Govt should reduce interest rates, energy costs to protect SME forging units, says Babu Rao, president, AIFI

Immoderate increase in energy costs on the back of rising fuel oil prices and power tariff increases over the last year amid deteriorating value of domestic currency is one of the  challenges among various currently faced by SME forging units, as explored by M Babu Rao, president of Association of Indian Forging Industry (AIFI) who is also the MD of GSB Forge Pvt Ltd, in an exclusive interview.

 

What is the role that Association of Indian Forging Industry (AIFI) aims to play in India's SME sector?

 

M Babu Rao: Since over 80% of the members of the AIFI are SMEs, supplying mainly to the automotive sector, the Association plays a pivotal role in updating and guiding the members on the latest developments and meeting the challenges to the industry on the cost and market fronts. 

 

 

 

The Association also enables interaction of the members with members of various international forging associations by hosting and mounting delegations to International Forging and Asian Forging Congresses being held periodically in various countries.

 

 

 

AIFI recently had the distinction of hosting the largest ever International Forging Congress IFC 2011 in Hyderabad with a record participation of over 1000 delegates and presentation of  66 technical papers besides an exhibition of the equipment manufacturers showcasing the latest technology.

 

 

 

What are the current projects being undertaken by AIFI?

 

M Babu Rao: Currently AIFI has initiated an “Energy Audit” programme for the benefit of the SMEs to tackle the problem of increasing energy costs in the sector. The programme is being funded by the “World Bank” and conducted by the BEE-GIZ for the Pune Forging Cluster of SMEs. The project has established the energy saving potential for the SMEs in the region, free of cost to the units.

 

 

 

The Association has also initiated steps to make an instructional video film to create awareness of the Indian Forging Industry among the students and teachers of Engineering Colleges with the help of the Government of India funded agency NITTTR.

 

 

 

In your opinion what are the key challenges that small-scale forging units face today. Please do provide some solutions to overcome the challenges.

 

 

 

M Babu Rao: The key challenges faced by the SME forging units are: a) Abnormal increase in energy costs due to balooning fuel oil prices and power tariff increases over the last year, following devaluation of the rupee

 

b) High interest rates affecting up gradation

 

c) Cyclical recessionary trends in the auto sector

 

d) Shortage of trained / skilled manpower

 

Government needs to intervene and prevent abnormal variations of fuel and power prices by suitably adjusting the taxes and duties on fuel oils and take steps to strengthen the power sector so that chronic shortages in the south and west of the country are overcome. Interest rates for the SMEs need to be brought down.

 

 

 

How the low-cost imported Chinese products are hurting the profit margins of small-scale forging units?

 

M Babu Rao: The bogey of low cost imported Chinese products is being used by OEMs in the country to deny genuine cost increases in the forging sector thereby hurting the financials of the SMEs in the sector.

 

 

 

In the wake of slowdown in auto industry, the domestic forging industry is turning its focus to alternative markets. What do you think, the diversification into other segments would be able to contribute in the revenues of forging industry?

 

M Babu Rao: The auto sector has traditionally been the largest consumer of forgings – 60 to 70%. However the cyclical variations in the demand of this sector has prompted the forging industry to gradually decrease its over-dependence on the auto sector and diversify to new & emerging sectors like Energy, Oil & Gas, Aerospace, Power, Defence and Heavy Engineering. Over the next few years, it is expected that these sectors will contribute to over 50% of the market for forgings.

 

 

 

Is the imposition of stringent anti-dumping laws and more tariff barriers on Chinese goods the need of the hour?

M Babu Rao: Yes, to protect the SMEs in the sector.

 

 

 

In your opinion, what measures should government take over the to promote India's forging industry?

 

M Babu Rao: Since the forging industry is both capital intensive and energy-intensive, Government should initiate steps to protect the industry SMEs by suitably cushioning the interest rates and energy costs against abnormal increases as has happened in the last 2 years. Inflation and devaluation of the rupee, which have aggravated the problems for the SMEs need corrective action from the government by way of reduction in duties and taxes and ushering in of GST at the earliest.

 

 

 

Kindly share the roadmap of AIFI for the ongoing financial year 2012-13.

 

M Babu Rao: In the current financial year 2012-13, AIFI intends to sensitise its members to the challenges being faced in the current recessionary scenario by conducting programmes for up gradation  in design / quality / technology and energy conservation besides laying emphasis on IT / CAD / CAM an other forms of computer based technologies to produce quality based forgings confronting to international standards with best yields, reduction in rejections & plant inventory & prompt deliveries to further the confidence of the customers.

 

 

 

Being the president of AIFI, what is your vision for this association for next coming years?

 

M Babu Rao: My vision for the AIFI is to strengthen the membership through interaction with members in all the regions of the country and unitedly work to contribute to the manufacturing / industrial growth of the country through innovative product & process development for the engineering sectors in general and automotive sector in particular.

