Access to Bank Credit to Small and Medium Enterprises Essay

Finance function is the most important of each business functions. It corpse a condense of all business activities. Financing SMEs has acquired enormous vastness in contemporary world of pays. This is primarily due to the national focus and priority of various countries developed and developing ones as well. In the Sri Lankan linguistic context , the government has provided impetus to the authorities to increasingly cater to the emerging pecuniary postulate of the SMEs. Bank and Institutional finance are expected to be made avail competent on easy and flexible terms and conditions and on priority basis.Small and Medium Enterprises(SMEs) are hit by unequal access to funds. This shadow be overcome if fiscal institutions are able to assess firm- give wayicular and general riskinesss and offer innovative products. This as per my personalized opinion heap be achieved by the formal financial institutions nevertheless when the so called sound cite principles are applied in a firm- special look to suit individual borrowers. In order to obtain camber credit, SME loan applicator shall prepre an effective credit proposal ,in a way, that the financial institution could consider favourably.See more Beowulf essay essaySMEs much(prenominal) as restaurants, lathe-work shops, brick-kilns, grocery stores, rice mills, factories and farming etc. need finance to purchase capital goods and raw materials, procure stocks, pay wages ,meet separate working capital requirements and backing expansion plans. Despite the efforts of the Government and support from the Ministry of Finance and Planning and the Central Bank of Sri Lanka by including SME as a priority welkin and by providing refinance facilities , there last out to be a huge demand supply mismatch in SME pay. oneness of the major reasons for pious platitudes being unable to bridge this gap is the perceived credit risk involved in financing SMEs. This is primarily due to non-avail superpower of comely business relationship records, valid bills and working capital management etc. As at present,to mitigate much(prenominal) credit risks , affirms typically look for deepen collateral or equity , both of which cannot be brought in by most entrepreneurs . Further, due to small size and local presence of SMEs , the doing costs involved in financing them are relatively rattling mettlesome.However, the good news is that wider credit distribution could be made to SME sector using modern secured transaction law ,introduced recently by the Secured proceeding Act 2009, which recognizes utilization of movable assets of a business as collateral to obtain credit. Further the Institute of Chartered Accountants of Sri Lanka(CA Sri Lanka)in its capacity as the fillet of sole accounting standard setting authority in the country has introduced a simplified financial report standard for the benefit of the SMEs in the country.The reporting framework so far has been a general setoff accounting standards to be used by all organisations . In 2011 CA Sri Lanka make the Sri Lanka accounting standards for SMEs (SLFRS for SMEs) with effect from 1st January, 2012. By removing some accounting treatments admitted down the stairs panoptic SLFRSs, eliminating topics and disclosure requirements that are not generally germane(predicate) to SMEs , and simplifying requirements for deferred payment and measurement, the SLFRS for SMEs reduces the volume of accounting treatments applicable to SMEs by more than 90% when compared with the full set of SLFRSs.SLFRS for SMEs would be applicable for the entities that do not fox humans accountability (listed companies) and publish general purpose financial statements for external users such as Banks and supplier creditors. This impart greatly help SME entrepreneurs to access otherwise organizations in a formal manner and enhance their businesses, once they range practicing this accounting reporting procedure.In the face of the banks hesitation to lend for want of proper accounting records , these enterprises are compelled to resort to high cost, non-continuous financing from money lenders and other informal sources , or continue to hunt down at sub-scale. However when SMEs start practicing and using above two facilities ( furnish in the Secured Transactions Act 2009 and the simplified SME Accounting recording procedure) the paradox of enjoying credit from formal institutions such as Banks get out be greatly reduced. Risks faced by any business can be in general classified as idiosyncratic or systemic.Idiosyncratic risks are specific to an enterprise , like skill of entrepreneur or location of business. general risks on the other hand , are beyond the control of any enterprise such risks make up the environment in which a business operates ,that is, the economic environment, social environment, fiscal environment etc.. Thus the systemic risk involves risks due to change in preference of customers, change s in delivery and changes in tax structure etc. Therefore the key to financing any enterprise lies in the ability of the borrower submitting his credit proposal with relevant information necessary o financier to evaluate the loan applicant to manage the risks involved in the proposed business.High quality origination can help evaluate idiosyncratic risks specific to the enterprise, well. Traditional form of risk mitigation is to cushion the risks with as much as equity from the entrepreneur. A high quality local financier with geography and business specific information about such enterprises in the operational area will be able to evaluate and manage this risk well and will demand less equity to be brought in by the entrepreneurs. general risks, notwithstanding, are quite different from the firm-specific risks and are arising out of the changes taking spatial relation in the market characteristics. It affect the business in every human face and as such is huge and no amount of equity is adapted when the financier is uncertain about an enterprise selling anything at all in the environment where demand patterns and economic situations can change very quickly. Therefore particularly in financing procurement of capital goods for large periods ,the banks search for cues to establish that the business has a current and future ability to service loans, even in an uncertain business environment.Hence in financing acquisition of capital goods it takes the form of project evaluation , however small is the business. Such situations can be managed by local bank branch which is quite familiar with the market environment of the locality. Thus the disorder and the other financials can be projected by the local bank branch staff in a more realistic manner using their knowledge in customer preferences and scale of demand in the area. This helps banks to reduce the risk involved in project loan subject term finance. Further more flexible and innovative evaluation techn iques have to be used in considering term loans for SMEs.However, SME enterprises that have large enactment of capital transactions , poor record of sales, produce undifferentiated goods and deprivation known usual clients , assessment of systemic risk becomes very difficult. Such challenges, however, can be addressed through structures , that allow financiers to trap cash flows by imposing conditions in the loan offer letter that permit resorting to a stronger and well established sales pattern in a supply chain. Some ways of financing working capital needs of SME businesses are supply chain financing where a supplier and a buyer have maintained books of accounts properly can be financed.For exemplification , small enterprises that manufacture and supply sauces, jam and the like to large enterprises such as supermarkets can be financed if their cash flows are reconciled with bills , or by obtaining a collateral /guarantee from the company to which it supplies. Banks also can fi nance similar transactions of SMEs by discounting Bills of Exchange drawn by the supplier( SME entrepreneur ) and accepted by the large enterprise to which supplies have been made. This provides part of necessary working capital needs of the enterprise enabling it to continue production at an enhanced scale.