Ask any entrepreneur what was the biggest hurdle that they had to face in the process of making their dream venture a reality – and more often than not, you will hear: getting the project financed. This is more so, when the entrepreneur has no assets to offer as collateral to obtain funding. The practice of collateral based funding, widely used by Indian banks, has been a great deterrent for entrepreneurs in this country. Owing to family-owned business structures and underdeveloped capital markets (lack of any primary market platform to support MSMEs like AIM, the London Stock Exchange’s international market for smaller growing companies), banking finance has been a preferred choice for Indian entrepreneurs not only as seed capital, but also as growth capital. But stringent collateral requirements including personal guarantees and short lending periods, have always restricted entrepreneurs either from obtaining the desired amount of capital or, at times, from getting any capital whatsoever.
No doubt, some wise men in the country’s banking system attempted to experiment in the late 1960s to move away from the “security based lending” practices to “purpose based lending”. The purpose underneath, as described by K. C. Chakraborty, Deputy Governor, RBI recently, was that credit and finance were instruments of empowerment. By unfettering credit from security, those who were able and willing, creative and talented would not be constrained by lack of funds. The security for the funds lent would not be physical assets but the discounted value of cash flows that the enterprise would generate. This marked a decisive shift in methods of lending – it reoriented lending from a static to a dynamic concept. But the real problem came thereafter. The experiment was a success, but it was never pursued the way it should have been. There is also the biggest fear that the massive corruption and rampant criminality existing within the financial industry’s rank and file would ensure that loans are blindly handed out to ‘purposes’ that are either fraudulent or impractical at the best. Still, till a way is found, entrepreneurs with great ideas but with no money or collateral, will keep suffering.
But this is not to say that there is no way. Some sparkling exceptions are already taking place. Take for example the case of SMEs. This is one segment which accounts for close to 40% of the country’s manufacturing output and over 33% of the exports. And most importantly, this is where most entrepreneurs first step into. The segment suffered for long in the hands of the banks to obtain funds, and finally the RBI came to their rescue in 2008 when it passed guidelines that asked banks not to insist on collateral security from SMEs for advances up to Rs.500,000, but only take into account the viability of their projects. However, as Usha Thorat, Deputy Governor, RBI in 2008, pointed out in a seminar, that despite banks not being supposed to ask for collateral security in SME requests, a few banks are still insisting on the same. Moreover, banks which did not ask for immovable collateral securities, required even tougher guarantee norms to be fulfilled, charged higher rates of interest and even the loan period was shortened. All this defeats the very purpose of equitable growth, where it has been proven way and beyond that a nation can spread economic gains equitably only when it promotes the SME sector – which results in massive increase in employment rates. 65% of Europe’s GDP comes from SMEs; 45% of US GDP too comes from SMEs.
Entry of an increased number of private equity players, both domestic and foreign, over the past decade has helped entrepreneurs to obtain finance on the basis of the merit of their projects. But a lack of a platform to facilitate the same and insufficient awareness is still playing spoilsport. And bank financing still remains to be the major source of funding.
To achieve and continue with a dream double-digit growth, India today needs a lot more entrepreneurs who can add to the GDP by creating employment. But for that, their basic necessity of finance must be taken care of in a good manner. And considering that India will still take some time before entrepreneurs look forward to PE players and not banks for getting their projects financed, it’s high time that RBI comes forward to facilitate the process, not just by bringing out some radical guidelines, but also by ensuring that the banks follow them religiously.
No doubt, some wise men in the country’s banking system attempted to experiment in the late 1960s to move away from the “security based lending” practices to “purpose based lending”. The purpose underneath, as described by K. C. Chakraborty, Deputy Governor, RBI recently, was that credit and finance were instruments of empowerment. By unfettering credit from security, those who were able and willing, creative and talented would not be constrained by lack of funds. The security for the funds lent would not be physical assets but the discounted value of cash flows that the enterprise would generate. This marked a decisive shift in methods of lending – it reoriented lending from a static to a dynamic concept. But the real problem came thereafter. The experiment was a success, but it was never pursued the way it should have been. There is also the biggest fear that the massive corruption and rampant criminality existing within the financial industry’s rank and file would ensure that loans are blindly handed out to ‘purposes’ that are either fraudulent or impractical at the best. Still, till a way is found, entrepreneurs with great ideas but with no money or collateral, will keep suffering.
But this is not to say that there is no way. Some sparkling exceptions are already taking place. Take for example the case of SMEs. This is one segment which accounts for close to 40% of the country’s manufacturing output and over 33% of the exports. And most importantly, this is where most entrepreneurs first step into. The segment suffered for long in the hands of the banks to obtain funds, and finally the RBI came to their rescue in 2008 when it passed guidelines that asked banks not to insist on collateral security from SMEs for advances up to Rs.500,000, but only take into account the viability of their projects. However, as Usha Thorat, Deputy Governor, RBI in 2008, pointed out in a seminar, that despite banks not being supposed to ask for collateral security in SME requests, a few banks are still insisting on the same. Moreover, banks which did not ask for immovable collateral securities, required even tougher guarantee norms to be fulfilled, charged higher rates of interest and even the loan period was shortened. All this defeats the very purpose of equitable growth, where it has been proven way and beyond that a nation can spread economic gains equitably only when it promotes the SME sector – which results in massive increase in employment rates. 65% of Europe’s GDP comes from SMEs; 45% of US GDP too comes from SMEs.
Entry of an increased number of private equity players, both domestic and foreign, over the past decade has helped entrepreneurs to obtain finance on the basis of the merit of their projects. But a lack of a platform to facilitate the same and insufficient awareness is still playing spoilsport. And bank financing still remains to be the major source of funding.
To achieve and continue with a dream double-digit growth, India today needs a lot more entrepreneurs who can add to the GDP by creating employment. But for that, their basic necessity of finance must be taken care of in a good manner. And considering that India will still take some time before entrepreneurs look forward to PE players and not banks for getting their projects financed, it’s high time that RBI comes forward to facilitate the process, not just by bringing out some radical guidelines, but also by ensuring that the banks follow them religiously.
No comments:
Post a Comment