sme lending axis bank
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Term Paper on SME Lending Policies of Axis Bank. Part of Academic Project of MBA(FORE School of Management)TRANSCRIPT
Neha Kasturia (91037)Lakshmi Sravani (91028)Mayank Sharma (91031)
Madhusudan Partani (91029)
Submitted to:Prof. Vinay Dutta
On13th of September, 2010
SME Lending
A Study on AXIS Bank
Group 4 ( FMG 18Y )
Acknowledgments
The Project Titled, “SME Lending: Live Case Study of Axis Bank” was never been possible without the guidance and support of few persons. We wish to express our thankfulness to Miss. Palak Khare, Executive, Credit Department, Axis Bank, GK-1, New Delhi and Miss. Akanksha, Credit Analyst, Credit Department, Axis Bank, Connaught Place, New Delhi. For being a support to us and clarifying each and every doubt we had.
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And a special Thanks to Mr. Venkat, Executive, Bank of Baroda, for helping us in understanding the SME Lending in Banks.
This project remains incomplete without the mention of support, guidance and mentorship extended by Prof. Vinay Dutta, Chairperson, Finance, FORE School of Management. We expresse gratitude and expect same guidance and support in future.
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13th September, 2010
Neha Kasturia
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Lakshmi Sravani
Mayank Sharma
Madhusudan Partani
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Table of Content bal Context
Table of Exhibits..........................................................................................................................................3
Objectives....................................................................................................................................................4
Data and Methodology................................................................................................................................5
Introduction.................................................................................................................................................6
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Review of Literature....................................................................................................................................7
RBI circular on financing SME..................................................................................................................7
Financing SMEs -An Industry Perspective................................................................................................8
Guidelines on One-Time Settlement Scheme for SME Accounts’............................................................9
Bank Finance to the SME Sector–Issues And Perspectives....................................................................10
SME Definition...........................................................................................................................................11
SME’s-A Global Perspective:......................................................................................................................12
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Global growth in SME Capital Markets..................................................................................................13
International capital-raising for SMEs....................................................................................................14
The Small Scale Industries (SSI) Sector in India- A Historical Perspective..................................................15
SMEs and Indian Government:..............................................................................................................15
SMEs and their Issues................................................................................................................................16
SWOT Analysis of SME...............................................................................................................................17
Banking to SME’s.......................................................................................................................................18
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Certain Initiatives taken by Banks with respect to SME Funding...............................................................19
Financing of SMEs by Banks: Data.............................................................................................................20
Role of Government and Banking Regulator in SME Lending....................................................................23
Overview of Axis Bank...............................................................................................................................28
Axis Bank: Product Portfolio......................................................................................................................31
Axis Bank: SME Specific.............................................................................................................................34
AXIS Bank SME Standard...................................................................................................................34
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SME Fast Track...................................................................................................................................36
Customer Acquisition and Promotion....................................................................................................40
Live Case at Axis Bank : Lending Process...................................................................................................41
Risk Management : SME............................................................................................................................43
Approach to SME Risk Assessment........................................................................................................44
Recent News in SME sector.......................................................................................................................44
Annexures…………………………………………………………………………………………………………………………………………..…45
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Loan Memorandum…………………………………………………………………………………………………………………………………I
Debt Restructuring Policy-AXIS Bank……………………………………………………………………………………………………….II
MSE Charter: AXIS Bank…………………………………………………………………………………………………………………………III
Table of Exhibits
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Exhibit 1 Loan Book Breakup.....................................................................................................................29Exhibit 2 Loan Growth : AXIS Bank............................................................................................................29Exhibit 3 CASA and Term Deposits Breakup..............................................................................................30Exhibit 4 Shareholding pattern as on 31st March 2010.............................................................................30Exhibit 5 SME Exposure of AXIS Bank as on 31st March, 2010...................................................................39
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ObjectivesThe primary objectives of this term paper are
To understand the Various Financial Resources available to SME Sector, the Backbone of Induan Industries
To Study the operational as well as lending process for SME Lending in Axis Bank
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To analyse a real life case study of lending to a SME Borrower, and to study the loan memorandum.
The Secondary objectives are
To understand the SME industry and their various problems Various regulations with respect to SME Lending.
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Data and MethodologyFor the purpose of having knowledge about the topic, and understanding various problems faced by SMEs, various research papers on SME Lending, SME Industry and SME Problems were studied. And also the reports and news published specific to Axis Bank and Its SME lending were also studied. And to have knowledge about the lending process and also for understanding the loan memorandum prepared for a actual SME borrower, an employee from bank was contacted.
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The primary data in form of
Lending Policy, Loan memorandum, Details of the Live case on SME Borrower has been collected from bank. Conversation and Discussion with Employees of Bank
And the secondary data was collected from
Ebsco Host database
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Website AXIS Bank’s Website RBI, MSME Website India Stat website
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IntroductionSmall and Medium Enterprises play a vital role for the growth of Indian economy by contributing 45% of the industrial output, 40% of exports, 42 million in employment, create one million jobs every year and produces more than 8000 quality products for the Indian and international markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors.
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Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialised countries, as well as in emerging and developing economies. SMEs constitute the dominant form of business organisation, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60-70% net job creation in OECD countries. Small businesses are particularly important for bringing innovative products or techniques to the market.
“Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his
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colleagues had a saleable product were they able to take it to the marketplace and look for investment
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from more traditional sources”1
The Indian market is growing rapidly and Indian industry is making remarkable progress in various Industries like Manufacturing, Precision Engineering, Food Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are finding increasing opportunities to enhance their business activities in core sectors.
Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help
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in return for a share in the business. But if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit.
1 Financing SMEs and Entrepreneurs: OECD, November,2006
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Review of Literature
RBI circular on financing SME1. At present, a small scale industrial unit is an industrial undertaking in which investment in plant
and machinery, does not exceed Rs.1 crore except in respect of certain specified items under
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hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has been enhanced to Rs.5 crore.
2. Current SSI/tiny industries definition may continue. 3. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be
treated as Medium Enterprises (ME).4. Only SSI financing will be included in Priority Sector.5. All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over
the immediately preceding year, while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue.
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This gives banks the flexibility to maintain and manage their desired portfolio of loans and disbursements with affecting growth of SMEs.
6. Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise.
7. There are tools like Credit Appraisal & Rating Tool (CART), Risk Assessment Model (RAM). By leveraging these tools banks can reduce their transaction costs.
8. The National Small Industries Corporation has recently introduced a Credit Rating Scheme for encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Banks may
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consider these ratings as per availability and wherever appropriate structure their rates of interest depending on the ratings assigned to the borrowing SME units.
9. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
10. Cluster based approach for financing SME sector offers possibilities of reduction in transaction costs, mitigation of risk and also provide an appropriate scale for improvement in infrastructure. About 388 clusters have already been identified. The existing institutional arrangements for review of credit to SSI sector like the Standing Advisory Committee in Reserve Bank and cells at the bank
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head office level as also at important regional centres will review periodically flow of credit to SME, including tiny sector as whole.
Hence the new RBI guidelines for Credits to SMEs have focused on the growth of SME sector without increasing affecting the risk and returns of the Banks.
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Financing SMEs -An Industry Perspective(R. Seshasayee*)
SMEs in India are mostly in the unorganized sector and are the source of livelihood for millions of people. The social contribution made by SMEs is even more significant than its economic contribution. The promotion of SMEs, therefore, becomes a major area for policy focus.
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Regeneration of SMEs must receive public support particularly for the village, cottage and micro level enterprises. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. According to the paper the major difficulties faced by SMEs are:
1. Financing2. Infrastructure3. Taxes and regulations4. Marketing5. Technology
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A major obstacle in SME development is inability to access timely and adequate finance. There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector.
