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Overview of Cluster Financing


This chapter analyses the various aspects of financing such as availability of funds, sources of funds and the hurdles that confront the SMEs belonging to the chemical, pharmaceutical and textile industry in the Mumbai cluster.

Sources of funds

The survey revealed the various sources of funds considered by the respondent SMEs to meet their financing needs. Almost 82% respondent indicated bank term loans as one of the avenues they had utilised for finance in the past. This trend seems to be on a decline as 74% respondents cite bank term loans among the various alternatives for raising funds in the future.

Among the total respondents that cited bank term loans as one of the sources of finance in the past, approximately 38% respondent belonged to the textile sector. On the other hand, pharmaceutical companies accounted for 45% of the total companies that utilised internal accruals or their own sources as one of the avenues to meet their funding requirements in the past.

Another interesting insight from the survey results was that none of the companies were interested in raising funds from sources like NBFCs, private lenders. In the past none of companies raised funds from Venture Capitalists/Private Equity but a few had plans to raise funds through these channels along with tapping the equity markets.

Deployment of funds

As per the survey, working capital requirement emerges as the key area where the respondents deploy their funds. Almost 90% of the respondents indicate working capital requirements along with other areas where funds were deployed in the last three years. Almost similar percentage of respondents indicate the deployment of funds for meeting working capital requirements along with other areas in the coming three years.

Companies that belong to the chemical and textile industry have displayed major requirement of funds for working capital requirement. Chemical and textile companies accounted for approximately 38% and 34% respectively of the total companies that deployed their funds for working capital requirement along with other areas in the last three years.

Credit obstacles

While applying for a loan, the respondent companies found higher interest rates and collateral requirements to be the two major obstacles. Among the respondents that face problems due to higher interest rates about 87% respondent sought funds for meeting their working capital requirement. There appears to be a significant difficulty for companies in the cluster to raise funds for working capital requirement due to higher interest rates.

Among the respondent companies that are hindered by higher interest rates approximately 50% companies belong to the chemical sector.

Section A: Chemical Industry

Sources of funds

According to the survey, the three most preferred sources of financing for the chemical SME’s were: bank term loans, overdraft/cash credit or internal accruals. Most companies are planning to avail loans from the same source which they had availed in the past. Bank term loans emerged as the most preferred source of financing for companies in the past and are likely to remain so in future; overdraft/cash credit is the other most preferred source of financing.

Deployment of funds

The survey revealed working capital requirement as the key area where the respondents deploy their funds. Almost 78% of the respondents indicate working capital requirements along with other areas where funds were deployed in the last three years. Whereas 88% respondents indicate the deployment of funds for meeting working capital requirements along with other areas in the coming three years.

Credit obstacles

Higher interest rates are the biggest obstacle that chemical companies in the cluster face while applying for loans. Apart from these, collateral requirement and long legal procedures are the other tedious obstacles that companies face while applying for loans.

Section B: Pharmaceutical Industry

Sources of funds

Out of the total respondent companies in the survey, approximately 70% companies in the Mumbai cluster have utilised their internal accruals along with other sources for finance in the past. This trend is expected to continue into the future as 71% respondents have indicated that they will utilise their internal accruals along with other sources to finance their future needs. Bank term loans proved to be the second choice for these companies for financing as approximately 68% respondents obtained finance through this source along with other sources in the past. However, this trend is on the verge of declining, as only 56% respondents indicate that they are planning to utilise bank term loans along with other sources in future for their financing needs.

Deployment of funds

Working capital requirements has emerged as the most important application of fund for the respondent companies in the cluster. According to the survey, 85% of the companies have deployed funds for working capital requirements along with other requirements the last three years and similar percentage of companies have indicated deployment of funds for working capital requirements along with other requirements in the coming three years.

Procurement of funds

The survey reveals that procurement of funds is not a key challenge for the respondent companies in the cluster as 37% companies found procurement of funds to be very easy. This can be attributed to the fact that approximately 70% respondents in the sector have utilised their internal accruals along with other sources for finance in the past. Only 6% companies find it very difficult to obtain finance.

Credit obstacles

According to the survey the respondents face various obstacles while obtaining credit. Among these obstacles, long legal procedures was ranked as the biggest obstacle by the respondent companies. Collateral requirements while applying for credit was ranked as the second biggest obstacle in the survey.

Section C: Textile Industry

Sources of funds

According to the survey results, majority of the respondents in the textile industry prefer to arrange for their financing needs through bank term loans and internal accruals or through their own sources of finance. In the past none of companies raised funds from Venture Capitalists/Private Equity but a few had plans to raise funds through these channels

Deployment of funds

As per the survey, working capital requirement emerged as the most prominent financing need of the respondents in the cluster in the last three years. For the coming three years, working capital requirement will continue to be the most prominent financing requirement for the respondent companies in the future.

Procurement of funds

Out of the total companies that were surveyed in the textile industry, around 43% of the companies found procurement of funds relatively easy. Around 40% of the remaining companies faced moderate difficulties in the getting funds.

Credit obstacles

The major credit obstacle faced by respondent companies in the Mumbai cluster, according to the survey was the high interest rates charged by banks and financial institutions. Other credit obstacles as per the results of the survey include, the credit ratings requirements and the perception of high credit risks by banks & financial institutions while lending funds to the SMEs.