SMEs -The Smart Enterprises

Abstract

Small and Medium Enterprises (SMEs) are crucial for the economic growth and stability of any country and play a vital role especially for developing countries as they facilitate economic activity and provide employment thus contributing to poverty reduction. In the Indian context they can be considered as the backbone of national economy. The major constraints of SMEs are finance for initial capital and working capital, Line of credit from the suppliers, new technology to produce quality products/ give service, ability to hire qualified and professional staff for production, service and marketing. Majority of the banks consider lending to SMEs an unattractive venture due to a range of factors including information asymmetries and consequently high transaction costs, collateral requirement, financial products not meeting SME sector requirements in medium to long term Information asymmetries, due to inefficient legal system and weak governance structures of SMEs, result in higher transaction costs on the supply side. On the demand side we find most of the SMEs tend to shy away from formal modes of financing due to the high cost of credit, lengthy procedures, collateral requirements and lack of awareness about the benefits of corporate governance. External finance cannot be obtained by firms in their start-up phase as their management structures are not transparent and usually have intangible assets. International investors are often reluctant to invest in developing countries because their institutions do not provide an adequate level of security for their investment particularly in terms of enforceability of legal rights and governance framework. MNCs and international investors will be willing to forge partnership with SMEs only when their level confidence and trust increases regarding transparency and governance of the local partner. Another problem for most of the SMEs being family owned enterprises is that there is no clarity on the roles resulting in credibility problems and inability to arrive at strategic decisions. Good governance is vital for the development of a healthy and competitive corporate sector. For SMEs, corporate governance is about the respective roles of the shareholders as owners and the managers. It is about establishing rules and procedures to manage and run the enterprise. It has been empirically tested that good governance practices of a company gives a positive signal to investors. With the globalization of markets, international capital flows have become extremely valuable source of external financing. Good corporate governance leads to development of a framework that provides adequate protection to the interests of stakeholders and reinforces the fiduciary responsibilities of those vested with the authority to act on behalf of the stakeholders. This paper would analyze the current status of Indian SMEs and how, the introduction SMART governance frame work can make the SMEs SMART Enterprises.