Instruments of SME financing in India:
SIBDI is the principal financial institution for the promotion, financing and, development of industry in the SME sector in the country. In order to improve the credit flow to the SME sector, it
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has tied-up with eight public sector banks in the country. Inspite of various initiatives taken by the Government, banks and financial institutions, SMEs face certain challenges which are universal in nature. These problems relate to the issue of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc. In order to address the above problems in the Indian context, some innovative instruments of financing have been introduced and institutional set up created. Some of the major initiatives include:
1. Credit Guarantee Fund Trust for Small Industries2. Risk Sharing Facility
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3. Venture Capital Funding4. Micro credit5. Small and Medium Enterprises fund6. Setting up of a dedicated Credit Rating Agency for SME
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Guidelines on One-Time Settlement Scheme for SME Accounts’
This article mainly focuses on the guidelines for one-time settlement of dues relating to NPAs of public sector banks in SME sector, issued by RBI in the September 2005. As per the article these guidelines will provide a simplified, non-discretionary and non-discriminatory mechanism for one-time settlement of chronic NPAs in the SME sector and all public sector banks are required to uniformly implement these guidelines. However, these guidelines will not, cover cases of willful
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default, fraud and malfeasance. Banks should identify cases of willful default, fraud and malfeasance and initiate prompt action.
Further this article lays down specifications pertaining to these guidelines, like under coverage this scheme will cover all NPAs in SME sector which have become doubtful or loss or classified as sub-standard and thus have subsequently become doubtful or loss as on March 31, 2004 with outstanding balance of Rs.10 crore and below on the date on which the account was classified as doubtful. It also specifies the last date for receipt of applications from borrowers which would be as at the close of business on March 31, 2006.
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Then, under amount to be settled, for NPAs classified as Doubtful or Loss as on March 31, 2004 the minimum amount that should be recovered would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPAs and for NPAs classified as sub-standard as on March 31, 2004 which became doubtful or loss subsequently the amount would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPAs, plus interest at existing Prime Lending Rate from April 1, 2004 till the date of final payment.
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Then, this payment in both the above cases would be paid in one lump sum. In cases where the borrowers are unable to pay the entire amount in one lump sum, at least 25% of the amount of settlement should be paid upfront and the balance amount of 75% should be recovered in installments within a period of one year together with interest at the existing Prime Lending Rate from the date of settlement up to the date of final payment.
Lastly, as per the article the decision on the one-time settlement and consequent sanction of waiver or remission or write-off should be taken by the competent authority under the delegated powers and Banks should follow the above guidelines for one-time settlement of all NPAs covered under
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the scheme, without discrimination and a monthly report on the progress and details of settlements should be submitted by the concerned authority to the next higher authority and their Central Office and also to the Board of Directors. A copy of the quarterly progress report may also be sent to RBI.
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Bank Finance to the SME Sector–Issues And PerspectivesY. Srinivas
1. Information Asymmetry: In many cases it has been observed that the owners of the business tend to hide some vital information (profitability, margins etc) from the lending bank. In that case the banks increase their lending rates so as to ensure that they are not being fooled. There is a need for the banks to work upon an SME lending information system which would contain all the necessary information that the bank would need. This will help the banks to be more informed about the
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SME’s prior to lending them funds. It will also facilitate in better management of funds since the banks will be able to judicially decide upon the lending rates for different SME’s and will thus be able to increase lending portfolio.
2. Granularity: Banks do not have a proper risk grading system in place in order to determine the risks associated with SME lending. As a result of this, banks either increase the prices or tighten the credit terms of lending or do both. Due to this, the borrower perceives that the bank is over-pricing good risks and under-pricing bad risks.
3. Pecking Order Theory: The pecking order theory states that due to the high costs involved with borrowing from banks as a result of the above mentioned issues, SME’s start looking for other
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sources of financing their projects. They tend to utilise their retained earnings instead of borrowing money from banks.
4. Moral Hazard: Despite taking loans from banks, it has been observed that sometimes owners of the SME’s tend to take higher risks than they otherwise would not have if loans were not made to them. This is because the owners want to take benefit from the additional returns and this leads to a problem of over investment of funds.
5. Switching Costs: Due to the high costs associated with switching, SME’s usually do not go for such a step. This is because in such a case, the lending process becomes a seller’s prerogative and the SME’s have to abide by what the seller (the Bank in this case) asks them to do.
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SME Definition
According to the Micro, Small and Medium Enterprises (MSME) Development Act of 2006, (India) a micro enterprise is where the investment in plant and machinery does not exceed twenty five lakh rupees. A medium enterprise is where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees. A small enterprise is where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees. In
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Classification Manufacturing Enterprises2 Service Enterprises3
Micro Rs. 2.5 million/ Rs. 25 lakh (US$ 50,000)4
Rs. 1 million/ Rs. 10 lakh (US$ 20,000)
Small Rs. 50 million/ Rs. 5 crore (US$ 1 million)
Rs. 20 million/ Rs. 2 crore (US$ 40,00,000)
Medium Rs. 100 million/ Rs. 10 crore (US$ 2 million)
Rs. 50 million/ Rs. 5 crore (US$ 1 million)
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By RBI
”At present, a small scale industrial unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs. 5 crore. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/ tiny industries definition may
2 Investment limit in Plant & Machinery
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continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs. 10 crore may be treated as Medium Enterprises (ME). "
By Axis Bank
Units with a turnover upto Rs. 125 crores or those with aggregate credit/capital market exposure with our bank upto Rs. 25 crores or gross investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries] upto
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Rs.15 crores. An account should satisfy all the three conditions in order to be classified as an SME account.
SME’s-A Global Perspective:
As a central pillar in the world economy, small and medium-sized enterprises (SMEs) play a critical role in innovation, advancement and sustainable development worldwide. In today's increasingly globalized world, SMEs around the world have to unprecedentedly compete globally. They are both 3 Investment limit in equipments
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the most dynamic and the most vulnerable constituent in the global economy. Some of them even became market leaders from an international perspective. Small and medium-sized enterprises (SMEs) have been identified as major contributors to economic growth and prosperity. New communications technology means that they are able to become significant players in the global economy. Size no longer matters in the global economy. In fact, in many ways, small could definitely be an advantage, given the rapid rate of technological change and the need for flexibility and adaptability. SMEs are seizing their opportunities domestically. It is they who are generating most of the new jobs and fuelling economic growth across the world. Now they are beginning to go
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global. This means they need to create new networks, and develop new insights into how business works in different cultural and political environments.
But executives at small and medium sized companies tend to be very much unwilling to work with international business consultants. There are several reasons for this. Most notably, smaller companies are mostly either family-owned or very closely held private companies. It is unusual to find qualified international practitioners within the ranks of small and medium sized companies. Therefore, the consultant who does come on board to try to fix some of the problems is most often
4 Rs 50 = 1 USD
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an outsider. And resistance to outsiders and the difference between the outsiders and insiders make the problems even more complicated.
'Inclusive Growth' for SMEsA key part of an 'Inclusive Growth' strategy is improving the performance and sustainability of local entrepreneurs and SMEs. In many APEC economies, SMEs account for the majority of businesses and employment, and contribute significantly to output. Hence, APEC economies need to revitalise their SMEs to make them more resilient and adaptable.
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Being small and with limited resources, SMEs face many challenges even in normal times. They tend to be hit harder by recession and lag behind large corporations during expansionary phases as they lack economies of scale and bargaining power. Nevertheless, SMEs are - and will continue to be - a key source of growth for APEC economies. They should, therefore, be encouraged to participate vigorously in growth strategies as well as be providers of job opportunities.
Strategic Plan Priorities consistent with 'Inclusive Growth'
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The four-year Strategic Plan (2009-2012) that the APEC SME Working Group has developed guides APEC economies in their SME development under six priority areas. The priorities and actions outlined in the plan are consistent with the concept of 'Inclusive Growth' as they seek to broaden opportunities for, and created by, SMEs.
Priority 1: Business EnvironmentActions in this area are focused on facilitating the ease of doing business by improving the legal and regulatory framework and by promoting cost efficiency and uncomplicated and transparent
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administrative procedures. These efforts would help foster a more conducive environment for businesses, particularly SMEs, to thrive and grow.
Best practice seminars targeted at SMEs have been conducted, covering areas like starting a business, licensing, taxation and trading across borders. These are part of a capacity building series that will also cover other indicators used by the World Bank to measure the Ease of Doing Business in various economies.
