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Various Issues Related to Finance

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Various Issues Related to Finance

  1. 1. VARIOUS ISSUES RELATED TO FINANCE IN Presented By- Babita Kumari Semester III (MBA – M52) MONIRBA , University of Allahabad
  2. 2. CONTENT INCLUDES…  Why finance is an essential part of any enterprise  Issues and challenges related to finance in MSME’s  Conclusion
  3. 3. WHY FINANCE IS ESSENTIAL  Finance is the elixir that assists in the formation of new businesses.  Allows businesses to take advantage of opportunities to grow, employ local workers and in turn support other businesses and local, state and federal government through the remittance of income taxes.  The strategic use of financial instruments, such as loans and investments, is key to the success of every business.  Financial trends also define the state of the economy on a global level, so central banks can plan appropriate monetary policies.
  4. 4. ISSUES AND CHALLENGES CONTINUES…  Non-availability of timely and adequate credit  High cost of credit  High risk perceptions among banks for lending to MSMEs  Non conducive bank policies towards lending to start-ups  Collateral requirements  Inadequate information available  Lack of owner’s capital  Difficulty in loan proposal evaluation
  5. 5. ISSUES AND CHALLENGES CONTINUES…  Non-availability of timely and adequate credit : Non-availability of timely and adequate funds is one of the most critical problem faced by the MSME sector.  MSMEs are more vulnerable to information problems..  MSMEs are much more bank-dependent than large enterprises.  The other argument is that MSME firms have lower profitability and therefore banks are reluctant to lend to them.
  6. 6. ISSUES AND CHALLENGES CONTINUES…  High cost credit :  Interest rates for non-collateral as well as collateral backed loans to MSMEs are often very high and at times prohibitive.  Banks regard this sector as high risk segment for different reasons and hence charges higher interest rates and transaction costs from MSMEs.
  7. 7. ISSUES AND CHALLENGES CONTINUES…  High risk perceptions among banks for lending to MSMEs :  Banks regard this sector as high risk segment for different reasons like low capitalization, lack of appropriate accounting records, and unavailability of complete financial statements and business plans. Precisely because of this banks demand heavy collateral, charge higher interest rates and transaction costs from MSMEs.
  8. 8. ISSUES AND CHALLENGES CONTINUES…  Non conducive bank policies towards lending to start-ups :  It has been observed that the Banks give undue significance to business vintage and financial statements / track record to compute eligibility for loan. Banks solely consider the financial statements to compute loan eligibility of MSMEs. The credentials/ background of the entrepreneur, the business potential of the organization and the product, markets served and future cash flows are not given much importance while computing the credit offer.
  9. 9. ISSUES AND CHALLENGES CONTINUES…  Collateral requirements :  Banks seek tangible assets to secure their loans against default. MSMEs normally do not have sufficient collaterals to obtain debt finance. MSMEs especially start-ups/early stage firms do not possess sufficient collaterals, and in case they do, the personal assets do not meet the loan to value norms of the bank.
  10. 10. ISSUES AND CHALLENGES CONTINUES…  Inadequate information available :  Inadequate information available on Credit Guarantee Scheme at Banks.  Banks generally target to promote there conventional loan products and are often reluctant/not aware to offer information on the CGS scheme. Consequently, most of the MSMEs are not able to get relevant information regarding the credit guarantee scheme from banks.
  11. 11. ISSUES AND CHALLENGES CONTINUES…  Lack of owners capital :  Lack of owners capital reduces eligibility to raise debt finance as It has been seen that MSMEs typically bring in capital into the business from their own / borrowed money from relatives, which is a normally a small amount. Lending agencies are reluctant to fund when they discover lower risk /capital contributed by the entrepreneur.
  12. 12. ISSUES AND CHALLENGES CONTINUES…  Difficulty in loan proposal evaluation :  It has been observed that several areas of MSME businesses are challenging to evaluate due to lack of adequate information / absence of proper records. In such a situation, it becomes difficult for the lending agencies to appraise the loan proposal. Further, due to low level of technology adoption and poor record keeping and lack of efficient systems and processes, the whole process of evaluation of loan application is extremely resource intensive and costly for the lending agencies.
  13. 13. CONCLUSION  The challenge for banks is to bridge the information asymmetry so as to take the appropriate lending decision so that the good firms are not financially constrained, and at the same time, cut down on exposures to bad credit risks.  Measures such as credit scoring for SMEs should improve the quality of financial information and enable greater funding for the sector. The strengthening of legal provisions to take possession of assets used as security has improved the legal environment for lending in India, thus lowering the cost of lending and enforcement of contracts.

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