ALLIANCE BUSINESS SCHOOL-FINANCE B

SME Financing
Group Assignment

Submitted to
Dr.Kavita Chavali

Submitted by
Group 7
Anup Kumar Rathi
Hema Prabha.S
Himani Sharma
Manish Gupta
Shivam Rastogi
Shruti Shrinivas
Vijayendra Rao
Vishal Singh
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Is the government really playing a useful role in the development of MSMEs??

Bring out the summary of the article

According to ASSOCHAM currently 3.5% of public procurements by the

government of India and its various arms are from MSMEs.But the ministry
of MSME has recommended at least 20% of public procurement by
government organizations should be from MSMEs. NSIC (National Small
Industries Corporation) chairman HP Kumar sees this 20% recommendation
as a great opportunity for MSEs in the country. The government is the
biggest buyer in the country with sound procurement bills from defence
ministry, railways and health ministry. This is a great opportunity for
entrepreneurship in manufacturing sector. But there are various concerns
both in the case of MSMEs and the government’s side that arise for
accepting this proposal

Concerns for MSMEs

Additional Investments and Capacity Expansion If the MSMEs have to

accept the 20% proposal there is the need for increased investment in R&D
and technology. The broader view is that MSMEs are ready for such huge
investment, which is supported by a study of ASSOCHAM.As per research;
investments by MSMEs in R&D have gone up by 55% in last 4-5 years.

Frequently changing requirements Government in certain cases is not

consistent with its requirements. Recently, Railways came out with a new
proposal, which, if implemented could weed out small supplier firms and
allow only those firms with integrated processes in house to participate. In
this case the setting up of a plant to match the proposed requirements
would need an investment of at least 40 crore which the small firms can
hardly afford.

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Delayed waiver payments MSMEs register with NSIC to be eligible to

waiver earnest money and tender deposit in bidding process of government
tenders. But the refunds take longer than stipulated time and leads to
financial difficulties for small businessmen. Rajiv Chawla director of Jairaj
Industries stands victim to such a situation. It took 18 months for Jairaj to
obtain the earnest money and tender deposits spent in the government
tenders.

Concerns for government

Quality of supplies Government officials contend that enforcing stringent

eligibility criteria for tenders is necessary because of the importance of end-
use. The home ministry has directed DGS&D(Directorate General Of Supplies
& Disposals) to procure automotive batteries only from reputed suppliers.
This was due to some quality and service hiccups from small suppliers

Formation of Cartels Small firms form cartels while applying for

government tenders wherein every bidder quotes the same price. To make
the process transparent the government is developing a national level e-
procurement portal. This will help both government and small appliers.

What is the focus of the article?

This article focuses on the benefits in store for MSME’s if they do business
with the Government. Government is the biggest buyer of the country. By
dealing with MSME’s, they can effectively contribute to the growth of small
scale industries. The article states that the Ministry of MSME recommended
that atleast 20% of public procurement by Government organizations should
be from MSMEs. The level of preparedness of these industries to meet such
large order is a debatable issue. No doubt it would involve a lot of financial
constraints for these industries but they are ready to invest in expansion
provided that there is assured business for them. They would also be willing

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to undertake more risks. The article also talks about the various hiccups
associated with such a regulation. It may be beneficial in the long run but in
the short run, MSMEs will have to face various problems.

Some of the problems that a few industry experts have highlighted are as
follows:

➢ Frequently changing requirements of Government organizations

➢ Huge investments required to meet the requirements
➢ Financial difficulties owing to its registeration with NSIC involving
delays in refunds of deposit money paid for such registeration
➢ Delayed payments

The article also looks at the Government’s stand on this. The Government
feels that imposing such eligibility criteria is absolutely necessary in order to
weed out those companies that do not provide quality materials. The
imposition of such a regulation would help in bringing about more
transparency in the procurement process and the key concerns associated
with small suppliers. The article also gives insights regarding the future
plans of the Government which involves the implementation of E-
procurement schemes.

How is the case relevant to SME financing?