Outsourcing can build better business for SMEs

Any organisation, either small or big, faces problem to keep pace with the technological development. Even though, big players can overcome with the technology-led transformations but for small enterprises an up-to-date technology platform is still a constraint. Every entrepreneur or businessman eyes for a top-most position for his/her organisation but the quick course of technology makes it difficult for SMEs to remain on top of trends.

 

In such scenario, small businesses may consider to pass on or outsource some or all of their IT systems or processes. With the adoption of outsourcing practice, SMEs will not only experience mass reduction in cost but it also allows them to focus on their core expertise like IT, Hotels, Health etc while hiring other people or respective organizations to manage other services like data entry, employee database, housekeeping, customer support and so on.

 

 

 

What is Outsourcing?

 

Outsourcing is the process of contracting out certain non-essential or non-core processes of a company to a third-party with proven expertise in the field.

 

 

 

The key market segments in outsourcing are business process outsourcing (BPO), IT outsourcing (ITO), knowledge process outsourcing (KPO) and HR outsourcing.

 

 

 

Business Process Outsourcing (BPO): In this segment, business-related activities or the non-core business like data backup, customer service and maintenance are outsourced.

 

 

 

Technology Outsourcing: This segment incorporates the outsourcing of  IT-related activities of the company. Various IT companies have started dedicated business practice focused small and medium businesses (SMBs) and offer complete outsourced solutions including hardware, software and applications designed for small businesses. IT outsourcing reduces initial capital constraint of the SMEs.

 

 

 

Knowledge Process Outsourcing (KPO): Over the years, KPO emerged as a new process to outsource knowledge-related work to third party service providers who holds specialization in this field. This includes processes of high level of domains like data analytics and investment research.

 

 

 

Finance and Accounts Outsourcing: The financial aspects of a company including account keeping and auditing are outsourced to the professional service providers within or outside one's country. For SMEs, cost of hiring CFO is a larger problem so now-a-days several SMEs are opting for outsourced CFOs.

 

 

 

Human Resource (HR) Outsourcing: The outsourcing of the basic HR functions like payroll processing, formulating and implementing

HR policies, hiring and induction, employee training, performance management system, etc. to an external service provider, is in today. The outsourced HR function makes it affordable for SMEs to have systems and processes that are hitherto utilised only by large corporations.

 

 

 

Why to outsource?

 

It is believed that single-mindedly concentration on the most important task is the key to great success, achievement in businesses. Besides, various business theories also indicate that focus on core areas of the business provides advantage over the rivals sending-off non-core activities to be performed by other firms.

 

 

 

Apart from this, there are other reasons that why companies opt outsourcing:

 

(a) Perks up company’s focus on core business – The adoption of outsourcing allows owner to concentrate on core business activities. It not only allows managers to set priorities of business more clearly and reap more profits out of it.

 

 

 

(b) Reduces operating costs – This is best part of outsourcing that it reduces overhead costs and capital expenditures of the company. For instance, by outsourcing, a firm could not only save salary costs but also pension and other benefit costs.

 

 

 

(c) To deploy competitively priced resources – Outsourcing also lets companies to deploy resources that are cheaper than that offered by the competitors and those are more attractive on the back of added incentives.

 

 

 

(d) Reduce risk – Outsourcing also reduces peril s like appointing right person for project, capital cost, labor cost, and focus on core business.

 

 

 

(e) Quick initiation of new projects – This is an another positive aspect of outsourcing strategy. A proposed business idea for the enrichment of the company may be outsourced for quick implementation because starting a new project in an organization may take months.

 

 

 

Why has the SME market not embraced outsourcing to a greater extent?

 

Outsourcing practice is under utilized by SMEs as small businesses contracting with outsources is a costly deal. But it is not important to contract with big outsource service providers, SMEs can turn up to micro outsourcers, wherein firms can attain  process efficiencies and cost savings by outsourcing tasks  to skilled freelancers or independent businesses (service providers) based locally, nationally.

 

 

 

Benefits of micro outsourcing for SMEs:

 

- To gain process efficiencies and increased effectiveness

 

- Reduces overhead costs and capital expenditure

 

- Firms can deploy resources which are more attractive because of added incentives

 

- Access to skilled resources

 

In the wake of technological development, outsourcing strategy has become more accessible tool for small businesses and has made it a powerful impact on their growth, productivity and bottom lines.

 

 

 

Right time to Outsource

 

Small companies are short in time and workforce and in order to grow their business they opt to outsource their regular work like accounting, payroll processing, distribution and many other functions. SMEs should adopt outsourcing practice so as to take advantage of this emerging phenomenon.

 

 

 

Some companies have in-house staff to handle daily activities, but in order to undertake new projects that don't call for another full-time employee companies may need outside help. To be more precise, when current employees are unable to manage the day-to-day business and are also not capable to build the business satisfactorily, then the company should mull over outsourcing strategy.

