Thursday, March 13, 2014

Strategy to ensure adequate and timely credit to Micro & Small Enterprises (MSEs) by banks

Published in TISA Mar 2014 Issue


Micro and Small Enterprises are dotting the trade and commerce scenario in each and every corner of the world whether developed, developing or underdeveloped. They are literally the cornerstone of the economic fabric of a nation.
The sector not only delivers manufacturing output or services but creates immense job opportunities especially for unskilled people and women in rural and other backward areas. Thus, they provide the much needed economic independence for a better quality of life.
However, these MSEs do not have a smooth life themselves. In most cases they are like babies, resilient till either they grow stronger and prosper or die due to malnourishment or disease. Here the malnourishment or disease manifests in the form of inadequate credit or funds to channelize energy in the initial few years of existence.
In the entire scheme of things, there are three parties – the business entity itself, the banks and the government. They are all equally responsible for the dynamics of the sector and the prevailing issues.

Let us consider a brief at a glance picture of the sectors’ overall performance in the last few years to create a context for this paper.

There is a lot of gap in the data since much of the MSE segment is unorganized, scattered and continuously in a state of flux. Reports routinely highlight “26.1 million enterprises” but only 1.5 – 1.75 million are registered and properly accounted for. Much of these are micro units. This fragmented state of the sector is one of the key reasons attributed to constant lack of timely credit from banks. Partly it is true but this is only a one – sided argument. There are many contributory factors.
At inception, businesses need funds for everything from plant and machinery, furniture and fixtures, operating expenses, buying raw materials. MSEs start their venture with the owner’s capital and some amount of borrowed capital from family and friends. Often property mortgage or pledging of existing assets generates additional funds from banks or financial institutions. It is only in the later years do they receive structured capital and credit support from banks.


According to MSME sector Fourth census data (2006-07), around 5.2% (13 lakhs out of 261 lakhs) MSME firms have received any financial support from financial bodies. There is a huge credit gap. The reason is plainly that only this number of firms was granted credit after probably close to 95% of them seeking for support. The generalized reason is lack of creditworthiness of MSEs. This increases due to the inability to provide collateral assurance, poor management and business control.
There is a lot remaining to be done by public sector banks to support MSEs in India. A substantial portion of the support comes from small marginal localized scheduled banks as presented in Ministry of MSME, GOI’s 2012-13 Annual Report.

The prime question is can we blame the banks alone for this state of affairs? Whose money do these banks manage and lend? It is common man’s savings that have been deposited with the assurance of accessing it whenever one wants for any kind of needs. We do not have a social security system in India unlike many other countries. It is our savings that provide our security. Can we really blame our banks to be cautious and stingy and choosy while lending to firms just because they need the funds and credit? The sector is grossly unorganized which truly compounds the problem of granting credit. The census data is old and full of garbage. We do not know the exact size and shape of the sector. Most of the data and scenarios are based on assumptions and extrapolation. Companies are being setup and closed every other day for various reasons. Are we able to keep track of the same?


The government’s effort towards this sector is again haphazard and fragmented. Too many schemes and policies have been initiated but there is no review of the success percentage or effectiveness of each of them.
The severity of credit shortage is clearly evident to the people in power but very rarely are they seen discussing the same in any forum with clear numbers or conviction. The MSEs are not attractive to the political parties as the entire vote bank politics revolve around NREGA type schemes and Food Bill etc which honestly are a drain of our resources with no tangible returns.
The government’s performance also leaves a lot to be desired. Inspector Raj is anyway acting like a borer, too many taxes, compliances, reports to be submitted each month, clearances are riddled with corruption, there is no seriousness or strategy to gather MSE data about number of companies/ firms, established in, performance etc.

