME in MSME in
GVA (%) GDP (in %)
2011-12 2583263 - 31.86 29.57

2012-13 2977623 15.27 32.36 29.94
2013-14 3343009 12.27 32.26 29.76
2014-15 3658196 9.43 31.86 29.39
2015-16 3936788 7.62 31.60 28.77
Growth Patterns in Small Entreprises
• Sources of Small Entreprises data:
(1) NSS Rounds on Unincorporated Non-Agricultural Enterprises in
Manufacturing, Trade & Other Services Sectors (Excluding Constructions),
latest 73rd Round: estimated number of 633.92 lakh enterprises in the
MSME Sector
(2) Economic Census of the CSO, 2013-14 is the latest: 58.5million
establishments were found to be in operation. 34.8 million establishments
(59.48%)were found in rural areas and nearly 23.7 million establishments
(40.52%) were found to be located in urban areas
(3) All India Census of the MSME Sector, 4th Census is the latest
(4) Collecting information on new registration of Enterprises now done
through self-declared online filing system under Udyog Aadhaar
Memorandum
(5) Other data available in http://www.msmedatabank.in
NSS 73rd Round Survey (2015-16) on Micro,
Small and Medium Enterprises
Table: Estimated Number of MSMEs (Activity Wise)
Activity Estimated Number of Enterprises (in lakh) Share (%)
Category Rural Urban Total
Manufacturing 114.14 82.50 196.65 31

Trade 108.71 121.64 230.35 36
Other Services 102.00 104.85 206.85 33
Electricity* 0.03 0.01 0.03 0
All 324.88 309.00 633.88 100
51% Rural MSMEs and 49% Urban; 79+% male ownership, 20+% female
NSS 73rd Round Survey (2015-16) on MSMEs
Table: Distribution of Enterprises Category Wise

(Numbers in lakh)
Sector Micro Small Medium Total Share (%)
Rural 324.09 0.78 0.01 324.88 51
Urban 306.43 2.53 0.04 309.00 49
All 630.52 3.31 0.05 633.88 100

Table: Estimated Employment in MSME Sector
(Broad Activity Category Wise)
Broad Activity Employment (in lakh) Share (%)
Category Rural Urban Total
Manufacturing 186.56 173.86 360.41 32
Trade 160.64 226.54 387.18 35
Other Services 150.53 211.69 362.22 33
Electricity* 0.06 0.02 0.07 0
All 497.78 612.10 1109.89 100
Table: Distribution of Employment in Rural and Urban Areas

(Number in lakh)
Sector Micro Small Medium Total Share (%)
Rural 489.30 7.88 0.60 497.78 45
Urban 586.88 24.06 1.16 612.10 55
All 1076.19 31.95 1.75 1109.89
(96.96%) (2.88%) (0.16%)
Comparative Analysis: 4th All India MSME Census
(2006-07) and NSS 73rd Round (2015-16)
Table: Growth of MSMEs (Figures in lakh)
Parameter NSS 73rd Round 4th All India Census Compound
Growth Rate (%)
No. of MSMEs 633.88 361.76 6.43
Manufacturing 196.65 115.00 6.14
Services 437.23 246.76 6.56
Employment 1109.89 805.24 3.63

Manufacturing 360.42 320.03 1.33
Services 749.47 485.21 4.95
Comparative Analysis: 4th All India MSME Census
(2006-07) and NSS 73rd Round (2015-16)
Table: Comparative distribution of top ten states
State NSS 73rd round 4th All India Census
Number(in lakh) Share (%) Number(in lakh) Share (%)
Uttar Pradesh 89.99 14 44.03 12
West Bengal 88.67 14 34.64 10
Tamil Nadu 49.48 8 33.13 9
Maharashtra 47.78 8 30.63 8
Karnataka 38.34 6 20.19 6
Bihar 34.46 5 14.70 4
Andhra Pradesh 33.87 5 25.96 7
Gujarat 33.16 5 21.78 6
Rajasthan 26.87 4 16.64 5
Madhya Pradesh 26.74 4 19.33 5
Total of top ten States 469.4 74 261.04 72
Registration of New MSMEs
• Prior to the MSME Act, 2006, there was a system of registration by small
scale industrial units to the DICs.
• As per the provisions of the MSMED Act, 2006, MSMEs used to file
Entrepreneurs Memorandum (Part-I) at District Industries Centres
(DICs) before starting an enterprise. After commencement of
production, the entrepreneur concerned used to file Entrepreneurs
Memorandum(Part-II) /[EM-II].
• 21,96,902 EM-II filings between 2007 and 2015 implying around 22 new
entreprises started production during this period.
• Since September, 2015, in view of promoting ease of business, an online
filing system under Udyog Aadhar Memorandum (UAM) based on self-
declared information has been put in place.

