The ‘Economist’ (June 05, 2004) quoted an IIPM survey to reiterate that the Indian SME has to still face no less than 40 inspectors a month.
This is the right time that the banks should make a bold move to give up their balance-sheet approach to assessing the financial worth of an enterprise and insistence on collateral securities for every pie – even additional pie they lend.
This should be replaced with cash flow approach. Balance-sheet, all said and done, is the culmination of finances on a particular date at the end of the year.
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The appraisal should consider the sector’s limited access to equity sources and high dependence on debt markets, blocking of or delaying payments by vendees, inevitable delays in submitting audited financial statements. Several SMEs are bracing up to computerize their back-office operations like accounting, office administration. They are constrained by finances. It is a slow process but will happen.
Several Banks are reformulating their credit origination methodology to discuss overall business plan and revenue model that the customer owns up. Cash requirements based on work orders for each month for 1 8 months should be worked out and reviewed at half-yearly intervals for any necessary revision.
Cash deficit should be worked out each month and that should be financed by the banks to the extent of 80 per cent. Financing capital expenditure shall carry a margin of 20 per cent of deficit in case of disruption and in cash receipts should be part of the limit.
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Financing capital expenditure shall carry a margin of 20 per cent of the cost price of the asset with a gestation period of 4-5 years and capitalization of interest for the first two years as part of the project cost.
The loan should be secured by a charge on overall assets of business. Collateral security can never substitute viability and every good banker knows it.
Banks should gear up to offer entrepreneurs information about industry, products, markets, etc., in addition to financial assistance and they can make use of the services of responsible small enterprise associations for such purposes and even for due diligence.