The case has thrown light on two important issues relevant to MSME
financing i.e. working capital issues and term loan for increasing capacity
and R&D activity to improve quality work.

Usually MSMEs face following types of problems when it comes to financing

their requirements:

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• Government to provide stimulus to MSMEs, buy goods and services

from them. But when it comes to payment they delay like anything.
Sometimes this period span a period of 3 to 10 months. This affects
the operating cycle of these MSMEs and results in to liquidity crunch
which in turns affects their top line and bottom-line.
• Government generally follows bidding system o source goods and
services form MSMEs. These firms bid according to their capacity. But
red tapism and bureaucracy has slowed down the refunding process.
In case the bid is not accepted by the government, refunding takes
place almost 12-18 months after the bidding. It makes the day to day
functioning of MSMEs difficult.
• To weed out inefficient firms from the bidding government
organizations have increased the threshold for initial bidding security
amount. Given the limited resources available to MSMEs it becomes
difficult for them to bid for these projects.

Some of the issues and the needs concerned to the SME financing and credit
policies with regards to the government are as follows:

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Anil Bhardwaj, Secretary General of FISME has mentioned that the public
procurement mechanism has the potential of generating a huge demand of
goods and services produced by MSMEs. However, to realize the potential it
is essential that steps are taken in the following areas:

a. Need for simultaneously pressing for e-procurement system to induce

transparency and greater disclosures of the procurement processes.
b. Need for ensuring prohibition of bundling of orders and putting
unrealistic entry barriers to crowd out MSMEs.
c. Need to develop a mechanism in association with Ministry of MSME so
that the following principles of Competition Policy be ensured. (e.g.
filing of cases against anti-competitive procurement practices with
support of Ministry of MSME).

If the government takes initiative and implement steps, the public

procurement mechanism will have a benign impact on large number of
MSMEs. It will provide them support in the midst of adverse economic
condition

General analysis of the article

Reasons that led government to the 20% ordinance

• Small enterprises in the country have been hit badly by the global as
well as domestic demand slowdown

• Indian companies have reduced production due to non-availability of

funds and lower demand, leading to a fall in raw material requirement
— majority of which is supplied by MSMEs.

• Risk aversion of banks tends to rise during such periods and MSMEs
bear the brunt of banks’ cautiousness in terms of lending.

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• The government purchases less than 1% of its requirement from

MSMEs.Its purchases are based on prices rather than quality. Big
enterprises have a price advantage due to their scale of operation.
• There exists is a guideline to all ministries to buy goods and services
preferably from MSMEs, but since it is voluntary, most purchases are
based on competitive bidding at the lowest price.

Benefits to MSME s out of government procurement

• To expand the supplier base of MSMEs which also gives an opportunity

to new players to enter into the market

• The payment in government buying is assured upon supply of goods

and services.

• MSMEs get advances easily against confirmed government orders.

• With orders in hand, MSMEs take the risk of expanding their capacities
and invest more in their companies.

Precautionary steps to be taken to realize the potential of public

procurement

• Need for simultaneously pressing for e-procurement system to induce

transparency and greater disclosures of the procurement processes.

• Need for ensuring prohibition of bundling of orders and putting

unrealistic entry barriers to crowd out MSMEs.

• Need to develop a mechanism in association with Ministry of MSME so

that the following principles of Competition Policy be ensured. (e.g.
filing of cases against anti-competitive Procurement practices with
support of Ministry of MSME).

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References

http://www.financialexpress.com/news/govt-mulls-mandatory-20-purchases-from-
msmes/432262/0

http://smetimes.tradeindia.com/smetimes/news/top-stories/2009/Jun/26/public-
procurement-must-for-msmes-growth-fisme9087.html

http://www.imsme.org/Uploads/MediaTypes/Documents/Four_shtr_MSME_Agenda.pd
f

http://economictimes.indiatimes.com/Opinion/India-Emerging/Government-procurement-pie-Windfall-for-
MSMEs/articleshow/5053280.cms?curpg=2

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