New Delhi: Small and medium-sized business organizations often find it very difficult to raise capital. Banks are slowly warming up to this sector and are offering a slew of innovative credit and non-credit products, though. J. Moses Harding, executive vice-president and head–wholesale banking group, IndusInd Bank Ltd, tells Lipi Mohapatra of Mint about his bank’s focus on SMEs. Edited excerpts:
How do you plan to assimilate small and medium enterprises in your business model?
We look at a multiple-banking strategy for top-end SMEs — those with a turnover of over Rs300 crore —and sole-banking model for the low-end SMEs. The engagement will be holistic, with a good mix of fund based, non-fund based and non-credit products and services that will enhance the customer profitability.
Will the SME sector provide value addition to banking sector?
The SME sector is a good risk-reward portfolio for Banks. While top-end businesses are typically low-risk-low-reward, the lower-end ones offer higher rewards at higher risk levels. In a growing economy, top-end companies are highly overvalued, with unsustainable price-earnings multiples. This makes the SME sector undervalued and will bring in capital not only for value enhancement but also for capacity building. Expansion of capacity brings in banking and finance opportunities – generating value-added business for banks.
Why are banks generally averse to lending to startups?
There is no past track record for startup companies. You need to evaluate the “idea” and the people who will implement the “idea” into products that will match the existing competition. So, there is an element of high risk and uncertain reward. Moreover financing startups will result in Banks absorbing the full “downside” and the promoter enjoying the full “upside”. Which means such deals aren’t “win-win” propositions at all. Now, banks are looking at startups with a mix of debt and equity so as to enjoy the “upside” as well.
If the banks aren’t willing to help them, where else can SMEs go?
SMEs with good upside potential have many options – developmental institutions, foreign currency convertible bonds (FCCBs), private equity, venture capital, to name a few. With Basel II making it mandatory for SMEs to get rated, they can now access capital markets directly for their equity and debt needs.
What are the basic must-haves for an SME for it to be eligible for a loan?
Some of the basic are:
• A sound business model – good product, manufacturing capability and market
• Efficient and experience people behind the business
• Sufficient cash to meet growth demand to maintain a reasonably low debt-equity ratio
• Sound financial planning
• Business/financial integrity and
• Immovable collateral.
The ability to sustain competition will be critical.
Are you launching any special packages to support SMEs?
We already have all our products and services on the shelf — fund based and non-fund based credit, trade finance, transaction banking and risk management products. The robust technology platform we work on also ensures reduction in transaction time and cost.
Now, our scheme is to upgrade SMEs by getting them rated. This will give them access to markets and could make them become global entities in the long run.
What are various products available to mitigate exchange risks for SMEs exporters?
SMEs are more vulnerable to market volatility as they do not have in-house expertise to manage market risks. More often than not, they are at the mercy of the market. They need to understand and be disciplined about locking in the risks at the time of origination through various derivative instruments available in the market.
It is also advisable for SMEs to keep things easy and simple by using plain-vanilla hedging techniques such as forward contract or options that not only lock in the downside (through an upfront fee) but also keep the opportunity gains open. They could either manage the risks on their own or engage outsourced specialists. If they opt for the latter, they can use our risk management outsourcing services on a discretionary and non-discretionary basis. This is specifically useful to small and medium entities.