Small and medium enterprises (SMEs) in the country may soon be able to offer managerial capabilities as a collateral against loans. The Export Import Bank of India (Exim Bank), in association with an arm of the UN, has just completed a pilot project, experimenting with innovative non-financial assets that can now be valued to make loans available to small enterprises that otherwise did not qualify. About 20 companies have already been granted loans on such parameters and the bank is considering at least 40 more.
SMEs are companies whose headcount or revenue fall below certain limits. The definition could be up to 500 employees in Germany or just 100 in neighbouring Belgium. In the Indian context, focus is on annual revenue.
The pilot project dubbed “loan.com” offered loans to SMEs not solely on their financial strength but other intangibles such as managerial capabilities. SMEs often find it difficult to get funding from banks and financial institutions as the guarantees they offer are often unacceptable to financial intermediaries.
“India has been chosen as a destination (for this project) because of the sheer number of SMEs this country presents. We recognize the potential of SMEs to become the oil of the machinery called economy and thus decided to partner with Exim Bank to empower them,” says Aicha Pouye, director, division of trade support services, International Trade Centre, a UN arm.
According to data with Exim Bank, there are 12 million SMEs in India that employ 28 million people. These companies produce products worth $89 billion and account for 33% of India’s total annual exports. Exim Bank had received a grant of €200,000 from the European Commission, through its Asia Trust Fund, for a one-year project. The International Trade Center provided technical expertise to this project and has helped develop the methodology for banks to simplify granting of loans to SMEs.
Economy’s oil: Exim Bank, with the International Trading Centre, makes loans for SMEs, such as this incense sticks business, easier
Exim Bank, which used to follow the traditional model of lending where lenders look at financial collateral or assets drew up a list of prerequisites for SMEs it would lend to under the new project. The firms considered: had a turnover that did not exceed Rs45 crore; employed more women than men; were largely export-driven; and were based in rural India. Fifty SMEs were selected through collaboration with the regional offices of Exim Bank across India.
“The first thing that we had to do was to draw up an elaborate questionnaire that would judge the non-financial parameters in a fair manner. We had anticipated that SMEs would be apprehensive about divulging information and it took us some time to convince them that this was for the purpose of granting a loan to them,” says Shankarnarayan Rao, executive director, Exim Bank. The bank is still experimenting and ultimately wants to move to a stage where SMEs can file all the information required electronically to qualify for a loan.
The pilot project is the first instance of such innovative collateral being used by financial institutions across the world and the UN arm is keen on spreading this experiment to other developing nations in Asia and Africa.
“I have been in business since 2003 and was looking for a loan. I went to all the private and public sector banks in my hometown and even to Chennai, but no one would give me a loan because I could not produce a formal collateral—a letter of credit,” says Poorna Prakash Vittal, proprietor of Subiksha Ayurvedic, an incense stick company that is a recipient of an SME loan. Vittal responded to an ad he saw in a paper from the Exim Bank; was surprised when some officers from the bank arrived at his factory within a week; and received a loan of Rs45 lakh (without collateral). The company’s turnover has since risen from Rs20 lakh to Rs60 lakh and Vittal is now looking to expand to Europe.
The pilot project methodology follows a four-step process. First, the background of a company is established by detailed questioning by the bank. At the next stage, a financial review of a loan request is done where the bank takes into account the financial parameters. Then a management competency analysis is done and the future growth plan for the SME is drawn up. Finally, the bank assists the SME in meeting specific requirements.