 

 

 

Conclusion

 

Several small companies outsource their regular work like accounting, payroll processing, distribution and many other functions. However, big companies outsource to cut down the cost. SMEs should adopt outsourcing practice so as to capitalise on this emerging phenomenon as it is an effective method to help businesses to reduce costs and improve processes.

SME collaborations open doors for untapped opportunities

Indian small and medium enterprises (SMEs) are poised to witness fast growth in the coming decade. If the predictions of the analysts are to be believed, the Indian small enterprises offer immense scope to push growth that will lead to an all round development of the country's economy despite the presence of various grey areas.



 

The Indian entrepreneurs are of the opinion that the availability of infrastructure and other aids assume significance as they can enhance the growth of small businesses or start up players.

 

 

Although, Centre has been taking concerted efforts, India is still reeling under the pressure of different concerns and constraints in the path of growth and development of small businesses. It is not practically possible for government to clear the obstacles instantly as it is also not feasible for any SME to solve these problems single-handedly. The only solution that is workable is 'Collaboration or Partnerships'.

 

 

Why Indian companies need to focus on 'collaborations'
 

As Indian economy has decided to continue its growth at a good speed in the coming decade, in this situation the SMEs will also aim to grow by bringing improvement in the productivity levels and business processes. To attain these goals, it is important for the small businesses to realise the importance of incorporating technology-driven collaboration among them.

 

 

With the onset of economic slowdown, SMEs should eye for technological collaboration since it is the primary ingredient for improving productivity. The small enterprises feel that it can play the role of an efficient tool that can increase the financial sustainability of enterprises effectively.

 

 

In the past few years, voice mails, video conferencing, mobile file sharing applications, online presentations are some of the off-shoots of partnerships.

 

 

What approach SMEs should adopt
 

The most important factor which needs to be kept in mind while exploring the potential of 'partnership' is to give an appropriate direction to the approach for undertaking this practice. Prominent areas and activities where partnership can lower costs besides increasing productivity should be stressed upon from time to time.

 

 

Proper research needs to be done for strengthening ties that will be mutually benefit the partners. The most important elements of collaboration is the partners' willingness. The SMEs should keep these factors in mind while working out 'partnerships'. Moreover, the international trends in technology and logistics partnerships can act as a parameter for deciding the strategies for collaboration among the SMEs.

 

 

How 'two-way collaboration' can be an option
 

The common aspect of any collaboration is that it should follow a 'two-way' approach since it should be inside as well as outside the establishment. In other words, it means that the collaboration should be both intra-enterprise level and inter-enterprise level.

 

 

This brings the importance of 'networking' for employees to the fore front as it is significant for efficient cooperation among the various streams inside the organisation for smoother and better operations. Communications and mobility are the key technology areas that enjoy tremendous potential for boosting the concept of collaboration inside any organisation, thus offering freedom to the employees.

 

 

What are the possible areas of collaboration
 

Today, new areas are opening regularly where scope of partnership among small businesses can be found. In most of the technology driven SMEs, the scope of a tie up is greater since new technology has potential to replace the older ones on regular basis. Few of the key factors which need to be focussed upon while inking collaboration are as follows -

 

 

-  Space

The rising commercial rentals across the globe have forced the small businesses to join hands in developing collaborative business spaces that are in favor of the participating collaborators. Common spaces means lower spending. 

 

 

-  Marketing Media

 

Marketing and publicity are few of the concerned areas for the small businesses, mainly the start ups as the over head expenditure often pose as a problem. Collaboration is possible in this areas in regard to the sharing common agencies and events for the promotion of multiple businesses. This concept has worked for the small businesses in US and Europe during the economic slowdown and can prove helpful for the Indian SMEs too.

 

-  Technology

 

Although, there are growing concerns over the security of information in cloud computing, but it is believed to be the most efficient partnership platform that many SMEs are benefiting from. The technological partnership are taking various forms such as sharing of knowledge, information, computational systems and online platforms for marketing and branding.

 

-  Human Resources
It is possible for hiring few of the professionals on part-time or temporary basis which will help in bringing down the expenses. 

 

 

 

-  Logistics
Over the years, it has been found the price of transportation, sharing and leasing equipment act as key expenditures for SMEs. This is where collaboration gains prominence as it helps in lowering the costs.

 

 

Understanding the benefits of collaboration
 

Analysts feel that collaboration among SMEs is beneficial for everyone engaged in the arrangement. The direct benefits out of 'partnership among SMEs' is endless. Few of the obvious benefits of teaming up are 

 

 

 

-  Space sharing

Sharing of space can bring down cost while the collaborating ventures can post good results. For instance, a petrol pump can house a fast food joint in its premise and it can be beneficial for both the partners. 

 

 

 

-  Platform for mutual support

The like-minded businessmen can offer physical, mental and financial support to each other whenever the need comes up. Regular meetings, online forums and also business communities can act as morale booster apart from motivating the members as well. 

