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