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Priority 2: Management Capability and EntrepreneurshipThis priority aims to improve the information and guidance available to business owners. It also seeks to increase opportunities for entrepreneurs to learn new skills and to start-up new businesses. A key feature of 'Inclusive Growth' is the emphasis placed on employment. Gainful employment is a more productive option than providing support as it leads to more income and demand and helps to build up human capital. As SMEs are a major source of employment, development of management and entrepreneurial talents will contribute to job creation and
sustainable growth.
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Priority 3: Market Access and InternationalizationAPEC has long been promoting liberalisation in trade and investment. But more can be done to increase access to information on market opportunities both within and outside the APEC region, and to enhance skills in market access and development. Members can also work together to identify and address trade barriers that curb SMEs' access to global markets.
Global growth in SME Capital MarketsThere is a worldwide trend towards the expansion of capital markets and investment listings specifically designed to meet the needs of small and medium-sized enterprises. Recent years have
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seen the emergence of numerous SME exchanges or listing programs, and these are playing an increasingly significant role in investment markets, not only in North America and Western Europe but also in many less developed parts of the world. This is a welcome development for a number of reasons. Greater opportunities are being provided for SMEs in these countries or regions to gain access to capital for growth and expansion, there are a wider range of investment options for private and corporate investors, and the potential boost to the small business sector can have far-reaching economic and social benefits, particularly in developing countries whose economies are often characterized by a high proportion of SMEs.
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At the same time, this development is raising concerns among heads of leading stock exchanges in the US and other western economies, which are now facing competition from smaller exchanges and those in other parts of the world.
International capital-raising for SMEsAlthough some of the existing SME listing programs are targeted specifically at companies in domestic markets, a particularly exciting aspect of the new developments is that many listings are open to foreign issuers, creating enormous potential for transnational investment and global inter-connectivity in SME capital markets. This is in turn made possible by advances in IT and
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communications technology, including electronic payment systems such as Paypal and WorldPay, and electronic trading systems. It was recently reported that internet share dealing has now overtaken traditional trading methods such as telephone or face-to-face trading, with the percentage of traders who used internet-based trading almost doubling from 28% in 2001 to 54% in 2005. The increasing adoption by exchanges worldwide of standardized electronic reporting systems such as XBRL can also facilitate the process of transnational listing.
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The Small Scale Industries (SSI) Sector in India- A Historical Perspective
The promotion of the small-scale sector in India has been an important thrust of industrial policy. Since the model for industrialisation in the 1950s was based on capital-intensive heavy industries, the priority of employment generation required the development of widely dispersed, mass consumption-good producing, labour-intensive, small-scale industries.
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The organisational structure for SSIs was set up in the 1950s with the establishment of a Small Scale Industries Board in 1954. Other important institutions at the national level were the Department of Small Scale Industries and Agricultural & Rural Industries and the Small Industries Development Organisation (SIDO) which was under the Development Commissioner, Small Scale Industries. At the State level, the Commissioner/ Directorate of Industries was the main institutional authority for SSIs. This structure has remained, though several other institutions have come into being in the 1970s and 1980s, particularly at the State level.
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SMEs and Indian Government:During the last forty years, several Committees have been constituted by the Government of India to examine the functioning of SSIs with a view to promoting their growth and efficiency within the context of the main objectives of the national economic plans. The Karve Committee Report (1955) was one of the earliest of these exercises which recommended a protective environment for the growth of small industries in India. Since then, policies targeted for the SSI sector have aimed at fostering its growth through positive policy interventions in the areas of finance, technology, infrastructure and extension services, among several other requirements of the sector. Supportive policies through the 1960s, 70s and 80s took the form of reservation of products exclusively for the
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SSI sector (836 products are reserved exclusively for SSIs at present) grant of fiscal concessions and government procurement of supplies from the sector. At present 836 products are reserved exclusively for SSIs. For increased credit flow to the SSI sector, a policy of priority sector lending through nationalized banks has been followed, though this has not been adequate for the growth requirements of the sector.
Since the 1980s and, more particularly, in the 1990s, there have been marked changes in the policy climate across the globe towards freer markets and reduced government intervention. The global
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economy is characterised by greater integration, a more liberalised international trade regime following the set up of the World Trade Organisation (WTO), a rapid pace of technological change, especially in some high-growth areas such as information and knowledge-based industries, and intensified international competition. India's economic policies are in the process of being restructured, through the second generation reforms, to adjust to the emerging challenges. The main emphasis of future policy will be to promote the growth of this dynamic sector through focused, sustained and wide-ranging interventions so that SMEs developed in a manner, which made it possible for them to achieve the following objectives:
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· High contribution to domestic production· Significant export earnings· Low investment requirements· Operational flexibility· Location wise mobility· Low intensive imports· Capacities to develop appropriate indigenous technology· Import substitution· Contribution towards defense production
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· Technology – oriented industries· Competitiveness in domestic and export markets
SMEs and their IssuesDespite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. Major obstacles for business development for SMEs relate to a wide range of issues:
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(i) Financing: Lack of access to finance and timely credit as well as escalating cost are cited as primary reasons for under- utilisation of the manufacturing capabilities of SMEs.
(ii) Infrastructure: The infrastructural facilities in India have not reached to the desired level. This restricts private initiatives in this sector. Therefore, creation of better infrastructural facilities for SMEs must receive greater priority.
(iii) Taxes and regulations: A multiplicity of regulating agencies lead to harassment and inspections with greater impact on operations of SMEs than on larger units.
(iv) Marketing: With growing access to modern means of communication, particularly revolution in the information technology, the sheltered market for the SMEs product is no longer so.
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SMEs should join hands globally to create a global commodity chain. In this regard, SME mother units in marketing, similar to mother units in production, may be promoted.
(v) Technology: Cutting-edge technology becomes difficult to access for SMEs due to the high initial costs leaving them behind in the race for competitiveness.
A major obstacle in SME development is inability to access timely and adequate finance. There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector. As the
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access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. While investment credit to SMEs is provided by financial institutions, commercial banks extend working capital. In the recent past, with growing demand for universal banking services, term loans and working capital are becoming available from the same source.
Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services by SMEs.
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There is an urgent need to regenerate SME financing. As the SMEs have been the greenfield for nurturing entrepreneurial talent, first generation entrepreneurs should be facilitated in access to the desired finance through creation of guarantee funds. Finance should not only be timely but also cost – effective.
SWOT Analysis of SMEStrengths WeaknessesContribution to national economic growth Lack of funds
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Generating employmentRegional developmentTechnological innovationExport market expansion
Lack of marketing fundsLack of informationNon-availability of technically trained human resourcesLack of access to technological information and consultancy services
Oppurtunities Threats
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Bilateral and multilateral trade agreementsEnhanced credit supportSupport for technological upgradationComprehensive support for cluster developmentMarketing assistance and export promotion supportGrowing domestic and international
Dumping from developed countriesDistrust between SMEs and financial institutionsPoor incentive structures for entrepreneursVirtual absence of enterprise educationNon-tariff barriers from developed countriesSlow improvement in quality to
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markets international standards
Need of the HourTo empower the SME Sector to take its rightful place as the growth engine of Indian economy, it is necessary to support the SMEs, educate and empower them to make optimum utilization of the resources, both human and economic, to achieve success. The SMEs need to be educated and
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informed of the latest developments taking place globally and helped to acquire skills necessary to keep pace with the global developments.
SME Chamber of India has decided to start various activities to empower and educate the SME Sector by organizing various trade promotional activities in India and abroad. Also provide assistance and support for the promotion of domestic business as well as export promotion of the SME sector.
As mentioned before, Small and Medium enterprises (SMEs) play a catalytic role in the development of any country. They are the engines of growth in developing and transition
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economies. In India they account for a significant proportion in manufacturing, exports and employment, and are major contributors to GDP (17% as per the latest report by Indian body Assocham and will touch 22% by 2012).