 

 

 

- Networking

In today's business world, everything and everybody depends hugely on effective networking. Partnership among SMEs offer scope to strengthen network and also benefit the participating members.

 

 

 

- Ownership

Fractional partnership assume significance as many SMEs need expensive equipment but it can be afforded by just few. Fractional ownership allows it to be used on time sharing basis. For instance, it is a common practice that many SMEs jointly purchase a helicopter in the west and this trend can be implemented in India as well. 

 

 

 

-  Opportunities for marketing and sales

The participants can access each others client base with the help of mutual cooperation. It has been found that shared marketing platforms can prove helpful in lowering costs considerably.

 

 

 

-  Importance of cost sharing

The collaborating small businesses have potential to raise the scale of operations by sharing costs and it increases competitiveness with the bigger players. Although, the efforts taken by both the parties are not of humongous proportion but the operations grow manifold with the help of partnership.

 

 

 

What Research tells us

 

According to a survey of 300 business leaders carried out by Deloitte Consulting, 75% of the surveyed gave priority to partnerships. Those with linked partners and suppliers to internal business processes posted 70% improved profitability as compared to players that did not opt for collaborations. 45% of the respondents stated that they are worried about the complexity of implementing collaborative tools.

 

 

Conclusion
 

It is becoming increasingly important in the present time for the small businesses to maintain their competitive edge and also relevance in the market where the big players are eyeing to tap every available opportunity.

 

 

As competition continues to remain as the top concern for the entrepreneurs, collaborative efforts have potential to effectively help every business attain its target despite the presence of constraints such as finance, resources and economic crisis. It is a common belief that the collaborative power can prove helpful for the creation of platforms that is not within the reach of a specific unit.

 

 

For the SMEs, the creation of partnerships and business relationships are gaining prominence due to the globalisation of the market. The MNCs are infusing capital in strategic procurement programmes to bring down their supply bases apart from stressing on risen expenditure with the help of strategic partners.

Sufficient funds should be spent on distribution to eradicate ever-increasing power demand-supply gap, says JG Kulkarni, President of IEEMA

The recent restructuring of age old policies by the government for discoms is a big breakthrough,  but besides  generation segment,  power transmission and distribution segments also require focus of investment, as informed by JG Kulkarni, president of  Indian Electrical & Electronics Manufacturer’s Association (IEEMA), who is  also executive vice president (EVP) of Crompton Greaves Ltd & President CG Power ( Asia) in an exclusive interview.

 

 

What are the growth opportunities for electrical and the electronics industry in India? How does IEEMA as an apex body facilitate electrical equipment manufacturers to cope up with these opportunities?

 

JG Kulkarni:  The demand supply gap in availability of electrical power offers a huge opportunity and IEEMA is actively working to improve the availability of reliable and economical electrical power to all Indians through energy efficient and reliable equipment. The Indian electrical industry over several years has doubled or tripled its capacities in line with the vision of Govt. of India to provide electricity for all.

 

 

 

What are the measures that the government and industry should take to eradicate this ever-increasing power demand-supply gap?

 

JG Kulkarni:  Everyone in the nation should have 24X7 access to power, but this is not the reality. The availability of power depends on the ability of user industries to distribute power to the users. Power shortage is a cause for concern. The investment proportion in the three specific categories of power, viz., generation, transmission and distribution, should ideally be 2:1:2. According to the 11th Plan, there is 55% investment in generation, 15% in transmission and 30% in distribution. Even though the 12th Plan has made some amendments, the ratio is still not 2:1:2. According to recent announcements, if a good amount of money is spent on discoms, it would not only better the proportion ratio, but would also cut short the wastage. Also, apart from generation of power, sufficient funds should be spent on distribution.

 

 

 

What are the major causes of negative performance by the Indian Electrical Equipment industry in Q1 of FY13?

 

JG Kulkarni:  The sluggish domestic demand due to the slow-down in the power sector and a surge in imports of electrical equipment are the major causes of the negative performance.

 

 

 

Our inability to meet targets for generation capacity addition, due to multitude of problems such as unavailability of coal linkages for new projects, land acquisition issues, delays in environmental and other clearances, etc. is adversely impacting the downstream transmission and distribution sectors.

 

 

 

The entire power sector value chain crucially hinges on the financial viability of the power distribution sector and poor financial health of State distribution utilities continues to adversely affect both existing and planned projects, leaving developers with no option but to run projects at sub-optimal capacities or go slow on the commissioning schedules.

 

 

 

Further, projects under RGGVY and APDRP also are not getting finalised for varied reasons, resulting in sluggish demand for the domestic electrical equipment industry, which is already facing intense competition from cheap imports in the domestic market.

 

 

 

To what extent, the Central government's debt restructuring package for state electricity boards (SEBs) will meet the needs of ailing power discoms?

