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2. MSME - Background and Structure

3. eee
Definition of MSME

Plant and Machinery Turnover
<= to 1 crore <= to 5 crore
<= to 10 crore <= to 50 crore

Medium <= to 50 crore <= to 250 crore

Micro Enterprise: Investment in plant and machinery or equipment does not exceed one crore
rupees and turnover does not exceed five crore rupees;

Small Enterprise: Investment in plant and machinery or equipment does not exceed ten crore
rupees and turnover does not exceed fifty crore rupees;

Medium Enterprise: Investment in plant and machinery or equipment does not exceed fifty crore
rupees and turnover does not exceed two hundred and fifty crore rupees.

4. | Market Scenario

+ MSME sector is the backbone of the economy and crucial for growth of the country

+ As per IFC Report on MSMEs, over 55.8 Mn enterprises operating employing about 124 mn people

+ Accounts for 31% of GDP and 45% of Exports

Size of the MSME Sector in India (in million)

Sac SUE ham Rear or WC ap Aas

Sree: MSWE Fond FC

94.9%

Micro

49%

27

Small

02%

01

Medium

Size of the MSME Sector in India (in million)
15% 85%

Bs

Registered Unregistered
Source Mis SUE YO Az WBC ea Aras

5. | Structure

MSME Sector in india by Industry (in milion)
nership structure of Enterprises inthe MSME Sector os zn
be dei is = E

Pater E Manufacturing Service

rate Campe on
Pa company oo Top five Industry of Operation (% of total MSMES)
Copec ou

or es

+ Manufacturing - From Handmade Crafts to high precision tools

+ Service Sector - Tourism and Hotel Mgmt, Trade, BPO, IT

a e
+ MSME Domination Industries - Retail, Food Products, Apparel, Motor ES
Vehicles R . = D = =
Meat "Fondue Warn Reale Tentes
eee A
foto ves

Source: MSME Cnsus 2007) BG Itllcap Analysis

Sure MSMEFncng I

6. | Regional Distribution

Distribution of MSME Enterprises across India

Karnataka constitutes about 38.34 lakh MSMEs, about 6% of the total in India

7. | MSME Registration Initiatives

Majority of MSMES are unregistered - cannot access Govt Grants, Subsidies
+ Critical criteria for the development of MSMEs for proper planning of subsidies and Grants is the data on MSMES
+ Currently full data - financial or operational - is not available on MSMES

+ To properly capture the data - Government has replaced the old Udyog AADHAR Memorandum (UAM) with UDAYAM - https://
udyamregistration.gov.in.

+ Firms Registered with the Udyam becomes eligible to receive the benefits of several government schemes such as subsidies, easy loan
approvals

Benefits of UDAYAM Registration
+ Industrial Promotion Subsidy (IPS) Subsidy Eligibility

+ Interest rate Subsidy on Bank loans, Collateral free loans from banks
+ Protection against delayed payments, against material/services supplied

+ Ease of obtaining registrations, licenses and approvals.

+ Msme Registered entity gets eligible for CLCSS (credit linked capital subsidy scheme)
+ Government security deposit (EMD) waiver (Useful while participating tenders)

+ Electricity bills concession

+ Stamp duty and registration fees waiver

+ 150 certification fees reimbursement

+ NSIC performance and credit rating fees subsidy

+ Barcode registration subsidy

8. | Covid impact on MSME

COVID-19 Pandemic — FICCI Survey Findings* (ca

Expected Impact on Order Book

9. Funding Demand

10. Overall Demand

Se ener eee AA Overall Finance Demand by the MSME Sector - 2017 (INR trillion)?

70% 30%

Total Debt Working Capital capex
Demand Demand

Stee won mf in Ra

+ Total Funding — both Equity and Debt is estimated to be Rs. 87.70 trillion
+ Debt Demand constitutes Rs. 69.30 Trillion

Sever: MSMERnoncng, Fe

11. | Addressable Demand

Addressable Debt Demand by Size of Enterprise - FY 2017 (INR trillion)”
‘Addressable Debt Demand by the MSME Sector - 2017 (INR trillion)" po
p > =

+ Addressable Debt Demand is the amount formal Financial Institutions can provide

+ Exclusions include those businesses which are not creditworthy, sick, those who seek finance from informal
sources etc

+ Formal Financial Institutions can address about 53% of the overall Debt Demand

Source MSME Financing, FC

12. | Manufacturing and Services - Addressable Demand

‘Addressable Debt Demand of Top Service Sectors - 2017 (INR trillion)”

‘Addressable Debt Demand of Top Manufacturing Sectors - 2017 (INR trillion)”
5 3
a am

(3) eo a
Oben Sets Cte | pt

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‘Chusilary Activities — Maintenance of
ours Tots” bat ode wag A —
pi A ed ri
alas ps
een nn

‘See Mans ons pres

Sever: MSMERnoncng, 15

13. | supply of Debt

‘Supply of Debt to the MSME Sector - 2017 (in INR Trillion)