Business Entities

The biggest problem for MSEs is scarcity of information and guidance to avail various schemes and lending facilities provided by the government. Most of the firms do not understand clearly how to prepare papers and present their case to the financial institutions for their credit needs. CGTMSE scheme is grossly underutilized. The firms do not stress on their ability to repay loans through strong documentation as evidence. This is often a contributing factor in banks’ books where recoveries from MSEs are low. Such instances further caution the banks and prevent them from being enthusiastic and proactive about lending.
There is indeed another significant concern which is not voiced regularly in clear terms is the role of the business entities and the owners themselves in compounding the inadequacy of credit. It can be liberally stated that MSEs have clear issues of “corporate governance.” There are too many holes in the firms which raise red flags when banks try to evaluate them.
It is commonly seen that small business owners often squander their earnings in buying flashy cars, funding foreign trips or home/ office purchase or renovation as soon as some funds start flowing in. They do not focus on becoming independent and cash rich improving the liquidity of the business. There are too many irrational expenses and all billed to the firm thus reducing profits and taxes. The CA’s are often complicit in such cases. The books are invariably cooked at times and banks are also aware of this. CAs cannot be entirely blamed. They are service providers. How we avail their services shows our competence. Rarely would you find owners asking CAs to strategize for the company. Rather the questions focus on whether certain arbitrary expenses can be billed to the company or how the data can be fudged to lower taxation and channelize funds to other avenues. In the short term, it helps but then the firms stumble while seeking bank funding. This short-sightedness of firms compromise their repaying ability and the seriousness of managing the firm as a true business entity. The general condition of the sector thus diminishes the chances of firms that are run honestly with full transparency.
The focus today is what should be done to resolve the credit availability concern.



We need a clear plan of action to resolve the credit crisis.


·         Start with Education. It is the responsibility and obligation of banks to provide detailed and specific information to MSEs about various lending options, documentation requirements and fees to avail the credit facilities. This should not be restricted to customary information on the website and few random leaflets and advertisement in newspapers. There has be fortnightly workshops with business owners for one to one interaction to understand specific needs and evaluation of papers, reports to understand the lacunae and guide firms to overcome them and become credit worthy.
·         There should be dedicated staff to handle new business owners and existing firms as both have different loan needs and ability to repay. One size will not fit all; one solution will not resolve all needs.
·         Banks should hire domain experts to evaluate loan requirements instead of standard financial review. Every industry has specific dynamics and growth prospects, risks and opportunities. A straight review of financial reports is grossly inadequate. Further, the banks should send the evaluators for routine training and management education to be in a better position to analyze and allocate funds. 
·         Banks have to strengthen their credit rating system with more realistic evaluation, make it transparent and hand hold companies to become compliant. The system should be broader in approach rather than focusing on narrow specifics which make or break a credit request.
·         The business environment is constantly shifting and going through rapid transformation. Banks have to keep up with times and allow flexibility in repaying of credit and remove any foreclosure penalty encouraging firms to be active and eager to repay.
·         It is time to move banks towards a developmental approach. They have to realize their role in a nation’s development and not merely as guardian of our funds and assets like Gringotts. There role is not to provide home and auto loans. They have to support businesses which will employ more people and increase their purchasing power. That will increase demand for home and auto loans not the other way round. Independent agencies should critically review the developmental bent of each bank and publicize their performance.
·         The fundamental requirement today is need for accountability from banks and each and every employee in these banks. It has to be hard coded in the form of well-defined key result areas and key performance indicators. Only floating schemes will not serve the purpose, people will have to be held responsible and accountable to implement the plans and get tangible and quantifiable results.