Banking to SME’s Considering the growth potential of Indian SMEs, the Government of India under Micro, Small and Medium Enterprise Development (MSMED) Act 2006 has public sector banks to achieve a minimum
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20 per cent year-on-year growth in the funding of SMEs that will lead to double the flow of credit to the sector from Rs 67,000 crore in 2004-2005 to Rs 1, 35,000 crore by 2009-2010
As the access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. In majority of the economies, while the investment credit to SMEs was being provided by financial institutions, commercial banks extended working capital. In the recent past, with growing demand for universal banking services, the term loan and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for
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introduction of new financial and support services by SMEs. Following are mainly the resources/ sources of raising funds available to SMEs:
Fund based
1. Existing shareholders and directors funds (“owner financing”)2. Overdraft financing3. Trade credit 4. Equity finance5. Business angel financing
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6. Venture capital7. Factoring and invoice discounting8. Hire purchase and leasing9. Merchant banks (medium to longer term loans)10. Cash credit11. Bill discounting
Non Fund based
1. Letter of credit
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2. Letter of Guarantee
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Certain Initiatives taken by Banks with respect to SME FundingIn the recent past a number of banks have discovered that lending to Small and Medium Enterprises (SMEs) as well as farmers is profitable.
In stark contrast, less than a decade ago, farmers and SMEs were both seen as unviable. Banks then reluctantly lent to both segments since they were forced to do so under the government-directed lending plans called ‘priority sector’ loans.
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Now, in a complete reversal of that scenario, even foreign banks like Citibank are aggressively pushing loans to farmers and SMEs. Many banks are operating in rural areas voluntarily and banking norms have been made more efficient in line with improved agricultural practices.
Increased Customisation Improved Risk Management Systems Cluster Based Approach Bill / Invoice Discounting E-Banking
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Credit Rating Credit Guarantee Venture Capital & Private Equity
Increasing Customization
Equally significant, banks are discarding generic lending models in order to create customised products. HSBC Bank, for example, uses credit card receivables of businesses such as hotels, shops or travel agents as collateral.
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Flexibility is the order of the day. When Pratibha Industries, an SME firm focussed on infrastructure development, undertook a project to construct a cooling water transmission system for National Thermal Power Corporation (NTPC) at Kahalgaon in Bihar, ICICI Bank structured a unique product called ‘back to back letter of credit’ that enabled the company to purchase raw material against the letter of credit.
That isn’t all. New tools such as third party ratings on SMEs have helped drive credit flow smoothly. SME Rating Agency of India Limited (SMERA), a joint initiative by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Ltd (D&B), Credit
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Information Bureau India Ltd (CIBIL) and several leading banks, now offer SME ratings that are comprehensive, transparent and reliable. In other words, assessing borrowers’ credit worthiness in the SME segment is no longer a problem for bankers.
Citibank, Standard Chartered and HSBC have already created special business units for SMEs, while their Indian counterparts like HDFC Bank and ICICI Bank have begun paying increased attention to the sector. Further, IDBI Bank has developed a special business model to serve SMEs in the country that has enabled the bank to develop a quality SME portfolio through a dedicated streamlined credit decision process.
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Financing of SMEs by Banks: Data
According to the RBI, advances to micro and small enterprises (MSEs) as defined under MSMED Act 2006, are a part of the priority sector advances. The total outstanding credit disbursed by public sector banks to MSEs as on Mar 2009 was Rs 1,909.68 bn, which constituted 26.5% of total priority sector advances.
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The total credit disbursed by private sector banks to the small enterprises sector as on Mar 2009 was Rs 479.16 bn, which constituted 11.8% of adjusted net bank credit (ANBC) and 25.2% of their total priority sector advances.
The share of loans in the total bank credit provided by the public sector banks to MSEs has declined since 2002; however, according to the latest trend, up to Mar 2009, a turnaround is in sight. Public sector banks were advised to make operational at least one specialised SME branch in every district and centre that had a SME cluster; consequently, by the end of Mar 2009, banks made operational 869 specialised SME bank branches.
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As on Mar 2009, different categories of banks as a group had achieved an overall target for priority sector lending. 3 out of 27 public sector banks and 5 out of 22 private sector banks failed to achieve the overall priority sector lending target of 40%. Similarly, 4 out of 27 foreign banks were not able to achieve the overall priority sector lending target of 32%.
We find that in recent years, large Indian firms (the firms above the SME threshold by the official definition) obtained about 47 percent of their total funding from internal sources, 19 percent from banks and FIs, and 5 percent from capital markets. The remaining 29 percent came from alternative sources.
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For the SMEs, the financing pattern was radically different. On an average, they got only 15 percent from internal sources, indicating that they are far less profitable, 25 percent from banks and FIs, and 10 percent from capital markets. As much as 50 percent of their total annual funding came from alternative sources. Friends and family equity accounted for a huge proportion of their alternative finance, followed by trade credit. In the same study, we also find that firm size is inversely related to dependence on alternative financing sources; the smaller the firm, the higher is the proportion of alternative financing in the total.
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Our findings are based on an examination of the finances of a very large sample of firms, over 12,000 in total. The dataset was compiled from the Prowess database of the Centre for Monitoring Indian Economy (CMIE), the most reputed purveyor of Indian corporate data. The findings paint a somber picture of the state of SME financing. Poor profitability and lack of access to formal capital markets and institutions result in heavy dependence on alternative financing channels.
Credit flows to Micro and Small EnterprisesThe Challenge of Employment in India: An Informal Economy Perspective (NCEUS, 2009) shows that between August 2007 and 2008, credit for credit cards increased by 86.3 per cent, all services
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sectors by 35.3 per cent, construction by 48.3 per cent, and real estate by 46.3 per cent. However, the increase to credit agriculture and allied activities has been 18.5 percent and for small-scale industries (including micro enterprises) just 9.7 per cent.
The overall availability of credit to small and micro enterprises as percentage of net bank credit (NBC) of the Scheduled Commercial Banks (SCB) has declined from 15.5 per cent in 1996-97 to 6.6 per cent in 2007-08. Banks’ credit to micro enterprises (investment up to Rs 25 lakh in plant and machinery) declined from 4.2 percent in 2002-03 to 2.8 percent in 2007-08. The lower segment of micro enterprises (with investment up to Rs 5 lakh in plant and machinery) has experienced a
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decline from 2.2 per cent to 1.6 percent in the same period. The proportion of net bank credit flows to the small scale sector has been falling in recent years (from 16 per cent in early 1990s to 8 per cent in 2006–2007)
Banks show their reluctance to extend credit to small enterprises because of the following reasons:
There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below:
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Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business owners or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require.
However, the sheer ticket size of SME lending makes it unviable for banks to invest in development of information systems about SME borrowers.
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In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair risk adjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case.
Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of credit terms, or an increase in prices, or both. From the borrower’s perspective, this leads to an outcome where the bank is over-pricing good risks and under-pricing bad risks. The fact that most
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banks in India have not developed adequate expertise in SME lending risk assessment exercises leads to the problem of granularity when it comes to SME lending.
Pecking Order Theory: Pecking order theory flows from the above two issues, which makes SME lending highly difficult for banks. Under this hypothesis, SMEs, which face a cost of lending that is above the true risk-adjusted cost, will have incentives to seek out alternative sources of funding. Evidence suggests that in such situations SMEs prefer to utilise retained earnings instead of raising loans from banks.
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Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the firm benefits fully from any additional returns but does not suffer disproportionately if the firm is liquidated. This is referred to as the moral hazard problem, which can be viewed as creating a situation of over-investment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid.
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Switching Costs: SMEs may find it harder to switch banks, when countered with any issue. It is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefits of switching outweigh the costs involved. This situation results in SME lending becoming a seller’s market, which may not be attractive to SME borrowers.
Credit guarantee schemes diminish the risk incurred by lenders and are mainly a reaction to small firms’ lack of collateral. Such schemes do have the potential to reduce the costs of small-scale lending and to improve the information available on borrowers.
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They enable small firms to access formal credit and also improve the terms of a loan.
Such schemes assist small enterprises to obtain finance for working capital, investment and/or leasing purposes at reasonable conditions. This enables SMEs to improve their competitiveness and to extend their economic activity. Weaknesses of credit guarantee schemes can be avoided through proper design and private sector involvement.