068)

supp Formalsources Informal Sources

Formal Debt Supply to the MSME Sector - 2017 (in INR tion)"

es

=
Form Banking" Non Sanking and
ettsippy stuns | Coremment

‘Source: MEME Resocig, RC

‘be Supply to Micro, Smalland Medium Enterprise Segments Suppy ef Informal Debt tothe SE Sector - 0 (m NR Ton)“

2017 INR lon)”

Sad Se Be
Cr

+ Even though the Addressable Debt Demand was estimated
to be Rs. 36.74 Trillion, only Rs. 10.9 Trillion was supplied
from Formal Financial Institutions

+ Substantial amount of Rs. 58.4 Trillion came from Informal
Sources

14. MSME Challenges

15. | Credit Supply Gap

Credit Gap by Size of Enterprise 2017 (INR trillion)”

ys
B kl
“
258 058)
675

=

- ToalCrsitCap MkroEntepise Sal Estepise. Medum Enterprise
Totaleot ‘Adaressable Debt Total Formal Total esta CedtGap Crea
Demand ‘Demand Supply of Debt creat cap ds id sl

Credit Gap by Type of Enterprise - 2017 UNA trition)"

* Only Rs. 10.9 Trillion was supplied from Formal Financial
Institutions

* Credit Gap of Rs. 25.8 Trillion, which can be addressed by

Formal Institutions, Is currently serviced by informal
segment

Source: MIME Anand, RC

16. | Demand Side Challenges

Equity Base and Existing Debt
> Inadequate Equity base leading to over leverage
> Debt from Informal money lenders not reflecting in credit

bureau — difficulty in ascertaining actual Leverage

+ Receivables/Collection Demand-side
+ Huge Receivables - Collection from Pvt and Govt not on time pre)
* Cashflow mismatch leading to high NPAs in MSME sector Formal Credit

* Inadequate Collateral

> Shortage of immovable collateral
> Banks seek collateral - even for working capital
> Collateral requirements range from 1x to 2x times
+ Information Asymmetry
. . . + These challenges make MSME opt for unsecured Loans, even
> Promoter driven - no information in one place though athigh cost of borrowing,

> Reported Financial Data vs Actual state of affairs + Since Banks do not get the true picture of operations and debt
> Cash Transactions undermining profitability leverage, they continue to be cautious and are discouraged from
providing debt to MSMEs

17. A
| Supply Side Challenges

Outdated Credit Appraisal and Underwriting Process
> Past Financial performance vs future cashflows
> No assessment of future contracts and opportunities
> Full emphasis only on Collateral
> Credit scoring based on CIBIL and CRILIC only
+ Low Risk Apetite
> MSME considered high Risk - especially Small Enterprises
> Medium size companies are preferred due to stable cashflows
> Banks look for high Margin of Safety
> Risk Aversion is priority
+ High Transaction Cost
> Ticket size small but cost of due diligence and collections is high
+ Lack of Product Innovation
+ Standard Criteria with fixed products (eg. Term loans, WC)

+ Misaligned to the needs of MSME — Term, repayment structure etc

18. Funding Institutions

19. | Financing Institutions

Formal Sources (INR 10.9 rilion) Informal Sources (INR 58.4 trillion)

Other Banks
(INR 0.56 trillion)

Scheduled Commercial Banks
(INR 8.8 trillion)

“Source: MSME Financing, 11

Su MSMEAR 7, Bonk and CAR, SO, RE ABARD, many Resch leap nass

+ Traditionally funding has been from Public Sector Banks. PVT sector banks are following up
* NBFCs provided the fillip....but due to crisis in NBFC, credit flow is slow from them as well

* Govt has given license to Small Finance Banks to cater to MSME needs — they too heavily rely on collateral

* SIDBI, NABARD, ECGC, SIDC, Sectoral Departments play a pivotal role in providing finance and export credit —

timeline for processing is high though

20. | Rise of Digital Finance

+ Innovative Credit Appraisal and Underwriting Process
> Technology — Al and ML in credit assessment

> Assessment based on psychometric profiling — credit card bill
payments, Utility bills, own/rented house, social behavior on
social media

> Assessment based on banking transactions
+ Unsecured Loan/ High Risk Appetite

> Assessment of willingness to pay based on technology driven risk
assessment models — helps in catering to wide range of
borrowers

> Without collateral
+ Minimal Transaction Cost and Regulatory Obligations
> No requirement of multiple branches

> Incorporated as NBFCs, they have less regulatory obligations
compared to Banks

21. | Market Place Lending

+ Itis a digital platform connecting Borrowers and Lenders - any type of loan - Secured and Unsecured
+ The platform serves as an intermediary - connection borrowers with lenders including institutional and retail

* Facilitates in Assessment, Disbursal and Recovery of Credit
| Finance NBFCs/Marketplace

