Views of Mr. Sunil Kapoor, Executive Director, Capri Global on Zee Business on 19th June, 2014

Authored article by Rajiv Janjanam, Vice President and Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd.

What financiers do when funding an SME, and what they can do better

The micro, small and medium enterprises (MSMEs) are the backbone of economic development in any country and more so in India as we have a huge population to be served. They are the incubators for talent, innovation and entrepreneurial spirit, which is key to a country's development.

The Indian small & medium enterprises (SMEs) sector is considered as the backbone of the economy, contributing 45 per cent of the industrial output, 40 per cent of the country's total exports, employing 60 million people, creating 1.3 million jobs every year and producing more than 8,000 quality products for the domestic and international markets.

With approximately 30 million SMEs in India, around 12 million people are expected to join the workforce in the next 3 years with the sector growing at a rate of 8 per cent a year. Efficiently organized and innovative, MSMEs often exercise frugal management skills and use local resources to create innovative products and services which cater to any country's growing needs. However, in order to continue scaling up, timely and adequate access to financial services is an imperative, and this has been traditionally one of the biggest hurdles.

Funding Gap in MSMEs

For SMEs, obtaining and securing the right source of finance is a major challenge. Lack of available funding for SMEs has been brought into sharper focus post-credit crunch.

The total gap in MSME funding is estimated to be around $126 billion. Out of this, the debt gap is approximately $84 billion and equity gap is about $42 billion, while the total equity supply is only around $526 million. Many growth businesses are started by entrepreneurs, often with little experience of how to raise finance to fund his/her growth.

The major reasons for creation of this gap are information asymmetry which exists in Indian SMEs, the family-owned nature of Indian businesses, and lack of information regarding tapping the right kind and source of finance.

Funding Structure

Traditionally, private funds from friends and family form the single largest source of finance to MSMEs in India. MSMEs in India also rely heavily on private money lenders and the unorganized financial sector for their requirements, where the terms of financing are unclear and interest rates are high.

Banks have been making steady strides in order to bridge this gap. However, the approach followed by banks to funding is very restrictive as the bank has to create value by controlling and managing risk.

In any loan application for a business, a bank has to necessarily evaluate the risks involved, gauge collateral support and the methods to mitigate those risks. Therefore, it is not always possible for an entrepreneur to satisfy all requirements and conditions which the bank might pose. The above methods of financing are majorly debt financing, and sources of equity funding remain elusive in India.

Government Initiatives in MSME Funding

The government has always been cognizant of the funding gap which plagues Indian SMEs. In the 2012-13 Budget, the government announced an India Opportunity Fund of $878 million to support Indian SMEs. This entire amount will be routed to SIDBI and is divided into specific targeted sectors, which include:

Domestic MSMEs >> Internationalization of SMEs >> Sector Specific Funds -ICE, Traditional Sectors, Defense, Infrastructure >> IPO on SME Exchanges

Such initiatives would go a long way in bridging the financing gap and ensuring that India gets a steady flow of entrepreneurs in various fields.

Some simple guidelines to funding SMEs

It is imperative for the financing company to understand the needs of the MSMEs and the capability of them to repay the loans they take.

>> Very rarely does the intention issue come up with the MSMEs. They are the first generation entrepreneurs from each of their families and do not leave any stone unturned to make their venture a success.

>> MSMEs do not have the wherewithal or the money to develop much needed finance team within their organization and end up hiring on a part time basis a small time chartered accountant to look into their accounts. While this suffices their need, however, when it comes to borrowing from large financial institutions, NBFCs or private equity investors fall short of creating the necessary documentation. For a financing company this can perhaps be overcome by watching the SME at work in their offices or unit, gauging if their operations are genuine and then helping them raise their financial reporting standards.

>> Asking key questions and judging the mentality/attitude of the MSMEs and the passion will tell more than looking for non-existent financial documents. A lifestyle of MSE promoter/partners/teams tells a lot about their future.

>> These micro and small enterprises serve much larger enterprises in their processes through job works / parts manufacturing, process outsourcing, supply chain etc. Strength of the principle plays a vital role. For example, a micro enterprise that manufacturers nuts and bolts for Maruti Suzuki largely draws its past, present and future performance from the performance of Maruti Suzuki as a company. During the boom phase, almost all of the suppliers/small time manufacturers of parts grew at a rapid pace and expanded. Some even ventured to cater to different industries rather than be defined by auto industry.

>> Another key aspect which almost every financier observes these days is their performance on loans/lines taken in the past. Key to this is Credit Information Bureau of India Ltd (CIBIL). A lot of information is derived out of the CIBIL report and plays a key role in assessing future performance on loans given to MSEs.

>> With specific mention to the micro enterprises, there exists one other key issue which is the way they operate. For example, businesses typically run by a family with father as the proprietor and children being inducted into business subsequently. Presence of business / legal existence proof also comes up as a hindrance. In some cases, simple rules like submitting your Know Your Customer (KYC) form requiring at least two proofs are not met as these customers fall short as they usually hold only IT returns. We do need to understand these aspects and help in generating another proof. A simple way could be assisting in installation of a landline at customer's office whose bill would suffice as a second proof.

It goes a long way in understanding these customers and the challenges they face to able to fund them with right products at the right time and help them grow. Be with them on the ground and see what they see, it is that very easy to assist them. After all they are the priority sector, and we carry the responsibility to bring in the financial inclusion.

(The author is Vice President and Portfolio Head, SME & Retail Lending, Capri Global Capital Ltd).