Steps for Smooth SME Lending
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In order to ensure that the above issues do not stand between SMEs and Bank Finance, the following steps could be taken as remedial measures:
Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrower’s willingness to accept a collateralised loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI)
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allows banks, with a good track record and financial position on SSI units, to dispense with collateral requirements for loans up to Rs. 25 lakhs.
Relationships: The length of the relationship between a bank and its SME customers is also an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the calibre of the people running the business. The closer the relationship, the better are the signals received by the bank regarding managerial attributes and business prospects.
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Quality of Information: SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided.
Customer Consideration: The SME market is somewhat different to the corporate market. In the corporate customers generally have a wide range of financing options to choose from and are not as dependent on bank financing as is the case with SMEs. The extent to which SMEs can take necessary
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steps, with the aid of public initiatives, to easily switch to another bank is another factor that can influence the level of competitive pressure on banks in the case of SME lending.
Role of Government and Banking Regulator in SME Lending
As is apparent, the above factors are only idealistic solutions and may not be practical for SMEs to follow because they are faced with several problems such as weak financial strength, inability to provide adequate collateral and other factors. Hence, the Government and banking supervisors
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should take a holistic view of the SME Sector while considering SME financing, taking into account the risks faced by banks and the problems faced by SMEs. In this regard, the initiatives taken up by the Government and Banking Regulators across various countries and in India are as follows:
Cross-country perspectives-Government Steps:
Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital;
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receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; micro-finance programmes, etc. In India, the financing of the SME sector has received some attention since independence.
Some of the initiatives taken by the Government in this regard are as follows:
Setting up of the Small Industries Development Bank of India (SIDBI), as the apex refinance institution in India for the purpose of channelling of finance to Small Scale Industries (SSIs) and SMEs in an organised manner
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SIDBI – SME Overview
Established in 1990, SIDBI is the principal financial institution that is engaged in promotion, financing and development of SMEs. It also coordinates functions of other institutions engaged in SME lending. SIDBI provides financial assistance to small scale sector under various categories, namely refinance assistance to primary lending institutions (PLIs), indirect equity assistance, direct assistance, and promotional and developmental assistance.
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The range of products and services offered by SIDBI for SMEs are direct finance, bills finance, refinance, international finance, micro finance and fixed deposit schemes. It also provides government subsidy schemes to the SMEs in textile, leather and food processing industries.
Further, SIDBI also acts as a nodal agency for implementing the government’s various schemes like Technology Upgradation Fund Scheme for the textile industry (TUFS), Scheme of Technology Upgradation/Setting up / Modernisation/Expansion of food processing industries, Integrated Development of Leather Sector Scheme (IDLSS) etc.
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Special Project
SME Financing and Development Project (SMEFDP)
SIDBI is an implementing agency of the SME Financing and Development Project (SMEFDP), which is a World Bank-led multi-agency/ multi-activity project for financing and developing SMEs. The project was introduced with an objective to attend to demand and supply-side issues of MSMEs through financial and non-financial services. The Department of Financial Services, Ministry of
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Finance, is the nodal agency and World Bank, DFID, UK; KfW, Germany, and GTZ, Germany are the international partners for the project.
Key Highlights
The entire credit allocation was utilised to benefit 927 MSMEs The BDS market was developed by strengthening both the supply-side (BDS providers) and
demand side (sensitisation and demand articulation of MSMEs)
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Extended capacity building support was provided to SMERA for scaling up exclusive rating of MSMEs and to CIBIL for setting up SME Commercial Bureau.
Apart from this, SIDBI has set up various institutions for development and financing of SMEs, namely
Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) SIDBI Venture Capital Ltd (SVCL) India SME Technology Services Ltd (ISTSL)
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SME Rating Agency of India Ltd (SMERA) India SME Asset Reconstruction Company Ltd (ISARC)
SIDBI proposed two fund based initiatives for improving credit flow to the SME sector as follows:
A contribution of Rs. 100 crore to the Rs. 500 crore corpus of the SME Growth Fund (SGF), which shall make primarily equity/equity related capital investments in accordance with SEBI guidelines, in SMEs operating in various growth sectors such as the life sciences, biotechnology, etc.
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The SME Fund of Rs. 10,000 crore to give an impetus to the fl ow of funds to the SME sector. This fund has begun operations with effect from April 2004. Under the Fund, assistance is provided to SMEs at affordable rates of interest, and direct fi nance is extended to SMEs through SIDBI’s network of branches. Further, refi nance to State Financial Corporations (SFCs) has also been made attractive in terms of low rates of interest.
The Government of India has launched the Credit Linked Capital Subsidy Scheme (CLCSS), which aims at facilitating technology upgradation of SMEs in specifi ed products/sub-sectors.
SIDBI negotiated a line of credit with the World Bank for financing and development of SMEs in India, with a view to upscale the credit fl ow to the sector and raising resources for the SME Fund.
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NABARD - SME Initiatives
NABARD is an apex development bank established for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.
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In FY06, NABARD decided to develop 5 clusters on its own and 50 additional clusters partnered with other government agencies to promote rural industrialisation, raise the income levels and living standards of artisans. Further, during FY09, the cluster development programme was extended to 39 clusters, that is, 37 clusters under participatory mode, 1 under intensive mode and 1 under eco-tourism mode, which took the total number of clusters adopted under this programme to 101 (90 participatory, 6 intensive, 3 rural/ agri tourism, 1 NPRI and 1rural tourism cum handicrafts) as at end March 2009.
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Realising the growth potential of SMEs, many banks have started offering products and services to this segment as highlighted in this chapter. Moreover, the SMEs have to offer more growth opportunities due to globalisation; however, this growth strongly depends on the SMEs’ ability to scale-up their capacity and embrace new technology, which is a major hurdle in present times. The banks can help them overcome such hurdles and cater to them through innovative products and services.
Indian scenario – RBI initiatives:
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The RBI, from time to time, has formed several committees and working groups to study the flow of credit to the SME sector in a comprehensive manner, and has issued detailed guidelines in this regard. Recently it has constituted an Internal Group under the Chairmanship of Shri C. S. Murthy to, interalia, consider the relaxation and liberalisation of credit lending norms that are applicable to the SME sector. The Group has submitted its report on June 6, 2005. The Internal Group, with reference to fi nancing of SMEs, has recommended:
Constitution of empowered committees at the regional offi ces of the Reserve Bank to periodically review the progress in SME financing and also to coordinate with other banks/financial institutions
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and the state governments in removing bottlenecks, if any, to ensure smooth flow of credit to the sector.
Opening of specialised SME branches in identified clusters/centres with preponderance of SME units to enable entrepreneurs to have easy access to bank credit and to equip bank personnel to develop the requisite expertise.
Empowerment of the boards of banks to formulate policies relating to restructuring of accounts of SME units subject to certain guidelines.
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Restructuring of accounts of corporate SME borrowers having credit limits aggregating Rs. 10 crore or more under multiple banking arrangements to be covered under the revised CDR mechanism Appropriate authorities are currently examining the above recommendations of the Internal Group.
Some other New Initiatives to Promote MSMEs
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In the recent years, Indian authorities have taken several steps to address factors that constrain SME financing and developments, and the World Bank has provided support through an SME Financing and Development Project.
The Government of India and the Small Industries Development Bank of India (SIDBI,
www.sidbi.com, which is the apex bank for SMEs in India) requested the World Bank to support efforts to remove constraints to SME access to finance (including term financing), and to foster SME development. A Bank project involving funding of US$120 million for SME financing and development was subsequently developed. The Project was approved on November 30, 2004, and
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became effective on April 4, 2005 and is currently scheduled to close on June 30, 2009. The objective of the Project was to improve SME access to finance and business development services, thereby fostering SME growth, competitiveness and employment. The Small and Medium Enterprises
Financing and Development Project has been designed to improve access to finance for SMEs. The lending from the original project covered 927 SMEs spread across 10 Indian states.
A US$ 400 million additional financing loan to the SIDBI was signed on 5 June, 2009 by representatives from the Government of India, SIDBI and the World Bank.