Registration of New MSMEs
• Till end of December, 2017, 38.99 lakh MSMEs have registered on UAM
• Services MSMEs comprise a larger proportion (around 55%) of UAM
filings than those involved in manufacturing.
• Micro enterprises constitute the vast majority of the enterprises (90%)
who filed UAMs since 2015, while the remaining are mostly Small
Enterprises (10%) with Medium enterprises constituting less than 0.5%
of the total UAMs filed.
• Bihar, UP, Tamil Nadu, Gujarat and Maharashtra are the top five states
where UAMs are registered, equitable distribution across states is an
important challenge.
Further on MSMEs
• At present there are about 42 million registered and unregistered MSMEs operating
in India, employing about 40% of the work force producing over 6000 products
across a variety of sectors, entreprises mostly producing single products.
• Ranging from agricultural commodities, traditional textiles to sophisticated
components of space crafts and auto components in manufacturing. In services, the
range is wider from petty shops to 3-starred hotels to IT and IT enabled services.
• These MSME’s have varying capital requirements, widely varying levels of
technology, implying significant differences in productivity across units and sectors.
• Even domestically, these MSME’s are rarely vertically or horizontally integrated,
barring a few sectors!
• MSMEs continue to remain a cause for concern with timid manufacturing growth,
lack of growth in employment in both manufacturing and services. The pattern
varies across product groups and across states.
Further on MSMEs: Causes for Concern
• The SMEs account for over 45% of total manufacturing exports and
have maintained a descent growth rate over the years. However, a large
number of units are not producing tradeables, and hence trade growth is
very lopsided.
• Further, even if tradeables are produced, these products (especially
manufacturing and lower end services) have rarely found a place in the
global value chain! Large part of the sector, the micro units, are rarely
involved in international trade.
• Heterogeneity in the sector is quite stark, but the sector is treated
homogeneously.

Further Causes for Concern
• Informality in the sector, at levels, drives the sector - this is another characteristic.
• A large proportion of these units are unbanked, informality in transactions and
finance continues. Financial inclusion is the first step.
• The causes for concern also include inadequate and timely finance on competitive
terms, especially loans of longer duration. Even short term credit has dried up for
the sector in recent period, after the prolonged crises!
• The financing constraints faced by Indian SMEs are attributable to a combination of
factors that include policy, legal/regulatory framework (in terms of recovery,
bankruptcy and contract enforcement), institutional weaknesses (absence of good
credit appraisal and risk management/ monitoring tools), and lack of reliable credit
information on MSMEs.
• Banks are reluctant to lend to the smaller entreprises, as the credibility of these units
is at stake along with production uncertainty. Because of this uneasiness, banks end
up lending to a few large borrowers instead of a large number of small borrowers.

Financing Concerns
• To address this issue Priority Sector Lending (PSL) was introduced, a closer look
suggests that still the relatively large units get easy access to funds instead of the
small units (Raj and Sen, 2016).
• Banks are reluctant to lend to the MSMEs because from the credit risk perspective
the probability of loan default is usually high for the banks. Banks generally have
asymmetric information about the MSMEs and the credit requirement of MSMEs
vary widely because the given definition of the sector captures the industry from a
broad view while considerable heterogeneity exists within the definition of MSMEs.
(Here we have to remember, that the Banks are faced with large NPAs).
• Recently, uniform policies have been enacted to ensure ease of registration of
MSMEs, ease of revival and rehabilitation of MSMEs, credit guarantee schemes,
provision of Make in India soft loans, allowing foreign investments in MSME sector
and also the direct benefit transfer schemes have been implemented for the MSMEs.

International Trade Finance (all the more difficult)
• Usually trade credit is related to financing for easing transactions for buyers and
sellers involved in international trade. Here, for India, often both domestic and
international transactions are often included.
• Various intermediaries such as banks and financial institutions are involved.
• In external transactions, lack of trade finance is a non-tariff barrier.
• Globally, according to WTO reports, over half of trade finance requests by SMEs are
rejected, against just 7 per cent for multinational companies. Global liquidity tends to
be concentrated within the biggest institutions and their clients.
• SMEs in developing countries face even greater challenges in accessing trade finance.
The estimated value, as per WTO reports, of unmet demand for trade finance is US$
700 billion in developing Asia.
• The problem in developing countries has accentuated after the 2008-09 crises with
the disinclination of the global financial sector to invest in developing countries and
localOctober
Wednesday, banking
31, 2018 sectors are often notofequipped
Department toUniversity,
Economics, Jadavpur fill the market gap.
Kolkata 23
Trade Finance in India
• In India, it is no different – trade is becoming more and more difficult.
• Trade finance instruments such as letters of credit, bank guarantees, open accounts
and invoice financing instruments are key enablers in ensuring timely payments and
managing of supply chain risks.
• Costs of trade finance have gone up for Indian traders. On the one hand, the move
for cashless transactions in a largely informal sector is taking the toll. Often the units
are not financially inclusive. There are unbanked adult individuals and units both in
rural and urban India.
• There are many other reasons for that: heightened regulatory requirements (relating
especially to anti-money-laundering and know-your-customer rules), higher Basel-III
capital requirements, attendant risk aversion and, consequently, higher volume of
paperwork.
• These transactions cost are on top of risks of finance for exporters and importers
separately.
• This is over and above access to finance by MSMEs, with plethora of initiatives