 

JG Kulkarni:  The accumulated losses of power distribution companies reached a level of Rs. 1.9 lakh crores, as on 31st March 2011. Poor financial health of State distribution utilities has been adversely affecting both existing and planned projects, leaving developers with no option but to run projects at sub-optimal capacities or go slow on the commissioning schedules.

 

 

 

The announcement by the government of the package on ‘Financial Restructuring of Discoms’ will very positively impact the entire power sector as the entire power sector value chain crucially hinges on the financial viability of the power distribution sector, which has been severely eroded in the last few years. With the debt restructuring and improvement in the financial health of the discoms, banks will regain confidence in sanctioning loans to them.

 

 

 

Do you think this package will bring investments for distribution segment? What reforms does distribution sector currently require?

 

JG Kulkarni:  The focus of investments in the Indian power sector has typically been in the generation segment. Power transmission and distribution (T&D) segments have lagged behind.  The T&D sector requires greater and focussed attention than given till now. The asymmetrical d investment pattern needs to be corrected and we need an investment ratio of 2:1:2 amongst generation, transmission and distribution segments in order to achieve a balanced growth in the power sector.

 

 

 

It is heartening that there is some move towards correcting this lopsided investment pattern in the 12th Plan. The total funds required by the power sector in the next five years have been estimated at Rs. 13.72 lakh crores, out of which 47% are for generation and the rest 53% for T&D and others. Distribution sector alone requires over Rs. 3 lakh crores in the 12th Plan.

 

 

 

As part of the package, the government has mandated concrete and measurable action by the discoms, including annual revision in tariffs, bring in private investment in distribution, etc., which hopefully will be strictly monitored. If what is envisaged is put in place, then it should help in substantially reforming the ailing distribution sector.   

 

 

 

Please elucidate the proposed 10-year vision plan of Heavy Industries Department? What growth opportunities do you see for electrical equipment manufacturing industry?

 

JG Kulkarni:  This mission plan is a co-creation between IEEMA and Department of Heavy Industries. This also involves active participation from E&Y. We were together able to come up with a document which would be released very shortly. That document would aptly define the needs and steps that should be taken by the industry. There are five different work groups which are being formed to guide and help industries to do what is necessary. This would help the growth of the electrical industry and also help in meeeting exports demands to an international level.

 

 

 

What is your roadmap foru IEEMA during 2012-13?

 

JG Kulkarni:  The primary role of any industry association is to undertake activities which help in capacity building of its members and also to proactively engage on their behalf with the government and its agencies on issues of concern and challenges faced by the industry as a whole. IEEMA has been very effectively providing a forum and a platform for knowledge sharing and capacity building not only for member companies but all stakeholders. Similarly, IEEMA has been playing a crucial policy advocacy role with the policy makers, both at the Central and State levels, and with power utilities across the country. We will continue to intensify our efforts in all these directions so that our industry becomes even more robust, healthy and dynamic.

 

 

What special initiatives IEEMA executes in creating awareness of latest technology trends among the electrical equipment manufacturers?

 

JG Kulkarni:  IEEMA regularly organizes various international level technical conferences every year like SWICON for Switchgear, TRAFOTECH (conference, workshop & exhibition) for Transformers, TECH-IT for Instrument Transformers, METERING INDIA for meters, CABLEWIRE for Cables & Conductors, ELROMA for rotating machines, CAPACIT for capacitors and INSULEC for electrical insulation materials. Other technical conferences are also held based on topial scenario like CIGRE conference on heavy electrical equipment and GRIDWEEK ASIA on smart grid.

 

 

 

Being the president of IEEMA, what is your vision for this association for next coming years?

 

JG Kulkarni:  As a president of IEEMA, I would desire to see IEEMA as sole spokesperson of Indian electrical and industrial electronics industry, which also has the power to do good for the ordinary citizens of this country who use electricity. The very reason for existence of the association is to further the Indian electrical industry across the country and the globe. Accordingly, my vision on a global level would be to increase our share from current 1% to 5% over the next decade. A mission plan is already under preparation for helping achieving this vision.

 

 

Ratings help MSMEs attain greater and easier flow of credit, says Parag Patki of SMERA

MSME ratings help raise corporate governance, bring transparency and also improve the reporting standards, according to Parag Patki, CEO of SME Rating Agency of India(SMERA).

He also divulged the information that SMERA would mainly focus on SME ratings and is targeting to achieve cumulative ratings of 25,000 SME ratings this year.

What is the role that SMERA aims to play in India's SME sector?

