Securitisation of small business loans proposed

The Finance Minister, Shri Yashwant Sinha has proposed a new scheme whereby SIDBI will be guaranteeing loans originated by commercial banks, where the bank lends an amount upto Rs.5-10 lakhs to an SSI. Backed by SIDBI's guarantee, these loans will be securitised in the market. 

If and when the scheme succeeds, this will be one of the best things to happen to SSIs. With all the priorities given to small business loans, SSIs all over the country still languish for want of proper funding and have to either depend on their own funds or those provided by private financiers. 

The securitisation schme is an excellent mode of promoting small business loans. The features of the scheme are : After being originated by the commercial bank, the loan will be transferred to an SPV (special purpose vehicle), which means the loan will not sit on the balance sheet of the bank, thereby releasing the bank's capital adequacy requirement. Since it does not impair the bank's capital, the bank will be far more aggressive in writing such loans. In effect, it amounts to making an income out of a loan without investing in the loan. As against a typical refinancing scheme, it is not even SIDBI which finances the loan. SIDBI merely provides its credit enhancement. The loan is funded by the capital markets. 

The loan will be acquired by an SPV which will then securitise the loan (that is, issue securities that will be self-amortised from the cashlows arising out of these loans). 

The investors will find the instrument reasonably secure, since the first and second loss risk will be absorbed respectively by the originating bank and by SIDBI. 

Typically in such a scheme the bank that originates the loan will retain risk upto a certain per cent. Then, the loans are guaranteed by SIDBI. Thus, the investors have a double layer protection - the second one being as strong as the guarantee of a government-owned institution. Therefore, there is a remote possibility of the risk reaching the investors. 

Securitisation of small business loans is promoted in the USA by the Small Business Administration. The programme has been running since 1985. Over these 15 years, over US $ 25 bn worth of loans granted by banks has been securitised. Not only banks, even non-depository finance companies are encouraged to lend to small businesses and even such loans are securitised. The securitisation of loans granted by finance companies has been in operation since 1992 and approximately US $ 1.3 bn worth loans have been securitised. 

Typically under the US practice, the originating bank is required to take risk equal to twice the historical loss rate, that is, the cumulative loss on account of default as seen in the past. 

The balance risk is shouldered by the Small Business Administration. Securitisation is certainly a fast developing innovation in finance, which the Indian government now has begun to acknowledge. 

SSIs registered before December 1999 to retain status

The Government on 15th March clarified that units which had obtained permanent registration prior to the December 1999 notification would continue to be regarded as small scale industries (SSIs). 

Under the December 1999 notification, the government had reduced the investment limit on plant and mchinery from Rs.3 crore to Rs.1 crore for units to be regarded as SSIs or Ancilliary industrial undertakings. 

According to an official release, units that had obtained a provisional registration from state authorities for their SSI status would continue as SSI units; provided the registration was done within the period of limitation of 180 days specified in the order. 

It further clarified that units which had switched over to the SSI status, based on the order dated December 10, 1997, would continue as SSI units, despite the new order. 

SSI credit guarantee fund of Rs.2,500 crore mooted

The government was expected to announce in April, 2000 a Rs.2500 crore fund for helping the small scale (SSIs) sector meet its credit needs, an industry ministry official said on March 17. 

A proposal for the credit guarantee fund, comprising Rs.2000 crore as government share and the balance as the contribution from the Small Industries Development Bank of India (SIDBI), has been sent to the Union Cabinet for clearance. This was told to PTI by the secretary in the ministry of small scale industries and agro and rural industries, Shri D.P. Bagchi. 

Shri Baghi said the corpus of the Rs.2500 crore fund would be built over a period of time. Every year the government would make a budgetary provision to the fund and SIDBI would also make contributions to the fund. 

In the first year of operations the fund will have Rs.125 crore, with the government allocating Rs.100 crore in the budget and SIDBI providing Rs.25 crore. He added that the fund was expected to be fully operational by the Tenth Plan. 

Since the fund would provide guarantee to loans from commercial banks, it was expected that the first disbursal would take place only after three years once some of the loans defaulted, he said. 

The credit guarantee fund has been created to encourage commercial banks to extend credit to small scale entrepreneurs who may not be able to offer collaterals, executive director of SIDBI, Shri G.K. Saxena said. 

The upper limit for the loans would be Rs.10 lakh. These would be provided without collaterals. 

He added that loans would be primarily extended to small scale units in the manufacturing sector and those associated with information technology. 