Sl. No. State / UTs No. of MSMEs Benefitted
2014-15 2015-16
1 Andhra Pradesh 129 38
2 Assam 0 4
3 Bihar 0 4
4 Chhattisgarh 59 38
5 Gujarat 3060 2046
6 Haryana 512 314
7
8
Himachal Pradesh
Jammu & Kashmir
8
0
2
0 Credit linked
9
10
Karnataka
Kerala
491
33
318
20
Capital
11
12
Madhya Pradesh
Maharashtra 1201
42 31
976
Subsidy
13 Odisha 19 7 Scheme
14 Punjab 561 447
15 Rajasthan 362 240
16 Tamilnadu 377 228
17 Telangana 31 80
18 Uttar Pradesh 174 129
19 West Bengal 27 27
Total 7246 5047
Sl. No. State / UTs No. of Credit Proposals Approved
Credit 1
2014-15
Andhra Pradesh 16043
2015-16
18627
Guarantee 2 Assam 14405 13543
4 Bihar 20650 19878
Fund Trust 5 Chhattisgarh 5945 9468
for Micro 6 Goa 2204 2736
7 Gujarat 12632 18636
and Small 8 Haryana 4748 7896
Entreprises 9
10
Himachal Pradesh
Jammu & Kashmir
6481
17912
7533
10005
11 Jharkhand 16653 18935
12 Karnataka 39561 48731
13 Kerala 41624 47120
14 Madhya Pradesh 14999 22150
15 Maharashtra 44835 49279
20 Odisha 14845 19060
21 Punjab 7458 15016
22 Rajasthan 10145 14796
24 Tamilnadu 42557 56472
27 Uttar Pradesh 36418 52739
29 West Bengal 15273 17792
Total 403422 513978
Initiatives Warranted
• An appropriate way out of transforming the financing crunch of MSMEs lies
in nothing short of a co-operative and collective effort on part of the industry
itself and the further clubbing it with government initiatives.
• Given the heterogeneity in sector, sub-sector specific focus is needed to ensure
that the benefits of policy stimulus are distributed well across the SMEs.
• Financial Inclusion is the first step.
• Financing through Regional Rural Banks have not worked in India.
• Formation of co-operatives, its backing by governmental schemes and further
private participation can induce confidence in lenders, induce the intensity of
peer pressure to repay loans in time and further provide financial strength and
stability along with social capital support (Bagchi, 2016).

Initiatives Warranted
• The importance of trade credit network in terms of financial
intermediation, credit activities, reach, inclusiveness, credit redistribution
and supply chain financing is very significant indeed. The length depth
and strength of liquidity chain needs to be developed so that external
capital flows can be captured to bridge the requirements of MSMEs.
• Bandhan Bank, RBL Bank and the like, which have evolved from
microfinance institutions, have to have initiatives to help out the MSME
sector with their hand holding spirit – sort of crowd funding.
• Other option is to reinforce the emergent cooperative spirit among
multilateral development banks (MDBs), regional development banks,
export credit agencies and national development financial institutions to
fill in the breach vacated by commercial banks.