Parag Patki: SMERA is striving to reduce information asymmetry within the sector by acting as an independent, third party, unbiased risk-opinion provider to the business ecosystem of the SME world. Considering SMERA’s completion of seven years in the business and its experience of rating over 17,000 MSMEs, SMERA is confident of becoming a bridge to plug the information gap between MSME borrowers and lenders such as banks and financial institution and enhance the credit flow to this sector. Moreover, SMERA’s rated universe will also provide comfort to the corporate sector in getting access to quality, well managed and funded pool of units. Policy advocacy is the other role that SMERA aims to play once the rating universe achieves a critical mass in the immediate future.

SMERA also plays the role of an advocator to the MSMEs on the benefits of accepting the good corporate governance practices and bringing transparency within their unit. SMERA has found that the credibility of its consistently rated clients have improved if such units have displayed improvement in successive ratings.

Kindly share the relevance of credit ratings for SMEs?

Parag Patki: The relevance of credit ratings for SMEs are mentioned as follows -

a)Concessional funding & lower collateral: Ratings facilitate greater and easier flow of credit from the banking sector to MSMEs.

b) Better market standing: Acceptance amongst lenders, trading partners (local as well overseas) and prospective customers.

c) Quicker credit decision at the lender’s level: Ratings provide comfort to the lenders thus reducing time to lending and cost of lending.

d) Better Governance: MSME ratings provide an impetus to raise corporate governance, transparency and reporting standards.

How do you think that the Indian SMEs are performing in the present global scenario?

Parag Patki: Slowdown in domestic demand coupled with weak global demand is pressuring both domestic and export oriented (SMEs which are engaged in 100% exports have been adversely impacted vis a vis SMEs having both domestic as well as overseas exposure). Also, stretched receivable cycle is further exacerbating the downward pressure on ratings. The increased financing cost and input cost (due to inflation) has exerted strain on their financial position. However, SMEs catering to domestic market are still exhibiting moderate growth.

As per SMERA, the general direction of the rating has a downward bias (% of ratings in upgrade category have continued to exhibit reducing trend even in the Q1 of FY 12-13). In FY 2010-11, around 38% of the total cases which had approached SMERA for review ratings were upgraded; however the percentage has dropped to around 21% in FY 2011-12. The data is as under:

Year	Upgrade %	Downgrade %
FY 2010-11	37.78%	10.37%
FY 2011-12	21.48%	12.50%

What are the key challenges faced by the Indian SME sector?

Parag Patki: The key challenges faced by the sector are as follows:

· High cost and terms of borrowings.

· Limited and timely access to bank loans.

· Unavailability of requisite volume of affordable skilled labour.

· Constraints on modernisation and expansion and adoption of newer technology.

· Limited bargaining power with the corporates resulting in stretched collection period and squeezed margins.

· Power shortage.

· Lack of infrastructure.

Do you feel that government policies (both Centre and state) are working in favour of the SMEs? Are they assisting these companies in alleviating the pertinent issues?

Parag Patki: Government have been taking various steps to promote the SMEs such as:

· Extending collateral free loans upto Rs 1 cr under CGTMSE scheme.

· Providing credit linked capital subsidy (CLCSS) for technology upgradation.

· Classifying loans to SMEs as priority sector to increase bank lending to the SME sector.

·SME Stock Exchange for enabling the SMEs to access the capital market.

· MSME Ministry operates a 'NSIC Performance and Credit Rating Scheme' and offers 75% rating fee subsidy for SSI units.

· Ease of bidding for government contracts for rated SME units.

· Lack of awareness is affecting the utility of these schemes.

Do you feel that ICT (information and communication technology) usage by SMEs has gone up?

Parag Patki: Yes, our communication with SMEs indicates that the usage of ICT is increasing exponentially, given the obvious reach and cost advantages that ICT bestows upon the sector.

A recent study conducted by FICCI shares some valuable insights as under-

- Almost 74% of the respondents (SMEs) have their company’s website.

- 79% of the respondents (SMEs) use ICT tools in their day to day business operations. It implies that most of the people are aware about ICT and understand its importance and therefore use ICT tools in their day to day business operations.

- 79% people who use ICT tools in their day to day business operations, maximum usage of ICT tools is done for promoting sales and marketing (79%) by different companies (SMEs), followed by finance (67%) and market research (53%). Very few companies (21%) use ICT tools in their supply chain activities.

- Out of the people who use ICT tools in their day to day business operations, maximum respondents (95%) find them beneficial in one or the other way.

What is the outlook for the SME sector in this year?

Parag Patki: In the next two-three quarters, SMERA expects sharp increase in pressure. Moreover, enhanced risk perception among banks could also lead to lower bank funding for the SMEs. From a medium to long term perspective, structural dynamics of the global slowdown will have the largest bearing on competitiveness of export oriented SMEs. Slowdown in the domestic consumption due to inflation may have a moderate effect on the growth of SMEs. The lower growth of GDP, high inflation and dull export market will have added bearing on the SME sector.

Fitch downgraded the outlook for the domestic retail sector to 'negative' from 'stable'. It has hinted at further rate cut in the future. How do you think it will impact the Indian SMEs?