Explaining the role of SIDBI, he said the company would stand guarantee for up to 75 per cent of the loan extended to a small scale unit by a commercial bank. 

"Despite the risk for SIDBI in case of defaults it is expected that commercial banks would extend more loans to the small scale units as their risk would be to the extent of only 25 per cent," he said. 

Under the proposal the scheme would be operated for a period of five years on a pilot basis and there shall be a lock-in period of 24 months from the date of disbursement. Lenders shall pay a guarantee fee of two per cent of the loan up-front and annual service fee of 0.5 per cent of the loan outstanding at the end of each year. 

Bank credit to SSIs goes up that to Tiny Sector goes down

Net bank credit to the tiny sector declined by almost 14 per cent during the year ended March 1999 at Rs.8,800 crore from over Rs.10,000 crore in the previous year despite a rise in overall credit to small scale industry. 

Consequently, share of the credit extended to the tiny sector as a percentage of the net SSI credit declined to 21 per cent during the year from 27 per cent a year ago, according to the annual report of SSI Ministry for 1999-2000. 

"It is clear that against the target of 60 per cent of SSI credit for tiny units, the actual flow has been only 21 per cent", the report said. 

Credit to the SSI units increased to Rs.43,000 crore upto March 1999 from Rs.38,000 crore, the previous year, a healthy increase of almost 12 per cent. Sickness in the SSI sector also increased over the same period. 

The number of sick units in 1998 was a little over two lakh accounting for 7.33 per cent of the total SSI units. This increased to 3.06 lakh units in fiscal ending March 1999 accounting for almost 10 per cent of the total. 

Value of production of small scale units in 1998-99 aggregated to Rs.5,25,000 crore registering an increase of 13.41 per cent over the previous year at Rs. 4,65,000 crore. 

The SSI sector continued its good performance in exports registering an increase of 11.4 per cent at Rs.49,400 crore in the fiscal ending 1999 over the previous year's Rs. 44,436 crore. 

Employment in the SSI sector witnessed a growth of 2.61 per cent in 1998-99. It stood at 171.6 lakh upto March 1999 compared to the previous year's figure of 167.20 lakh persons employed. 

Synergy in SSI - big corporate relationship

Small scale industry's (SSI's) output rose 13 per cent in 1998-99, a year in which industrial growth overall was just 4 per cent. Growth in exports of SSI sector in 1998-99 rose by 9%. It shows that small industry has a certain verve. Policy is, however, limited to granting SSIs reservation, protection (entry barrier) in terms of the ceiling on investment for entitlement to small industry status. There is need to review this conventional approach. 

The public sector does not have adequate resources to forge ahead. The big corporates, including multi-nationals have got involved with mergers and acquisitions. The resultant financial transactions are large but add little to productive capacity. After the initial spurt in capacity addition, the big corporates face a slack in capacity utilisation to this day. The issue then is to gear up investment. This can be best done by creating a policy environment in which SSI investment can flourish. 

In the early nineties, the big corporates, in consumer goods in particular, shifted their focus from direct production which was passed on to SSIs e.g. in ceiling fans industry, to marketing and distribution. To enable the SSI sector to get the best technology and derive the benefits of economies of scale it is imperative to remove obstacles in their path which exist in the form of investment ceilings. The SSI-big corporate relationship would facilitate growth and productivity and increase the prospects of investment and employment generation. 

40% SSI tariff floor urged

The small scale industry ministry has asked the finance and commerce ministries not to reduce tariff on SSI items below 40 per cent, in order to protect the interests of domestic industries once quantitative restrictions (QRs) are removed in line with World Trade Organisation (WTO) obligations. 

SSI units may have to face severe competition not only from abroad but also from the larger domestic players once QRs were removed. In this context there was a proposal to redefine the role of the SSI sector into tiny, medium and small units on the basis of level of investment. 

Fixing investment levels was crucial for all the three categories as it could not be kept at too low or high levels

Books on Venture Capital Financing

A number of books have been published on venture capital financing in India in recent years. Mention may be made of Asim Kumar Misra's Venture Capital Financing (New Delhi, Shipra, 1996), I.M. Pande's Venture Capital in India (New Delh, Prentice - Hall, 1996), S. Ramesh and Arun Gupta's Venture Capital and Indian Finance sector (New Delhi, Oxford University Press, 1995) J.C. Verma's Venture Capital Financing in India (New Delhi, sage publications, 1997), and V.P. Chitall's Risk Capital for Industry (New Delhi, Allied), Venture capital funds also publish their annual reports.