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The Securities and Exchange Board of India (SEBI, http://www.sebi.gov.in/) issued norms on separate stock exchanges for SMEs during November, 2009 so as to give them more options to raise capital. At present, around 90% of the 2.61 crore MSMEs depend on either banks or informal sources to finance their business. Setting up of a separate stock exchange for SMEs is not so simple. Two requirements are to be fulfilled. One is to reduce the cost of compliance and the second is to safeguard the investors from any undue risk. The SEBI has laid the groundwork to allow SMEs to list on SME Exchanges. SMEs have always complained of difficulty in accessing to both debt and equity capital. It is perceived that registration of companies from the SME sector is essential so as to raise capital from the stock exchange.
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SMERA (www.smera.in) is India’s premier credit rating agency in the micro, small, & medium enterprise segment. It focuses primarily on the Indian SME segment. The primary objective is to provide ratings that are comprehensive, transparent and reliable.
It takes into account the financial condition and several qualitative factors that have bearing on credit worthiness of the SME
The credit guaranty fund and credit linked capital subsidy scheme has been built in order to support the SMEs. Credit rating helps in cost efficiency and innovation to be undertaken by SMEs,
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and helps the bank to go for less riskier lending venture, provided the credit rating is done in a scientific way. The Exim Bank of India in India has also provided financial solutions to the SMEs.
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Axis Bank
Overview of Axis BankAxis Bank, formerly UTI Bank, was the first of the new private banks that had begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-
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I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United India Insurance Company UTI-I holds a special position in the Indian capital markets and has promoted many leading financial institutions in the country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with other unrelated entities with similar name. After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing director and CEO on 20 April 2009.
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Deposits and Loans
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Axis Bank’s loan book grew at a CAGR of 54.2% to INR 815.6 bn5 from FY 2005-FY 2009. In FY 2010, loan book growth was relatively weaker at 27.9% y-o-y to INR1043.4 bn due to slowdown in Large & Mid corporate loan and SME loan book.
The bank has a well-diversified loan book. It’s large & mid corporate loan book accounts for 50% of the loan portfolio. The Retail advances account for 20% share, SME contributes 19% and Agriculture 11% to the total loan portfolio. The management cited that its overall loan mix will not see any significant change and will remain focused on growing its corporate loan book. It also
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mentioned that it would aim to bring its retail loan portfolio to 25% by FY 2011 to be a beneficiary of the surge in demand in retail credit within sectors like home loans, auto loans etc.
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5 Company report on AXIS Bank; Asit C Mehta Investment Intermediates Ltd; May 2010
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Exhibit 1 Loan Book Breakup6
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Exhibit 2 Loan Growth : AXIS Bank
Axis Bank maintains one of the highest CASA ratio in the banking industry. As on FY 2010, the bank reported a CASA ratio of 47%. CASA deposits grew at a CAGR of 40.5% to INR660.3 bn over FY 2005-FY 2010, outpacing the CAGR growth of term deposit of 30.8% to INR752.7 bn for the same period. This remarkable achievement has been made due to management’s continuous focus and investment in expanding its branch network. The bank as on FY 2010 has a network of 1,027 branches and 8 extension counters. Management has indicated that it will add approximately 200
6 Source: ACMIIL(Asit C Mehta Investment Intermediates Ltd) Research, May 2010
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branches to its network in FY 2011. This would support CASA growth in future, thus helping the bank to reduce the overall cost of funds in an increasing interest rate cycle and support NIM.
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Exhibit 3 CASA and Term Deposits Breakup
On 24 February 2010, Axis Bank announced the launch of 'AXIS CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards. Axis Bank is the first bank in the country to provide a secure debit card-based payment service over IVR
The Bank today is capitalized to the extent of Rs. 407.44 crores with the public holding (other than promoters and GDRs) at 54.51%.
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The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1042 branches (including 56 Service Branches/CPCs as on 30th June 2010). The Bank has a network of over 4474 ATMs (as on 30th June 2010) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country.
The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.
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Exhibit 4 Shareholding pattern as on 31st March 2010
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As on FY 2010, the bank’s NIM stood at 3.75%. NIM is expected to grow in long term as rising interest rates will improve yields on advances and higher CASA ratio will lower the cost of funds.
The bank has a Capital Adequacy Ratio (CAR) of 15.8% and tier 1 capital of 11.2%, which provides enough headroom to grow its loans & advances.
The bank has a well-diversified loan book. It’s large & mid corporate loan book accounts for 50% of the loan portfolio. The Retail advances account for 20% share, SME contributes 19% and Agriculture 11% to the total loan portfolio.
Axis Bank maintains one of the highest CASA ratio in the banking industry. As on FY 2010, the bank reported a CASA ratio of 47%.
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Net Profit during Q4FY10 rose to Rs. 764.87 crores from Rs. 581.45 crores in Q4FY09, registering a growth of 31.55% yoy. Net Profit for FY10 stood at Rs. 2,514.53 crores, up by 38.51% yoy from Rs. 1,815.36 crores for FY09.
Axis Bank: Product PortfolioThe bank provides customers with host of services:
1) Savings Accounts:
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Easy Access Savings Account Prime Savings account Salary Savings Account Power salute: A salute to the defence forces Azaadi Senior Privilege Savings Account For the woman of today – Smart Privilege Savings Account A complete banking solution for Trusts, Associations, Societies, Government Bodies, Section 25
companies and NGOs
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Pension Savings Bank Account,
2) Business Current Accounts: Normal Current Account Business Advantage Account Business Classic Account Business Privilege Account Channel One Current Account
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Club 50 Current Account Capital Market Current Account for Broker Segment Current Account for ‘Builders And Real Estate’ Segment Current Account Business Global Krishi Current Account Current Account Shipping & Maritime Current Account Inland Road Transport Current Account Travel, Tourism & Hospitality
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3) Deposits Fixed Deposits Recurring Deposits Encash 24 Tax Saver Fixed Deposit
4) Corporate CreditAt Axis Bank, Corporate Credit is handled under 3 business verticals as follows:
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S.No. Business Segment Criteria1 Large Corporate Net turnover above Rs. 500 cr
or aggregate exposure above Rs. 100 cr
2 Mid-Corporate Net turnover exceeding Rs. 125 cr and upto Rs. 500 cr and aggregate exposure above Rs. 25 cr and upto Rs. 100 cr
3 SME Net turnover upto Rs. 125
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crores and exposure upto Rs. 25 crores
A. Fund Based Debentures and security trustees Overdrafts Cash credit Demand Loans
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Working Capital Demand loans Bills purchased/discounted Packing credit Rupee Term Loans Foreign Currency Term Loans Dealer/vendor financing Factoring of ReceivablesB. Non-Fund based Letter of Credit
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Bank GuaranteesCredit products from offshore branches
a. Foreign Currency loansb. External Commercial Borrowingsc. Trade Finance
5) CardsApart from Gold & Silver credit cards, Axis Bank provides
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• Axis Bank Meal Card
• Axis Bank Gift Card
• LIC co-branded Annuity Card
6) Capital Markets• Debt Solutions (syndication)
• Equity Solutions
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• Private Equity, Mergers & Acquisitions
• Advisory Services
• Trusteeship Services
• Depository Services
• Capital Market Funding
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• E-Broking
7) Cash Management Servicesa) Collection Service – Power Collect includes: Power speed – local cheque collection Power country – upcountry cheque collection Post dated cheque collection IPO collections/Rights issue ECS debit
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Utility Bill Collection Sale of prospectus/Fee collection
b) Payment Service – Power pay includes At par payment Dividend/interest payment Power remote – remote DD printing Power cheque – customer cheque printing Electronic Clearing Service (ECS credit)
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National Electronic Clearing Services Real time Gross Settlement (RTGS)
8) Treasury & Forex Products Collection Services Remittance Services Capital Account Transactions Letter of Credits and bank Guarantees Export Financing
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Hedging services Bullion business Retailing of Government Securities Constituents Subsidiary General Ledger Facilities (CSGL) Commercial Papers Collateralized Borrowing and Lending Obligations (CBLO)
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Axis Bank: SME Specific
AXIS bank has got two basic modes through which it lends money to SME’s. The first one is SME Standard and the second is SME Fast Track.