Recent Initiatives
• The Micro Units Development & Refinance Agency Ltd (MUDRA) scheme was announced in
the 2015 budget under the Pradhan Mantri Mudra Yojna (PMMY); with the tag “fund the
unfunded” the main aim of the scheme is to act as the last mile financiers.
• MUDRA has been initially formed as a wholly owned subsidiary of Small Industries
Development bank of India (SIDBI) with 100% capital being contributed by it. Presently, the
authorized capital of MUDRA is 1000 crores and paid up capital is 750 crore, fully subscribed by
SIDBI. The agency is responsible for the development and refinancing of the micro-enterprises
by supporting the financial institutions which lend to micro or small business entities engaged in
manufacturing, trading and service activities.
• MUDRA partners with Banks, MFIs and other lending institutions at state level and the regional
level to provide micro finance support to the micro enterprise sector in the country. Based on the
loan requirements the borrowers are divided into three categories Sishu (businesses with loan
requirement up to Rs. 50000), Kishore (businesses with loan requirement between Rs. 50000 and
Rs. 5 lakhs) and Tarun (businesses with loan requirements up to 10 lakhs) with the Sishu category
receiving the chunk of the business loans.
• Also for more than 10 lakh credit requirement, the GOI has launched Stand up India Scheme
(SUI) for loans of more than 10 lakhs and less than 100 lakhs to be given by each bank branch to
one SCs/STs and one women and Start-up India scheme to foster entrepreneurship and promote
innovation by creating an ecosystem promoting growth of businesses. As of financial year 2018-
19 a total of 20828562 number of PMMY loans have been sanctioned.
Recent Initiatives
• In 2014, Pradhan Mantri Jan Dhan Yojana (PMJDY) was initiatedto

ensure access to various financial services through these basic savings
accounts.
• Recently, this financial inclusion scheme was reinforced by doubling the
overdraft limit to Rs 10,000 under the and allowing holders of such no-
frills accounts to withdraw as much as Rs 2,000 without any conditions.
• The PMJDY, under which 32.54 crore accounts have been opened since
inception, would now be an open-ended scheme. These accounts, 83%
of which are Aadhaar-seeded, collectively have deposits of about Rs
81,200 crore now.

Recent Initiatives
• Digitisation is one of the recent initiatives.
• Digitization can help MSMEs cater to specific client needs, enhance efficiency,
reduce cost of production, minimize manufacturing defects, and shorten production
time. E-commerce route through digitization has a significant impact on businesses
as the digitized marketing of products can help a business cater to a wide market
having greater reach, also the digitized frame of operation excludes the middlemen
and commission agents in the system.
• With the world moving towards a more and more digitized and connected frame with
the advent of IT and ITeS the need of the hour is to go digital and make a global
presence through digital real-time supply chain, digital product definition and digitally
crafted, run production lines and stay ahead.
• However, a large number of MSMEs that exist in India are still unaware of the
benefits of these digitized initiatives, they face lack of knowledge about the existing
technologies, skepticism about change of operation from traditional route, the lack
of availability of affordable software solutions and also the lack of availability of
finance.

Recent Initiatives
• RBI’s Trade Receivables Discounting System (TReDS) is an interesting
example of how digitization is helping MSMEs get access to easy capital,
by auctioning their receivables. TReDS is an electronic platform that
allows businesses to auction trade receivables such as bills of exchange
and invoices, and the platform serves as a transparent and quick medium
for the small scale players to avail funds at cheaper rates, through
banking and factoring companies. The system is expected to be a game-
changer. The benefits expected include quick turnarounds, owing to
digitized information. The full benefits of the system cannot yet be fully
estimated though, given the mindset change the system requires among
the MSME segment that is currently paper driven, as well as the quality
of data that is fed into the system.
Recent Initiatives
• Seven of India’s largest banks have joined a Blockchain-
powered trade finance initiative led by Indian IT giant InfoSys.
• The collective, known as India Trade Connect, includes
institutions such as Axis Bank, ICICI and South Indian Bank. It
was reportedly formed to conduct testing of InfoSys’ Finacle
Trade Connect, a blockchain platform designed to “address the
trade finance process requirements of banks.”

• It remains to be seen whether such recent moves including digitisation
make the heterogeneous MSME sector financially Inclusive, improve
access to trade finance for the MSME units!
Thank you

SMEs, Trade Finance and New Technology

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Presentation on

SMEs, Trade Finance and New Technology

How Digital Innovation can help SME Access to Finance in Asia

October 29-30, 2018

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 1

 SMEs – rather MSMEs – in India

 Trade Finance: one such challenge

 Digitisation: does it minimise these challenges & make the

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 2

• Manufacturing Enterprises are the enterprises engaged in the

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 3

Employment of less than 50/100 persons with or

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 5

Enterprises Investment in plant & machinery

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 8

Table: Contribution of MSMEs in Country’s Economy at Current Price

Year MSME GVA Growth (%) Share of Share of

2011-12 2583263 - 31.86 29.57

Manufacturing 114.14 82.50 196.65 31

Table: Distribution of Enterprises Category Wise

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 12

Table: Distribution of Employment in Rural and Urban Areas

Employment 1109.89 805.24 3.63

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 17

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 20

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 21

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 22

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 24

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 27

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 28

• In 2014, Pradhan Mantri Jan Dhan Yojana (PMJDY) was initiatedto

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 30

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 31

Wednesday, October 31, 2018 Department of Economics, Jadavpur University, Kolkata 33

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