Views of Mr. Sunil Kapoor, Executive Director on the expected priorities of the new Indian government in ET Online

May 16, 2014

2014 Lok Sabha elections: Top five sectors which are likely to do well with Narendra Modi as PM

NEW DELHI: It was historic event for India markets with benchmark indices scaling to fresh lifetimes highs in trade on Friday, as the Bhartiya Janta Party (BJP) emerged as the single largest party to form the government with Narendra Modi as the new Prime Minister.

Narendra Modi has won the general election in a landslide. The fact that the BJP looks set to secure an absolute majority in the Lok Sabha gives Modi a much greater chance of effecting real change and driving a new investment cycle.

Next big question in front of investors is - where should one invest? Which sector is looking attractive and is likely to do well in near future?

While Sensex has made fresh life time highs, the performance of various sectors have been quite divergent. Pharma, IT and Auto have been best performers in the last six years, while Banking, Oil & Gas, Capital Goods and metals have been worst performers.

Most analysts expect this trend to start to reverse going forward.

"Narendra Modi will have to enhance the overall business environment, which has taken a back seat due to policy paralysis in last 12-18 months of the UPA II regime," said Sunil Kapoor, Executive Director, Capri Global Capital Limited 

"As soon as Modi comes to power, the top priority issues that he needs to address are develop infrastructure, simplify the taxation system, ease FDI regulations, increase dependence on exports than imports, reverse the fiscal deficit rise and boost education system, especially for girl child," he added.

On the macro side, the top priority for the new government would be accelerating the growth rate which fell below 5 per cent, the slowest in a decade. To achieve that, decision-making will have to be speeded up and big ticket infrastructure projects need to be implemented.

"With interest rates not expected to increase, we have turned positive on interest rate sensitive sectors like banks, capital goods and automobiles. And for India Inc. capex cycle should also revive although with some lag," said Varun Goel, Head PMS, Karvy.

"Big infrastructure projects need to be provided quick access to capital, speedy environmental and forest clearances and policy support. Several large projects have got stalled in last few years. We expect that the new government will identify some large infrastructure projects and concerted push will be given to drive them to completion," he added.

Views of Viswajit Srinivasan, Director - Business Development, Wholesale Lending, Capri Global Capital Ltd. in ET Online

May 15, 2014
Don't expect a 'spectacular rally' on Friday the 16th, say analysts

NEW DELHI: It may not be official yet, but it looks like the markets are discounting a scenario where the NDA forms a government with Narendra Modi as a Prime Minister on Friday, May 16. 

We have already witnessed a massive spectacular rally of over 1,500 points on the S&P BSE Sensex in a matter of just three trading sessions starting Friday. All the exit polls have unanimously given the BJP-led NDA a seat tally which is near majority of 272 seats, which will enable them to form government and Modi to become India's 14th PM. 

However, the real picture will be out on May 16 only. The rally is primarily driven on the hopes of exit polls and these polls have been misleading in the past two elections, say analysts.

Even if the NDA does come to power but with seats lower than market expectations, we may see some bit of profit booking, say experts. The runaway rally seen so far on the benchmark indices will only extend marginally even if a stable business-friendly government comes to power on May 16, because most of it is already factored in.

"Exit polls have not been completely reliable, as has been evidenced in the past. However, the overwhelming view is that there would be an NDA-led government at the Centre and this has already been factored in by the market at the current levels," said Viswajit Srinivasan, Director - Business Development, Wholesale Lending, Capri Global Capital Ltd.

"In the event of a significant difference between the exit poll results and an unstable government at the Centre, the market would see a big correction. The volatility would definitely be high and retail investors would be best placed to not enter till there is clarity on which party is likely to lead the next government formation," he added. 

The recent run-up seen in benchmark indices is evident from the fact that the markets are pricing in some probability of the BJP-led NDA government at the Centre. If the exit poll numbers are in favour of NDA, there is a possibility of a sharp up-move while a vice-versa situation could be disastrous for the markets, say analysts.

"It seems the NDA may form the next government at the Centre. The Nifty around 7100 levels suggests a lot of good news is already factored in. Having said that if there is a fractured mandate, with the NDA bagging around 220 seats, then the markets will be in shock," said Raamdeo Agrawal, joint managing director of Motilal Oswal.

"I think that NDA will get 225-230 seats as no one's prediction has been below that. So let's not talk about something which is completely surprising, like the UPA getting 250-270 seats," he added.

The last three days saw the Nifty rallying over 100 points and the index is now trading comfortable over 7000 levels. Experts feel that traders should book some bit of profits as the rally might not be that strong on Friday.

"I have been advising my clients now for the last 8 to 10 days, saying that at every rise it is time to book profits to a certain extent. Investors should look at liquidating 30% to 35% of their portfolio, especially if they have bought in the last five or six months," said Ambareesh Baliga, Managing Partner-Global Wealth Management, Edelweiss Financial Services.

"It is always prudent to book out to a certain extent, because the best of the news is already there in the price and assuming that they have a complete majority as per the exit polls, we can possibly have one more bump up may be of 150-200 points," he added.

But Baliga is of the view that the pop may not really be worth playing, because in case the final result is different and negative compared to the exit polls, the downside could be huge. So it is better to take that bird "It is always prudent to book out to a certain extent, because the best of the news is already there in the price and assuming that they have a complete majority as per the exit polls, we can possibly have one more bump up may be of 150-200 points," he added.

But Baliga is of the view that the pop may not really be worth playing, because in case the final result is different and negative compared to the exit polls, the downside could be huge. So it is better to take that bird which is in your hand than hoping for two in the bush, he said.