Parag Patki: Textile oriented retail sector is currently facing high inventory, debt pile up and overall deterioration in the consumption due to reduction in discretionary spending. These factors will impact overall demand (due to lower demand)/ lower credit flow (bank & other lending channels)/ tighter cash flows (due to delayed payments) as the retailers tighten their belt and adopt stricter working capital management to manage their business, thus impacting the Indian SME sector.

RBI's move to leave rates unchanged for the second consecutive policy review has been criticised by India Inc. How do you think it will impact the growth of SMEs?

Parag Patki: Growth of SMEs would be impacted due to lower bank credit as a result of higher risk perception among banks and also prohibitive costs of borrowing at the SME level. This would not change due to RBI move to retain the rates for the second consecutive policy review. The costs of borrowing coupled with high raw material prices, high labour costs are affecting SME profitability. It would also affect the capex plans of SMEs and affect their overall growth. However, inflation is also hitting SMEs sector on account of increased cost of --input and labour cost and therefore regulatory action from a perspective to control uncomfortable level of inflation should be appreciated.
SMERA’s analysis also reveals that bank credit to MSME, as a percentage of total bank credit, is at a six year low of 20.6% (Source- Deployment of Gross Bank Credit by Major Sectors; RBI). This is lower than the average by around 1.2 percent (1.2 per cent translates to Rs.57,000 crs). Hence, bank funding to SMEs has reduced by over Rs 57,000 crore on a relative basis. Also, on an absolute basis MSME credit has grown by only 12 per cent (June 17, 2011 to June 29, 2012) as against overall bank credit growth of over 19 per cent for the same period.

Inflation in India eased in July to 6.87% as compared to June. Do you think it is a signal of the changing times in Indian economy?

Parag Patki: Weak infrastructure and power scenario will continue to remain as bottlenecks. Even though the inflation has eased to 6.87%, the fiscal deficit of India is widening due to continuous decline in exports and increase in oil prices, which is a dominant constituent of our imports. The weakened Rupee has also added to our woes, further pushing up import cost. The food inflation also continues to hover at the 10+% mark. With poor monsoon in India and large scale crop damage in US this year, food inflation may further go up and push the overall inflation rate. Hence, in SMERAs opinion this is still not a clear signal for changing times for our economy.

Kindly share the roadmap of SMERA for the on-going financial year 2012-13.

Parag Patki: While SMERA would primarily focus on SME ratings and is targeting to achieve cumulative ratings of 25,000 SME ratings this year, SEBI licence to rate bonds and IPOs would enable SMERA to diversify its offerings to the corporate sector too. SMERA is also keenly awaiting accreditation from RBI for Bank Loan Ratings which will open doors to the SMEs as well as corporate sector to a choice of better service as well economical pricing advantage. In addition, SMERA would continue to evolve newer products so as to cater to the requirements of bottom of the pyramid SMEs and also play an important role in financial literacy of the sector with the help of technology. Similarly, handholding SMERA rated universe to explore newer avenues of funding for growth such as: SME Exchange/ Private Equity/Risk Capital/Venture Capital will be other focus areas this year for SMERA.

Overdue invoices pose biggest hindrance in SME growth

 Chasing overdue payments is the biggest obstacle in the growth of the small and medium scale enterprises (SMEs). To get rid of this unfair business practice, the small traders have sought government intervention with the setting up of a full-power regulator which will ensure the timely payment of all invoices by the big players.

Reports suggest that the problem of late payment is continuously affecting the cash flows of numerous small companies and severely restricting the efficiency of their business. Hard hit mid-sized traders have demanded the authorities to enforce some rigorous regulation and play a proactive part in doing away with this ailment. Primarily, the irregularities of large players are responsible for the dwindling cash flow of the small scale units.

The SMEs or small scale industries (SSI) say that there are very few big companies who follow the payment norms of 45 days and give a lame excuse of not receiving the bills, which is always sent along with delivery of goods.

The syndrome needs to be cured on an urgent basis as it is continuously hitting the SMEs hard and is the reason for them reeling under the pressure of overdue invoices. Usually, the large companies attribute the delays in settlement of payment of bills to lengthy and complex bill passing procedures, following the cheque preparation, signing and handing-over procedure, which entails a few weeks to months to come up with a final payment.

Besides, the interest retrieving is another matter of concern for the mid-sized companies. In a bid to maintain a healthy and long-term relationship with their clients, small traders turn a blind eye to the interest and the clients leave no stone unturned to take undue advantage of the situation.

The government offers a legal approach for SMEs facing such a problem in Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.. It is aimed to facilitate the promotion and development besides competitiveness enhancement of MSMEs.

In order to curb the growing menace of overdue invoices, the representatives of several small firms have submitted there suggestions in a survey, helping the small traders to get their accounts paid much more quickly while keeping all of their clients happy without facing any confrontation.