+ Vivriti Capital — Credavenue
Marketplace Lending Model
+ LendingKart

+ Innoviti

* Capital Float
+ Instakash

+ Loanzen

+ Kredx - online invoice discounting

+ SBI e-VFS - Receivable financing
+ SBI eDFS - Purchase Financing for Dealers
+ SIDBI - TReDS — MSME receivable financing

+ Similar other institutions

22. Government Schemes

23. | Key Schemes

Scheme Name efit
Emergency Credit Line Guarantee Scheme Eligibility: Upto Rs. 25 Cr Outstanding and Rs. 100 Cr turnover as on Feb
29, 2020. Credit line with tenor of 4 years and moratorium of 1 year
Guaranteed by National Credit Guarantee Trustee Company Ltd (NCGTC),
Gol

Credit Guarantee Trust Fund for MSEs (CGTMSE) - Provision of Collateral | The Scheme covers collateral free credit facility extended by eligible lending
Free Credit for MSMES institutions to new and existing micro and small enterprises up to Rs. 200
lakh per borrowing unit.

it to MSMEs The Scheme offers 2 % interest subvention for all Udyog Aadhar Number
(UAN) and GST registered MSMEs on fresh or incremental loans to the
extent of Rs. 100 lakh.

Interest Subvention Scheme for Incremental Cre

Credit Linked Capital Subsidy Scheme (CLCSS) To facilitate technology to MSEs through institutional finance for using well
established and proven technologies. Upfront subsidy of 15% on
institutional credit up to Rs. 1.00 crore (i.e. a subsidy cap of Rs. 15.00 lakh)
for identified sectors/subsectors/technologies

Make in India, Startup India, Atmanirbhar Scheme, Mudra Loans Various subsidies are available under these schemes

The above is only the key schemes widely used — other schemes on employment, skill development, cluster development Is detailed in MSME Annual
Report 2020-21

24. | SME IPO - BSE Exchange

Listing Requirement

. The SME must be a Limited Company.

2. The issuer or SME must have a post-issue face value capital of Rs.1 crore to Rs.25 crores. Entities
having a post-issue face value of over Rs.25 crores has to be necessarily listing on the Main Board
of the BSE.

3. Net Tangible Assets of the SME must be atleast Rs.1.50 crore, as per latest audited financial

results.

Positive Networth

The company must have a website.

The company must have a minimum of 50 investors while listing through IPO.

ONO

25. eS ee
| sme IPO - BSE Exchange... (Contd.)

Procedure for Listing on the BSE MSE Exchange

1. Appointment of Merchant Banker
The issuer Company must consult and appoint a Merchant Banker in an advisory capacity for the
listing on the BSE SME exchange.

2. Due Diligence and Documentation

The Merchant Banker would then conduct a due diligence regarding the Company i.e checking the
documentation including all the financial documents, material contracts, Government Approvals,
Promoter details etc. and prepare documentation for the IPO. Planning and documentation by the
Merchant Banker must include IPO structure, share issuances and financial requirements

26. A
| SME IPO - BSE Exchange... (Contd.)

Procedure for Listing on the BSE MSE Exchange

3. Application to BSE SME Exchange

Once the due-diligence and documentation is completed by the Merchant Banker, the draft
prospectus and DRHP is submitted to the Exchange as per SEBI requirements. After submission of
the required application and documents to BSE, BSE verifies the documents and processes the same.

On satisfactory completion of required process, BSE issues an in-principle approval on the
recommendation of the Committee, provided all the requirements are compiled by the issuer
Company. On obtaining in-principle approval, the Merchant Banker would file the Prospectus with
the ROC indicating the opening and closing date of the issue. On obtaining approval from ROC, they
intimate the Exchange regarding the opening dates of the issue along with the required documents.

4. Initial Public Offering (IPO)

The Initial Public Offer (IPO) opens and closes as per schedule. After the closure of IPO, the company
submits the documents as per the checklist to the BSE SME Exchange for finalization of the basis of
allotment. On completion of the allotment, BSE issues the notice regarding listing and trading.

27. Role of Chartered Accountants

28. A
| Role of CAs

+ Advisory
+ MSME promoters are ill advised — atleast what we have seen in our interactions
* Promoters know their business very well — have little time for financial structuring and running behind banks

+ Some advisors sell financial products not aligned to business needs — LAP and Unsecured Loan — vested interest
due to fees

+ LAP loan only provides upto 65% or 70% of colllateral value as loan

+ If properly advised, structured loan amount equal to full value of collateral can be accessed — 1x times
+ CAs can help

+ Maintaining proper books of accounts

* Pursue promoter to go digital in transactions - little cash transaction — it will take time but overtime it will be
beneficial

+ Help promoter in maintaining proper Collateral Registry

+ Help maintain all documents required for loan processing — we are experiencing even getting simple information
is getting delayed for many days

+ Help business access government schemes, grants, subsidies — keeping updated about various schemes

29. | Contact

[email protected]