DARE - Because Entrepreneurs Do

SKV Srinivasan, Executive Director, IDBI Bank spoke to DARE on the latest trends in lending

IDBI is in the forefront of infrastructure development. How do you see the MSME sector developing?
IDBI Bank is a dominant player in the Infrastructure space. We bring significant strength to this space and derive considerable fee income from infrastructure activities. Post our conversion to a commercial bank, we have regulatory obligations under Priority Sector Lending. Micro and Small industries being a part of Priority Sector, has been engaging our serious attention since the last couple of years. We have a dedicated vertical within the Bank for this business. The exposure to Micro and Small enterprises (MSE) grew 114 per cent from `5300 crore to `11300 crore during the year ended 31 /3/2011. If we include regulatory medium category, our MSME exposure grew 17 per cent from `16940 crore to `19785 crore during the corresponding period. The total outstanding credit of all scheduled commercial banks (SCBs) to MSE Sector grew from `1,27,000 cr in 2006-07 to `3,28,426 crore in 2009-10, representing a cumulative annualized growth of about
40 per cent.

The sector is represented by 26 million units, mostly in the unorganized sector employing about 60 million people. There is immense potential for growth in this segment, as a large number of these units is still to be covered by formal bank credit. It has been rightly recognized as a growth engine for the economy as it contributes to focus areas like exports, rural employment etc.

How is IDBI positioned to help India’s largest economic engine?
IDBI Bank continues to enjoy a very strong relationship with most of the industrial groups in this country by virtue of its pioneering role as a development bank. We have seen ancilliarisation and component outsourcing grow rapidly over the past few years.

Most of the major manufacturing units are focusing on core activities and divert the rest to ancillaries in the SME domain. This enables them to contain cost as wages in the unorganized sector are much less, besides helping them in containing the capital investment on the balance sheet. The capital investment shifts to ancillary units. We are engaging more of these ancillaries in our effort to grow the MSME portfolio.

We derive considerable comfort from the association of the parent units in these ancillaries. We are trying to move away from traditional plain security-based lending by substituting it with structured products, order financing, deficit cash funding, asset securitisation etc.

We have set up SME processing/care centers at the major SME clusters for handholding the customers and quick TAT. The effort is to leverage IT Infrastructure to enable online processing of application from this sector. We hope to simplify the credit process without diluting the quality of appraisal to reach several unbanked MSMEs. These financial inclusion efforts would also enable us to extend our reach to many hitherto unbanked SMEs.

We are also working on tailor-made products for specific clusters, and plan to work with other organizations dedicated to this sector for credit plus activities like advisory, credit rating, enabling market reach, model projects for the area, identifying the need and arranging for growth capital etc. We have tied up with SIDBI who understand this sector better for co-lending activities. We would also be open to partnership with NBFCs who bring their own strength in this business for Co-lending etc.

What challenges do you foresee MSMEs facing in the coming days and how can they overcome them?
The growing inflation and the consequent increase in rate of interest remain the biggest challenge. We have to understand that this segment is very vulnerable as they neither have control over prices of raw material nor finished goods. Hence it is difficult for MSMEs to pass on the increased cost.

One CRISIL study has stated that a 1 per cent increase in interest rates results in 14 per cent decrease in profits for SMEs. We are already witnessing a slowdown in auto and infra sectors. Large units typically thrust inventory cost on to ancillaries, so both inventory holding and the cost of holding are rising. MSMEs should try to contain financial leveraging to stay afloat during this difficult time. More equity /growth capital should be brought in rather than debt funded growth.

What policies are most favorable to MSME sectors? What can be done on this front?
The credit guarantee scheme, the RBI policies on collateral free lending up to Rs10 lakh, the efforts of GoI in directing portion of incremental lending, both in terms of number of units and volume of funding from SCBs, the enactment of MSMD act which makes it necessary for large units to promptly pay to small vendors are steps which have helped this sector grow.

Considerable efforts are needed to  build capacity for quality accreditations and reduce transaction cost through IT enablement. Industry associations, Corporates, Commercial banks and GOI need to pool in resources and evolve a viable revenue model to support these activities.

Access to finance is the most cited challenge by MSMEs. How do you think this can be solved?
There is no denying this fact. The reasons are perceived high risk, high cost of delivery/ supervision of credit and lack of reach to many of these units which are situated in the remote areas. The perceived high risk is on account of limited risk-bearing appetite of these units due to small capital base or limited financial flexibility to put it in banking terms and lack of structured information flow.

To a large extent, information flow can be addressed by encouraging the units to get a rating, which perforce encourages setting up of systems and processes conducive for information flow. A lot of KPOs set up by CA firms or rating agencies have emerged, which also help units in organizing the financial activities at minimal cost.

We need to set up a large fund for augmenting equity of entities which ride a difficult terrain due to external issues. SME exchanges would help some of the units to access the capital. We should encourage units which have absorbed the benefit of growth capital to return the capital ahead of time for recycling of such funds. Banks' interest margin in corporate exposures are under continuous pressure, so they are increasingly looking at SMEs as a viable business proposition rather than as a regulatory submission. High cost of delivery is slowly getting addressed as both banks and SMEs are increasingly using IT for transactions. Reach is getting addressed by the policy of RBI in directing the commercial banks to open branches in unbanked areas as also increasing use of banking correspondents and banking facilitators (BC/BF) for reaching masses. Coordinated efforts in this direction could see in next few years’ large growth in lending to this sector bringing large scale benefits to the economy.

Are we doing enough to enhance the banking experience of MSME owner? What suggestions do you have for them?
Especially in SMEs, banks are partners in the business as they provide a lot of credit plus services and are continuously in touch with them. The promoters look to banks as the port of first call for distress, and can better their banking experience by embracing technology to leverage on alternate delivery channels of the bank, actively exchanging information on the business with the banks etc.

< Prev		Next >