·         First and foremost plan should be to organize the sector by bringing not more but all the enterprises into the official fold. Each and every firm should be identified and their progress recorded by the Government. The data should be in the public domain and available for proper statistical reporting.
·         Secondly, the Inspector Raj has to stop completely. The micro monitoring of businesses with the confirmed premise that everyone is waiting to cheat and circumvent has to cease. Allow people to report performance openly without subjecting them to prejudice or hounding them with audits and assessment and inquiry. Use technology. Create a chain of data to monitor performance rather than showing up at their gates every other day keeping them in perpetual fear of being penalized. Sales tax, Professional Tax, Income Tax data are all being filed regularly. We have TAN, DIN, PAN etc. What is the purpose of all these if we cannot create knowledge – base out of it? Today, everything can be linked. Why bring inspectors to pore through books when they do not understand much about the business and then after wasting time and resources ask for money? These inspectors should be put in positions to do some real work instead of promoting corruption.
·         Thirdly, governments should make the nation investor friendly. Make the laws easier and simpler. Create a straightforward method for compliance instead of wrangling them in 40 different Acts and Laws with another 100 different types of forms which are constantly changing. Educate the owners to file their reports correctly. Make the periodicity comfortable for MSEs who are anyway short of manpower.
·         Fourth, protect small businesses from payment defaults by debtors through fast legal recourse and major deterrent laws. Improve the delayed payment clause of the MSMED Act 2006. Give the clause more effectiveness and teeth to deter largest of the companies from taking MSEs for a ride and playing with their receivables. Flow of regular funds will automatically improve the condition of MSEs and their repaying ability. A CIBIL like agency will surely help in monitoring the payment discipline of large companies thus creating a sense of seriousness among them.
·         Finally, government has to rein in inflation while strongly improving infrastructure and clusters. As per the recommendations of the Working Group, allocation to the tune of Rs. 19,500 through schemes has been suggested. Per unit funding limit has to be substantially increased owing to the growing cost of doing business due to inflation and improper growth of infrastructure costs.

Micro and Small Enterprises

·         Build a strong long term vision and mission for the firm. Write the year on year growth plan specifically in terms of purchases, sales, profits, taxes etc. If the owners themselves do not believe in the future of the business and its economic viability, why will banks do? Define how the company aims to be cash sufficient and liquid.
·         Creating a cult for corporate governance by inducing compliance system. Every action of the firm should be bound by explicitly stating accountability and transparency. Everything has to be process driven and disciplined. Implement technology and software solutions to become lean. Adopt full disclosure system thus removing any scope for doubt. Firms that are fundamentally clean about their credentials automatically draw favor from banks.
·         Build strength to finance from within instead of lending agencies. Once firms are independent and self – reliant, banks will automatically swoop on them to extend credit support and at very comfortable terms.



The best of plans can go awry if not executed properly with dedication and seriousness.


·         Start the MSE Education Workshops immediately by advertising in the newspapers and bank website. Entrepreneurs should be enlightened on the benefits of capital build up for sustainability. Create a list of participants and advertise the case studies on the website. Support the workshops with online forums to continuously provide follow--up information. Report the results publicly.
·         Banks should carefully assess the problems faced by entrepreneurs in getting credit from banks. Setup dedicated facilitation cum counseling cells where entrepreneurs can seek advice on the funding problems. Such cells should also work to enlighten the entrepreneurs on clean governance by maintaining honest accounts.
·         Banks should issue monthly statement of actual credit support to MSEs on their website. Provide complete details of firms who availed the benefits including their contact information so that other firms can get in touch and learn.
·         Success case studies should be publicized freely to encourage entrepreneurs to follow the traits for getting finance.
·         Modify the HR policy of firms and make changes in the KRAs and KPIs of each personnel.
·         Put all information in the public domain and accessible for scrutiny.
·         In the present system of financing businesses, no weightage is given to the potential of the business or the talent of the entrepreneurs leading to frustration of the genuine entrepreneurs. Banks have to setup a separate system for funding talented First Time Entrepreneurs (FTEs) or the start-ups that hold a promise. The banks must immediately enlist a panel of experts (who are professionals with successful business) adept in their respective fields.
Most of the above can be implemented in a short span of 3-6 months.


·         Start with simplifying the process of starting a business in the country. The nation has to become investor friendly and corruption free.
·         Ease the compliance norms and make it technology driven. Abolish any kind of inspectors.
·         Reform the number of laws one has to comply with and run a business. Simplify the taxation system. Reduce the number of forms, periodicity of reporting and the number of taxes. It will make more sense to keep one or two types of taxes rather than complicate it for MSEs. Individuals and businesses should just pay one tax and be free. The onus of allocating funds for different government projects and bodies should be the job of the government. This will automatically reduce the interaction with multiple government bodies and people.
·         Government has to setup a CIBIL like institution to protect the interest of small scale players. Today companies and people are concerned about defaulting or delaying paying to the banks. The same should be extended to payment to MSEs. Every payment default should be noted, flagged and reported earning a blot for the erring firm or company. And a huge penalty should be put to clear the red flag.
·         Government should start actively coordinating with banks for enlightening entrepreneurs on the various schemes available for enhancing business.
If the intent is there, things can start changing in less than a year.


