Transparency will help small companies: S

New Delhi, May 8: Greater transparency and independent financial information about small and medium enterprises (SMEs) would encourage a more efficient financing market for Asia's smaller companies and support broad-based economic growth in the region, according to a leading rating agency.

''A vibrant SME sector is vital to the well being of the region's economies, whether they are developed or developing,'' said Tom Schiller, head of Standard &Poor (S&P) Asia-Pacific region at a seminar held in Japan.

SMEs globally account for 50 per cent of GDP, 30 per cent of exports, 10 per cent of FDI, 60-70 per cent of private sector employment, and 95 per cent of all enterprises, as per the data of Organisation for Economic Cooperation and Development (OECD).

''However, SMEs face unique challenges that constantly threaten their viability and existence, including their heightened vulnerability to the business climate, unpredictable access to capital, governance by misguided regulation that often constrains their development while seeking to support them, and lastly, their own management and governance challenges.'' Dependable access to finance is the biggest problem facing SMEs in the region, the world leading rating agency said at the seminar held at the 40th annual general meeting of the Asian Development Bank in Kyoto on Saturday.

Lack of transparency and limited availability of independent financial information about SMEs is hampering the development of new sources of finance for smaller companies. The result is over-reliance on traditional bank lending, lack of capital market access and inefficient pricing of SME credit risk.

Governments and regulators are supporting SMEs in the region through credit subsidies or guarantee schemes, but these policies may actually stifle competition and innovation, the very qualities that define a healthy SME sector.

Michael Petit, head of corporate and government ratings in Asia-Pacific, said, ''We would much prefer to see policies aimed at improving the business environment -- such as creating laws that allow for the registration of security interests on a wide variety of assets, that protect property rights, that make it easy to enforce contracts, and that enhance transparency so banks can provide finance with greater confidence.''

Agency Managing Director for Japan, Korea, and Taiwan Yu-Tsung Chang said credit model and ratings for SMEs could play an important role in opening up financing opportunities for smaller companies in the region. ''Ratings also help SMEs showcase their financial standing for purposes such as for recruiting, advertising, internal reviews and business expansion, including securing new customers or suppliers.'' ''SME ratings have become a strong tool in communicating an SME's credit quality to various stakeholders, including customers, suppliers, banks and even their own employees,'' he added.

Mr R Ravimohan, Managing Director and CEO, CRISIL, an S&P company in India which also provides ratings to SMEs, said, ''We have rated close to 1,000 SMEs in India and the feedback from the rated companies is very positive. Ratings help financing, enhance governance, improve credibility with customers, and are valuable as self-improvement tools.'' He noted that ratings add value to banks in their lending process. ''Easier and stable access to financing by SMEs will be possible only when banks and other financiers are able to assess credit risk for SMEs in a more scientific manner. Independent third party credit ratings are a good solution.'' Last week, national and international experts at an SME Cluster Conclave also emphasised the critical importance of SMEs in India's economic growth.

It was announced that the government propose to increase financial assistance to existing clusters of micro, small and medium enterprises (MSME) by upto as much as 80 per cent of their financial requirements under the 11th Plan.

It was also proposed to build a pool of consultants under its national manufacturing competitiveness programme to enable MSMEs to become competitive. These consultants would be deployed with a cluster of 8-10 companies for a period of one to one-and-a-half years and their cost will be borne by the government.

United Nations Industrial Development Organisation's (UNIDO's) regional representative in India said the UNIDO has proposed a 5-year strategy for India, of which cluster development would be an integral part along with programmes aimed at upgrading technological capability and building up of social capital in the country's industrial sector.

UNI