AXIS Bank SME StandardFor a business on the growth phase with a wide range of opportunities to explore, timely availability of credit is an integral ingredient needed to scale new heights. Axis Bank understands
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this and endeavors to be not just a bank but also the financing partner for SME’s so that they can focus on the business needs whereas they will facilitate in the financing needs.
The services of AXIS bank range from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures that you get finance the way it is best suited for your business.
Services offered by AXIS bank under SME Standard are
a. Cash Credit
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They offer Cash Credit facilities to meet the day-to-day working capital needs. Cash Credit is provided against the primary security of stock, debtors, other current assets, etc., and/or collateral security of movable fixed assets, immovable property, personal or corporate guarantee, etc. Interest is charged not on the sanctioned amount but on the utilized amount.
b. Working Capital Demand Loan
AXIS bank also provides working capital facilities in the form of Working Capital Demand Loan instead of cash credit facility. The primary or collateral security will be as mentioned in cash credit facility. Here also interest is levied on the amount drawn rather than on the amount utilized.
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c. Export Finance
They provide finance for export activities in the form of Pre-Shipment Credit against firm order and/or Letter of Credit and Post shipment credit. Credit is available for procuring raw materials, manufacturing the goods, processing and packaging the goods and shipping the goods. Finance is provided in Indian or foreign currency depending upon the need of the borrower.
d. Short Term Loan
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Companies may enjoy Working Capital facilities to meet their day-to-day working capital needs and Term Loan for capex. However there may be occasions where they may need ad hoc or short-term finance for general corporate purposes, meeting temporary mismatches in working capital or for meeting contingent expenses. In such situations AXIS bank provides Short Term Loans for tenure upto a year so as to ensure that their business runs smoothly.
e. Term Loan
Given the growth opportunities a particular business enjoys, it may need long-term funds for capex or capacity expansions or plant modernization and so on. Keeping these requirements in mind AXIS
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bank provides term loans upto acceptable tenor with suitable moratorium, if required, and repayment options structured on the basis of the company’s estimated cash flows. These loans are primarily secured by a first charge on the fixed assets acquired through the loan amount. Suitable collateral security is also taken whenever required.
f. Clean Bill Discounting
AXIS bank provides clean bill discounting facilities to fund receivables. It also discounts bills or receivables from the credit worthy clients and provide credit against that. This facility is provided for a period of 3-6 months depending upon the tenor of the bill.
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g. LC Backed Bill Discounting
The bank discounts trade bills drawn under Letters of Credit issued by reputed banks to fund the borrower’s receivables. This facility is provided for a period of 3-6 months depending upon the tenor of the bill or Letter of Credit.
h. Co-Acceptance of Bills
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AXIS bank also provides co-acceptance of trade bills depending upon the need of the borrower. Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks
Various foreign companies set up subsidiary in India. We provide funding to such companies against guarantees or SBLCs of acceptable foreign banks.
i. Letter of Credit
Apart from fund based working capital facilities AXIS bank provides a range of Non-Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is
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provided to meet the customers trade purchases. These are generally provided for 3-6 months depending upon the Trade cycle. Apart from this bank provide Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower.
j. Bank Guarantee
They provide Bank Guarantee on behalf of thier client to various other entities such as Government, quasi govt bodies, corporate and so on. It also provides a range of guarantee such as Performance
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guarantee, financial guarantee, EPCG etc. The tenure of Bank Guarantee range from 1 year to 10 years depending upon the purpose of the guarantee.
k. Solvency Certificates
AXIS bank also provides solvency certificate depending upon the need of the borrower.
SME Fast TrackAxis Bank offers fast track loans for SMEs under the following schemes
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a. Mpower-Term Loan (Mpower-TL)
Axis Bank's Mpower-TL provides a hassle free way of meeting the business needs of expansion and other long term funding requirements against the security of immovable residential or commercial property. Mpower-TL is an EMI based loan and can be availed by Partnership firms, Private Ltd. Companies and Trusts. Mpower-TL has the following features:
Loans upto Rs 5 crores
Flexible repayment options of upto 10 years
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Attractive market related interest rates
Fast processing and quick disbursement
b. Business Loan for Property
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Looking to acquire an office space for your business? Axis Bank's BLFP offers companies with a convenient way. It is an EMI based term loan and can be availed by Partnership firms, Private Ltd. Companies and Trusts. BLFP has the following features:
Loans upto Rs 5 crores
Flexible repayment options of upto 10 years
Attractive market related interest rates
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Fast processing and quick disbursement
c. Power Rent
Having a rental income from commercial property leased out to reputed corporate or Public Sector Units or Banks or Insurance Companies? Axis Bank's Power Rent is just the right product for you. The product offering involves discounting the future receivables and providing an upfront loan to the landlord, thus extending immediate liquidity in the hands of the landlord. It is an EMI based
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term loan, which can be availed by Proprietors, Partnerships, Private Ltd. Companies and Trusts. Power Rent has the following features:
Loans upto Rs 20 crores
Flexible repayment options of upto 10 years
Attractive market related interest rates
Fast processing and quick disbursement
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d. Power Trade
Axis Bank understands the unique needs of the trader segment and have tailor designed a specific product 'Power Trade' to meet their business needs. Axis Bank's Power Trade is a hassle free and flexible credit facility for meeting the working capital requirements like Cash Credit, Bills discounting, Export Credit, Bank Guarantee, Letter of Credit or a term loan.
Loan upto Rs 2.5 crore
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Stock statements to be submitted quarterly
Tenure - 1 year for Working capital and 3 years for Term Loans
e. Mpower-OD
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Axis Bank's Mpower-OD helps borrower’s to meet their short-term funding needs and allows them to leverage every business opportunity that comes their way against the security of residential or commercial property.
Loans upto Rs 2 crores
Tenure - 1 year
Immovable Property as collateral
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Attractive market related interest rates
Fast processing and quick disbursement
f. Enterprise Power
Axis Bank's Enterprise Power is a unique product designed keeping in mind the business requirements of Micro and Small Enterprises (MSE).
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Loans upto Rs. 1.00 crore
Tenure-1 year for working capital and 3 years for term loan
Attractive market related interest rates
Fast processing and quick disbursement
g. Equipment Power
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This product is a term loan facility with a tenor upto 48 months for purchase of construction, medical and office equipments. There is a standard list of equipments, which the Bank would finance under the scheme and the maximum exposure permitted under the product is Rs. 100.00 lacs.
h. Zero Collateral Loans to SSI Units (ZCL)
Collateral free product to facilitate the MSE and software/IT related services to avail both working capital and term finance from the Bank. The facility is secured by guarantee cover of Credit
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Guarantee Fund Trust for Micro and Small Enterprises (CGMSE). Maximum loan amount under the product is Rs. 50 lacs.
Lending To Micro, Small and Medium Enterprises, Agriculture and Micro Finance
The Micro, Small and Medium Enterprises (MSME) segment is a key target area of business for the Bank. MSMEs play a vital role in the development of the economy and generation of employment through the diversity of businesses that such enterprises are engaged in, the entrepreneurial talent that has built the businesses and their geographical dispersion. Banks are able to participate in both
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fund and non-fund based credit limits, diversification of risk and cross-selling. Importantly, banks can also fulfill their priority sector obligations by lending to MSME. The Bank has set up 25 SME Centres to focus on lending to this sector.
The Bank continued to focus on agriculture lending and build on its cluster-based approach. Nine Agriculture Business Centres manage retail agriculture, corporate agriculture and commodity business (i.e. financing against warehouse receipts). The focus of different agri-business segments, through different teams and a wide range of products, has helped in business growth in each of these segments.
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The retail agricultural model consists of 56 agriculture clusters, which are placed in areas best suited for retail agriculture business. The Bank undertakes retail agriculture lending through 246 branches, which are the contact points for the clientele in this segment. The Bank has client-specific relationship manager/credit analyst teams with sectoral expertise, to drive the corporate agriculture business.
Under the warehouse receipt financing scheme, agricultural commodities stored in warehouses are financed all over the country through the network of branches working under the overall supervision of our eleven Commodity Business Centres. Bank finance has been extended to farmers,
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joint liability groups, traders, food processors, aggregators etc. During the year, agriculture advances grew by 40.36% to Rs. 11,534.04 crores, constituting 12.54% of the Bank's domestic advances. As on the last Friday of March 2010, the direct agriculture lending was 10.14% of the adjusted net bank credit of the Bank.