·         When banks lend business finance to entrepreneurs, there is no mechanism for monitoring regularly. Entrepreneurs, more often than not, use business finance for purposes other than business and end up faltering on repayments.
·         Keep your financial objective clear. Do you aim for less expenses, more profit, pay more taxes thus having clear earnings which can be ploughed into the business or more random expenses, less profit and less taxation thus remaining perpetually weak and dependent on credit even for operating expenses.
·         Get registered as a firm and also with an industry association, file all returns on time.
·         Maintain and organize entire business data using simple software. Establish chain of data and links to each and every transaction which can be cross-checked. Keep all data open for scrutiny by banks anytime.
·         Maintain a status report on how further to go before you become zero debt company.

The crux of the problem can be understood and resolved if all three parties concentrate on the quote by Chanakya –
Before you start some work, always ask yourself three questions – Why am I doing it, What the results might be and Will I be successful. Only when you think deeply and find satisfactory answers to these questions, go ahead.

Quality as a Culture

Published in SME WORLD Mar 2014 Issue

“Quality means do it right when no one is looking.” These are the famous words of Henry Ford.
hen I was in school, my father would always insist that I write in a good handwriting and keep the notebooks and answer sheets clean and tidy, labeled, highlighted; fundamentally well – organized. My retort would be to focus on the contents and the answers not the cosmetic appearance. Anyway, no one has really commented on my calligraphy skills (or the lack of it) and the appearance of my notebook and journals. Father would reason that many others can write the same quality of answers or even better, what will differentiate your stuff from them? I grudgingly started adopting his advice. Today, I look back and realize how profound and life changing was the viewpoint.

Quality Matters

Years later I was working under a German boss; the Late Mr. Norbert Wilms. He would go around the plant every day, take photos of dirt, breakages, loose wires hanging, unclean premises, broken drains – the list was endless. One day he wrote a letter to the plant owners saying that a drain cover in the bathroom was rusted and should be changed. Everyone was flabbergasted. Is this even an issue in a multi-crore power generation plant? He said that everything matters however small or big. Today you consider a drain cover as trivial, tomorrow you will say a small raw material issue as minor and allow under deviation; one day an alarm will be ignored and when a turbine crashes then everyone will wake up. Who decides what is trivial and what is not? And why should we settle for mediocre when we can always do better.

Ordinary Approach

Indians are often ticked for their “Chalta Hai” attitude. It is embedded in us as a supplier, buyer and end-user. Poor workmanship, late deliveries, inaccurate dimensions or alignment, incorrect quantities, ineffective communication are all part and parcel of this “Chalta Hai” approach. If we ask an electrician to visit our house/ business premises for some work, we know that he won’t visit without repeated reminders. The job that is done will probably require rework too.
We look at quality as some extraneous factor, as an element for compliance to get the material or service approved and bills passed through quality control. It often represents some paper work to complete an audit and get a certificate for a particular process/ product. This is how many enterprises and individuals view quality.

Mindset for Quality

Quality is an opportunity; it is a plinth on which businesses can achieve stellar success. It is Quality that creates Brands for which people pay a premium. But for that “Quality” has to be embedded in the basic fabric of the business and individual mind-set. Everyone has to perform routine tasks with quality and competence while aiming for improvement at each stage without an explicit demand or need.
SME players often feel that they are small, resource-crunched and hence just being able to meet orders and deliveries is an achievement. Wrong! The tea stall vendor at the street corner in all likelihood will go out of business if another vendor offers quality tea in the vicinity. And the quality tea stall has larger concrete prospects of turning into a restaurant due to repeat customers and word of mouth appreciation plying a mundane item as a cup of tea.
Quality is not an act, it is a habit. ~ Aristotle