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    In India, management skills become innovative assets


    International Trade Forum - Issue 3-4/2008 

    A partnership between ITC and an Indian bank has shown how lenders can safely use competency as collateral against small business loans.

    Traditionally, lenders wouldn't dare offer credit to small and medium-sized enterprises (SMEs) without financial collateral. But since a major Indian bank began doing just that in 2007, the results have been staggering. In just over a year, they have enhanced opportunities for small businesses, women and entire communities.

    Management skills are being used as an innovative form of collateral for loans, in an ITC initiative designed to improve access to credit for SMEs. The Export Import Bank of India (Exim) has tested LoanCom, as the project is known, to great effect. By regarding managerial capabilities as "non-financial assets", the programme guarantees a finer assessment of each company's future potential, rather than relying solely on past successes. Unlike the traditional financial parameters used by lenders, management skills are a key determinant for business success.

    The results from LoanCom's pilot year were presented in November 2008 at the Asia and Pacific Exim Banks' forum in Mumbai, which held a special session on the impact of the global financial crisis on SME access to finance. The results came as a surprise to many, by highlighting definite advantages of lending to SMEs in the context of the current economic climate.

    "India has been chosen as a destination [for this pilot project] because of the sheer number of SMEs this country presents," Aicha Pouye told press at the time of the programme's launch. As ITC's director of business and institutional support, Ms Pouye has been closely involved in the development of the LoanCom project. "We recognize the potential of SMEs, and thus decided to partner with Exim Bank to empower them." SMEs constitute 95% of all industry establishments in India, contributing 40% of all domestic exports and industry output. They make up more than a third of the manufacturing sector, providing significant economic returns as well as vital employment opportunities in local communities.

    But despite their value in the economy, banks have traditionally been reluctant to loan to SMEs, based on the perception that they present higher risks. Add to that the difficulty for banks to identify which SMEs have real potential plus the higher transaction costs associated with SME banking, and the situation becomes tough for these businesses which cannot expand without credit. The paradox is that the hesitation is often unjustified, as SMEs demonstrate a 35% return on equity, with a rate of default that is no higher than other sectors of the banking industry.

    Exim Bank allocated a fund of $11 million to the pilot project, agreeing to direct the credit primarily into rural and agricultural industries in under-privileged areas. The participating companies had an annual turnover between $250,000 and $1 million and were mainly export driven. The project prioritized SMEs that were labour-intensive and largely owned or operated by women. As predicted, this had an impact on employment rates and poverty reduction in the neighbouring communities.

    LoanCom follows a four-step process. First, the bank establishes the company's background through detailed questioning. Next, they review the loan request according to financial parameters. Management competency is then analysed through an elaborate questionnaire, and the future growth plan for the SME is drawn up. Finally, the bank provides the SME with assistance in meeting specific requirements.

    Of 120 lending requests throughout the pilot period, about 60 new loans have been approved. About half of the loans have been granted to new clients who have limited credit records. Exim reports that after a year of operation, none of the SMEs have defaulted on their loans.

    The majority of the SMEs involved in LoanCom are manufacturing goods for export. The biggest markets are in the European Union (Belgium, France, Germany, Italy), Japan, Israel, the United States and some countries in Africa. Some projects also reflect a good margin for local sales (particularly handicrafts and incense sticks).

    About 30 of the new loans are related to agro-industrial initiatives such as the production of mushrooms, organic agro-commodities, organic food products, canned vegetables, fruit juices, instant mixes, spices and powders, and medicinal plants. Another 30 proposals are related to industrial products such as foils, synthetic adhesives, incense sticks, leather and wooden handicrafts, which all involve light engineering processes.

    The success of the pilot project in India has encouraged ITC to extend the programme to other developing nations in Africa and Asia. LoanCom has recently been launched in Tunisia with the Banque de Financement des Petites et Moyennes Entreprises (Bank for the financing of small and medium-sized enterprises) and a partnership is under way with the African Development Bank for programmes with Zanaco and Investrust in Zambia and EcoBank in West and Central Africa. With these expanded frontiers, LoanCom can help banks to unlock women's trading potential and use innovative enterprise to steer through these troubling economic times.

    Adapted from: "Small firms to get loans against managerial skills.", By Gargi Banerjee,www.livemint.com