WITH the Minister of Economic Development Ebrahim Patel’s announcement last month that his department would be looking at ways to increase funding to small businesses, his officials would do well to look to the East, at an impressive credit guarantee scheme in India.
While Khula, the government’s small business finance agency handed out a mere 209 credit guarantees, valued at R98m, in 2008/2009, India’s Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) last year handed out 151 387 guarantees, valued at Rs68.7bn (R11.3bn).
But then what’s the big deal when India has about 26 million business owners, compared to South Africa’s two or three million? The answer is the scheme’s impressive performance.
Just two years ago the scheme, launched by the government of India in 2000, dispersed just 30 000 credit guarantees. The 150 000 given out last year is equal to the total number of loans dispersed in the last nine years. So what happened?
The CGTMSE operates in a similar way to Khula’s guarantee scheme, in that business owners take out a guaranteed loan through a network of banks and lending organisations.
The Indian scheme guarantees up to Rs10m and covers between 75% and 85% of a loan. Only primary security such as a project or a contract, can be used as collateral.
About 83% of the guarantees taken out through the Indian scheme last year were for amounts under Rs500, 000 (R80 000).
Khula’s guarantee scheme disperses amounts of between R10 000 and R3 million, covering between 50% and 90% of a loan, depending on the amount of security a business have.
Unlike Khula which is funds all its lending from its own balance sheet, the scheme is backed by a corpus of Rs25 billion (about R4bn), of which Rs5bn is from the Small Industries Development Bank of India and Rs20bn from government. This compares to the mere R330m that Khula was capitalised with when it was set up in 1996.
So how has the CGTMSE managed to scale up lending to such a degree?
A visibly proud Vinod, attributes the scheme’s performance to two things – a significant buy-in from member banks and a web portal which allows member banks to feed applications for guarantees back to the scheme’s offices for processing. With the online system business owners can apply for and receive a guarantee within 24 hours.
This along with over 100 tweaks Vinod recently carried out on the portal has helped to streamline the handling of applications. The system is working so well now that a Japanese consultant who recently visited the scheme’s Mumbai head office returned saying there was nothing he could find to improve the working of the system.
Business owners like Asheesh Pal, managing director of Styrka Consultants, are testament to the effectiveness of the new system. Pal was able to take out a collateral-free loan for his business through Punjab National Bank in the state of Himachal Pradesh.
“It was pretty easy for me to get the loan sanctioned and I got the payment the very same day of my actual application, but I had to convince the Bank Chief manager for the business plan,” he said.
While Khula aims to finalise applications for guarantees within three days, the agency’s marketing manager, Zimbili Mosheshe said bank’s processes often meant applications could take “weeks” to finalise.
Workshops and meetings with member banks have also helped drive up the lending rate, with the scheme roping ordinary bankers into workshops to explain to them the significance of guarantee lending.
Last year the scheme conducted 1 384 seminars and meetings its 111 member lending institutions – 858 of these were workshops each attended by groups of about 25 bankers.
In South Africa getting buy-in from banks has long been a headache for Khula. It may well have prompted the cabinet to back the agency’s request to lend direct to business owners through the KhulaDirect scheme, which is expected to be rolled out this year.
But probably one of the most important factors which has helped the Indian scheme to up lending, has been the rate at which it responds to paying out defaulting loans.
For Khula the time it takes for the agency to pay out defaults remains a concern for banks, admits the agency’s managing director Setlakalane Molepo.
Khula requires a bank to first seek a default judgement against a business owner before it can claim, which could take between a month to three months to obtain, he said.
But at the CGTMSE the first payment is made within the same day an application is posted. This maintains Vinod is the scheme’s “unique selling proposition”.
In the 2008/2009 year, the trust received 1 263 claim applications from 25 member lending institutions. It paid out 784 of the applications these to the tune of Rs187.7m through a first instalment.
As on March 31 2009 just nine applications for Rs3.8m were pending for settlement. The remainder of applications were either not eligible within the purview of the scheme or were incomplete when
Vinod said the scheme learnt from the failure of a previous government guarantee scheme, the Deposit Insurance and Credit Guarantee Corporation which eventually closed down after struggling to settle claims on time.
He believes it’s all about “working passionately” to serve small businesses and even sends SMS alerts out to his team each morning to motivate them. Each alert contains a break down of the number of guarantees handed out the previous day and the total for the financial year so far.
None of his employees receive incentives for their work, but Vinod who is confident the scheme can reach 300 000 guarantees this financial year, has now approached the board to ask if this was possible.
Commenting on what Khula was doing to improve payment processes, Mosheshe said the agency was in discussion with banks on ways to speed up the application and claims payment processes. One bank is about to embark on a test scheme to put changes into place, she said.
This article appeared in Business Day on 20 April 2010. The writer visited India in April 2010. These articles will form part of a report funded by Trade and Industrial Policy Research (TIPS) on lessons South Africa can learn from India and Brazil, in boosting small business support.
Stephen Timm is a