The introduction of credit policy in an organisation has been voted as the best way to protect the revenue of the business. An effective credit policy not only ensures good commercial practice but also protects the revenue. The creation of credit policy involves a secured copy of all invoices in a file, along with a weekly check on them and act accordingly.

On the other hand, the constitution of an SME certificate-issuing body has also been hinted as the measure to pause the late payment sequence. Small traders seek the body to have powers to keep a close watch on big firms, conduct audit at frequent intervals, and issue No Objection Certificates (NOCs).

The introduction of a 'credit card type system' can also minimise the problem at some extent. The industry seeks the body to come up with defined credit-period among the parties and in case the period has not been mentioned, it should include the maximum number of days to clear the payments. The system should also include the lenders to offer a collective system of operation of settling the payment and the credit period.

The setting up of a credit-rating body to voice problems and concerns of SME sector has also been proposed by the respondents. The body is recommended to be constituted through a forum or a third party.

The government should come up with a stricter legislation against the bigger companies who are disheartening the potential SMEs with unfair business practices and affecting the small and mid-sized companies who have limited cash flow and limited bank support. The joint cooperation from the fellow-traders and government is highly required to reduce this menace.

ITPO provides needful impetus to MSMEs, says Rita Menon, CMD of ITPO

Accentuating ITPO's major contribution in bringing the Indian businesses particularly those in the SMEs and MSMEs sectors closer to global markets, Rita Menon, chairman & managing director (CMD) of Indian Trade Promotion Organisation (ITPO) said that the organisation puts special focus on SMEs/MSMEs products and services during its B2B specialised activities.

 

ITPO's exhibitions in India and abroad are the most reliable platform for promotion of SMEs, she said in an exclusive interview.

 

 

How would you relate trade fairs with SMEs/MSMEs ?

Rita Menon: ITPO has been playing a pioneering role in the national trade growth dynamics since its inception. As an ideal catalyst for India’s trade promotion, ITPO provides desired impetus to the process of enhancing technological capability of the SMEs and MSMEs. These events offer a unique forum of B2B meetings for promotion of these sectors. 

 

 

What is the current scenario of trade and business in India?

 

Rita Menon: Integrating with the global economy, Indian trade and commerce is in a transition stage. In view of the contemporary challenges in the country, a fresh initiatives have been taken by the Government such as economic reforms and the country is becoming investor-friendly. Indian companies are competitive effectively both at home and abroad. They are also investing around the world.

 

 

 

ITPO primarily aims to promote country's external trade. What new business initiatives your organisation has undertaken in recent years to promote India's external trade?

 

Rita Menon: ITPO organises national level participations in major international trade fairs and exclusive India trade shows overseas in line with the market opportunities. These efforts are made and in keeping with the Government’s focus programmes in the Africa, Latin America, specific CIS countries and also for promotion of products including setting-up exhibitions in different countries where bilateral agreements have been taken place. Currently, ITPO organises India pavilions in around 30 trade fairs. Some of the prominent overseas events in which ITPO organises national participation are: Anuga Food Fair, Cologne, Sial, Paris, AF-L Artigiano de Fiera, Milan, Hospitalar, Sao Paulo, Asia Pacific Leather Fairs, Hong Kong, AApex, Las Vegas, Australia International Sourcing Fair, Sydney, Foodex, Tokyo, Africa Big Seven/Saitex, Johannesburg, National Hardware Show, Las Vegas and Practical World, Cologne. Besides, two highly popular regular ‘India Shows’ are organised in Osaka, Japan annually are India Home Furnishings Fair and India Garment Fair.

 

It is a matter of pride that ITPO has been the official organiser of India’s participation at World Expo series and would be playing the same role in Expo Milan 2015.

 

 

 

How is your organisation helping SMEs in disseminating information about their enterprises and also accessing markets? Rita Menon: Apart from its role in bringing the Indian businesses particularly those in the SMEs and MSMEs sectors closer to global markets, ITPO provides reliable trade information to the foreign buyers and exporters. Its dedicated trade portal: tradeportalofindia.com assists in accessing potential markets for SMEs. Besides, ITPO has always special focus on SMEs & MSMEs products and services during its B2B specialised activities including IITF, an annual magnum opus of the organisation.

 

How, according to you, MSMEs, can extend their reach to customers in different markets in such a competitive environment?

 

Rita Menon: In this fiercely competitive scenario, India MSMEs have to improve, upgrade and acclimatize their products and services, as per the global standards in quality. Promotional back-up through exhibitions and e-commerce play a pivotal role in business expansion and brand promotion
globally. 

 

 

For SMEs, which is the most effective way of promoting trade?

 

Rita Menon: As earlier mentioned, ITPO’s exhibitions in India and abroad are the most reliable platform for promotion of SME’s. Along with interaction with potential buyers, these events offered opportunities in the form of technology transfer, exploration of joint ventures and creating fresh business network.