Get your financials, all correct

Nilesh Challawar
product head printing, Electronica Finance (EFL)

1. Where is the divide between lenders and SMEs? For example, how can paperwork be reduced?
First divide is accessibility. An SME entrepreneur is immersed in his day-to-day activities and it becomes difficult for him to take out the required time to understand as well as cater to his financial needs. While it may become costly for banks to provide last mile connectivity to SMEs for their finance requirements, NBFCs are definitely in a position to provide that.

Secondly, as you rightly pointed out, paperwork is another major hurdle. While lending to SMEs, it is more important to understand the requirement of the customer and his business. We give more importance to the type of machine required and the customer’s business rather than the financial statements and other documents.

Simple steps like maintaining a proper repayment track record of his previous loans, having a CA certified/audited accounts and filing his tax returns on time, can go a long way in taking care of the paperwork required by a bank or NBFC like ours.

2. What is the best method for a small-scale entrepreneur to fulfil his working capital requirement?
Previously, the only avenues available to a small-scale entrepreneur as far as fulfilling working capital requirements were concerned, was personal loans from relatives/friends. However, off late, a lot of additional avenues have come up. Firstly, if he has land or building or any other property, then he can always take a LAP i.e. a loan against property to take care of his working capital needs.

Secondly, we at EFL, offer a unique solution where in if they do not have any property but they have a machine/ machines which are free from charge and the business also shows good growth prospects, then he can get a loan by providing a charge on existing machines as security. This way, he can utilise funds received to generate greater business and repay the loans later on.

3. Will an organisation such as yours look beyond lending, like consulting?
Yes, we are planning to expand into the advisory space. It becomes a natural extension for us because of the huge customer base, 20 year vintage and consequently a robust understanding of the MSME space. We are in the process of starting consulting services very soon.

4. Why is it that now banks do not accept machines as collateral for funding even though it’s quite common in other sectors?
The basic reason for taking collateral is to sell it off if the loan turns bad. Banks, historically, have relied on financial numbers rather than the machine potential, business prospects to provide funding. Further, when loans turn bad, they do not have enough expertise and reach to sell such machines back in the market and recoup the outstanding loan balance. However, our expertise lies in the understanding of machines because of our manufacturing roots. Hence, it is easier for us to determine the optimal capacity and capability of a machine and at the same time understand and have access to a market to determine the real value of a used machine. This makes it easier for organisations like us to accept machines as collateral for funding.

5. What’s your opinion on foreign funding - it’s quite lucrative because of the low rate but would you advise it in these troubled times.
Foreign funding, till may be Jun-Jul 13, was definitely useful as far as rates were concerned. However, in the months of Aug to Nov, 2013 due to significant fluctuation in the USD, the rate benefit was eliminated due to hedging costs which were up to 3-5% at one point of time. If you look at the INR v/s USD now, even with the first act of tapering, the INR did not depreciate much. Thus, there has been a kind of acceptance now as far as the tapering and the revised levels of INR v/s USD are concerned.

6. Name two key pointers which you look for in a SME balance sheet when assessing risk.
Our risk analysis is more based on the machine capabilities, customer profile, monthly outstanding balances and repayment track record rather than the balance sheet itself. But we do look at the debt equity ratio (to analyse the debt repayment capacity of the company) and the year-on-year revenue growth (to project business growth) as measures for assessing risk.

“Historically, banks have relied on financial numbers rather than the machine potential or business prospects to provide funding”