The poor and vulnerable sections of society face a dearth in banking and financial services in India. Over the past decade, micro finance has played an important role in filling this gap and Micro Finance Institutions (MFI) are uniquely positioned to provide financial services to a clientele poorer and more vulnerable than traditional bank clientele. The Bank has supported MFIs over several
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years and as on 31 March 2010, the Bank has financed 87 institutions and has extended assistance through them to20 lac such poor and marginalized people. The Bank has also extended credit aggregating Rs. 0.33 crores under the Differential Interest Rate scheme to very poor people in four states. The Bank continued its strategy of extending loans under various government sponsored schemes.
A graphical representation highlighting the distribution of risk across various rating grades for large corporate, mid corporate, infrastructure business and SME portfolio as on 31st March 2010 is given below
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Exhibit 5 SME Exposure of AXIS Bank as on 31st March, 2010
Customer Acquisition and Promotion The bank has a well-diversified loan book. It’s large & mid corporate loan book accounts for 50% of the loan portfolio. The Retail advances account for 20% share, SME contributes 19% and Agriculture 11% to the total loan portfolio.
Further, on our interaction with the concerned employee of the branch we found out that bank apart from their TV commercial and newspaper advertisement pitch to their existing savings and
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current account holders the special credit facilities extended by bank. As a result of which most of their Cash Credit account holders are the ones who already had their current account with the bank. Also, while selling third party products like mutual funds and insurance they make sure that they make the customers aware of their credit facilities. So, that is how their rope is their potential SME clients.Their second means of acquiring customers is through word of mouth.
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Live Case at Axis Bank : Lending Process
On the basis of our interaction with Ms. Palak Khare, executive – credit department in Axis Bank,
GK-1 branch, we found out that following steps are observed whenever any SME firm/Corporate
approaches Axis Bank branch for availing credit facility and also the fact that a very stringent and
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disciplined format is followed by the bank not only at the branch level but also at the zonal and
centre level.
The various steps involved in the loan process have been explained below:
There was an SME that approached Axis bank to raise a loan of `15 lakhs, and he already had a
current account with the bank.
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So on coming for the loan the bank carries out the following process explained with the help of the
following flow chart-
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Bank branch demands the following documents
to carry out the first stage of credit garnting
process
Credit limit the client wants to avail(minimum `10 lakhs in case of SME)
Photocopy of the last 3 years financial
statements, if not then loan rejected
legal Documents with respect to the collateral
being provided
On proper verification documents are sent
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Zonal office, Barakhamba
Cannaught Place, New delhi
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Credit Analysts at the zonal office take into consideration the following parameters
Financial Ratios Site visits In-depth analysis of the financial statements
and the promoters of the company
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To generate the interest rate to be charge on the loan
thus offered
Credit Rating entered into bank run software
On verification by the credit analyst a weighted average of all the parameters is considered to generate the Credit Rating of the
company
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As we can see that the level of scrutiny and the overall check that is maintained at all the levels of
the bank, the chances of default are very low leading to higher credit risk management and its
efficient implementation.
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Thus under this case the loan was ultimately provide to the person who approached the bank as he
met all the requirements and was high on credit ratings carried out by Ms. Akansha at the Zonal
office.
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Incident of Rejection
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In one of such incidents as told by Ms. Akansha7 there was a case of a 27 year old man, who
approached Axis bank for loan, for his start up,
But his loan was rejected due to the following reason at the branch level itself
Too young to take a loan of `20 lakhs
Inexperienced towards the project that he was starting
And could not provide 3 year financial statements
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Thus we can say that a loan application can be rejected on certain subjective issues as well and that
the overall credit risk management process carried out by Axis bank is highly efficient in nature,
rightly reflecting the high gains and low defaults for the bank over the past few years.
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Risk Management : SME
Profiling SME Risks Opaque financials - tax planning oriented Asymmetric financial data - cannot be extrapolated for projections Credit risk correlated with parent industry segment as well as parent corporates SME loans have high credit process costs Exhibit high variation in expected losses within segments
Risk management critical to SME Portfolio7 SME Risk Management Department
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Pricing presently flat across risk spectrumo Need for risk adjusted pricing
SME portfolio capital intensive with high potential losses Capital charges will in future be related to credit exposure and potential losses (Basel II) Credit risk needs to be handled at portfolio levelo Asset classes rather than individual loans
Transaction history crucial input for portfolio supervision and monitoring
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Approach to SME Risk Assessment Industry : Correlation with industry trends, Corporate linkages and length of relationships Business :Length of operations, sustainable levels Management : Promoter family, Collateral, market standing (trade references) Financial : Sales, cash flows, availability of informal credit Transactional: Payment history, cash flows, defaults, return of collections etc. Credit process cost to be reduced by use of judgmental scoring models, recalibrated based on
statistical data going forward Monitoring - based on capital consumption and expected losses
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Ex-post management - sale, securitization, credit derivatives to transfer credit risk No easy solutions - generic solution cannot be transplanted - need to develop own models.
Recent News in SME sector
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Ahmedabad , the best Indian city for SME businesses8
The Indian SME sector contributes almost 8 to 9 percent of India’s GDP and Employs more than four crore people. In a recent report by Ernst & Young (E&Y) and Franchise India Ahmedabad is the frontrunner in the list of cities for successfully running small scale businesses. The city has a good scope in the pharmaceutical, leather footwear, textile machinery parts, gems and jewellery health and wellness services. Gujarat is known for being the best state for entrepreneurs and it has seen micro, small and medium enterprises (MSMEs) growing.
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Bengaluru, which is the ideal city for B2B services, ranks second in the list. The city is known for supplying hand tools, auto component and hosiery sectors and it ranks second in the list of all cities for electrical goods and apparel manufacturing.Mumbai, the commercial capital of India ranks third in the list as it serves an ideal environment for machine tools, electronic goods and B2B services.Hyderabad, which is ideal for information technology-enabled services (ITeS), offshore services, bulk drugs, and leather tanning has been ranked as India's fourth best city to start a business.
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New Delhi is rated as the fifth best city to start small business in sectors like rubber, auto components and food processing. It ranks 5th among the best Indian cities to do business in. Some of the other cities that could find a ranking in the chart are Chennai, Surat, Faridabad, Jaipur and Gurgaon.
SME Report on top 100 Cities released9
A report titled 'Top 100 cities for small business in India', was released by Franchise India, an integrated franchise and retail solutions company, on August 26, 2010, in Mumbai. The report has 8 http://www.siliconindia.com/shownews/Ahmedabad_the_best_Indian_city_for_SME_businesses-nid-71192-cid-3.html
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rated Ahmedabad as the most preferred city and Gujarat, Maharashtra and Andhra Pradesh as the most preferred states for SMEs (Small and Medium Enterprises). These states provide the best conditions for robust growth of the SMEs in India.
The report highlights the essential pre-requisites of starting a new business that includes demographic infrastructure, retail activity, regulatory and entrepreneurial ability and paying taxes. SMEs are the backbone of developing nations and contribute about eight to nine per cent to the GDP of India by providing employment to more than four crore people. The SMEs comprise 45 per cent of the industrial output in the country and contribute to about 40 per cent to the Indian export.
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The report talks about the facilities like incentives to promote quality competitiveness, research and development and technology upgradation provided by different states.
9 http://news.franchiseindia.com/franchise/SME-report-on-top-100-cities-released-2428/
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Conclusion
Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms. Similarly, banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation of the banking industry. In India, however, the various public initiatives for promoting finance to SMEs have not been as successful as envisaged because there has been some overlapping of
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regional and national initiatives. Efforts to harmonise the standards and practices, therefore, need to be properly coordinated to facilitate SME finance further.
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References:
“Debt Restructuring Policy- Axis Bank” “MSE Charter- Axis Bank” “Helping SMEs to gain a global perspective” EU-USA Co-operation Distortion on “How Can IndianSMEs become Export competitive” by Divya Sampath,
SIBM,Pune
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