Small and micro businesses in India are responsible for fewer non-performing loans at banks than are large companies, a new report finds.
The report by the Small Industries Development Bank of India (Sidbi) and TransUnion CIBIL found that while the overall non-performing assets (NPA) rate remained between 8% and 11% for small and micro firms in the last two years, the NPA rate of large corporates has more than doubled from 7.9% to 16.9% over the same period (see below graph).
Interestingly the report – which intended to be released quarterly to track MSME credit activity – finds that among small and micro borrowers, it’s NPAs are highest for loans of less than 1 million rupees and those of 50 to 100 million rupees.
The report also found that in the number of first-time business borrowers – mainly micro firms – has increased significantly has increased from 270,000 between January and June 2016, to 400,000 recorded between July and December last year.
In addition firms with loans of under 10 million rupees have grown their credit exposure by 20% between December 2016 and December last year, compared to just 0.5% growth for those firms taking out loans of 1 billion rupees.
Most small and micro firms tap public banks for funding, but private banks are getting stuck in too – having increased their market share from 34% to 40% for the sector between December 2015 and December last year.
The increase has been driven in part by the ratcheting up of the Indian government’s priority sector lending rules – to get banks to lend more to small firms (see this post).
This is good news, as the NPA rate for small and micro firms at private banks has remained fairly constant at 3.7% over the same two-year period – while climbing from 10.3% to 12.4% at public-sector banks.
Credit guarantee scheme boosted
Last month India’s small business minister Giriraj Singh (pictured above) announced the injection of 50 billion rupees ($770 million) by the government into its credit guarantee scheme that helps small businesses to get loans from banks.
This follows an announcement over a year ago by Prime Minister Narendra Modi that the scheme would be recapitalised (see this post).
The scheme, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), was launched in 2000 with a corpus of 25 billion rupees. The new capital brings the corpus to 75 billion rupees ($1.1bn).
Banks are able to use the fund to guarantee up to 85% of any loan they provide to small businesses. The fund acts as a safety net, reimbursing banks when small firms fail to repay loans. In turn small firms don’t have to rely on providing collateral to secure a loan.
The government, which runs the scheme with the Small Industries Development Bank of India (Sidbi), has also adjusted some rules to make it easier for smaller firms to access the scheme. IT infrastructure will also be updated.
The changes will mean among other things that firms that take out a guarantee will no longer pay a fee on the amount lent out, but rather on the outstanding amount.
In addition, 75% of a loan above 5 million rupees will be covered by the scheme, up from 50%, a practice note says.
Importantly, the scheme will now allow guarantee cover for the portion of credit facility (up to 20 million rupees) not covered by collateral security. Termed partial collateral security, the option will become applicable to any new loan guaranteed after April 1.
Since its inception the scheme has approved three million guarantees covering loans amounting to over 1.4 trillion rupees ($25.8bn). In this time the government has paid out 43.2 billion rupees to 166,578 claims (or three percent of all disbursals).
Those firms that received funding created 9.9 million jobs and contributed 83.8 billion rupees in exports.
If this is indeed the real default rate – it is extremely low when compared to that of the overall NPA rate that banks report.
Yet like many such state credit guarantee schemes, there is no publically available evaluation on the scheme, making it difficult to test out Sidbi's numbers.
An OECD report last year of existing studies said though there appears to be evidence that credit guarantees are positive for company access to debt finance, less is known about the financial sustainability of these programmes. Worryingly, it said some studies suggest that loan guarantees are associated with increased default risk of beneficiary companies.
This is particularly concerning given the massive ramp up in lending by the scheme reported last year by Small Business Insight (see this post).
A measure introduced in a circular by the scheme dated 14 March will allow small finance banks with paid up equity capital of at least 1 billion rupees to now also offer the guarantee.
This may help, given that non-performing loans are concentrated more in public-sector banks.
In the end what is needed is better data. States need to commission rigorous evaluations of the performance and cost effectiveness of such schemes. Only then will one know if those firms supported and jobs created will really prove sustainable.
Timm is a South African who writes on small business. He was briefly on holiday in February. Follow Small Business Insight on Twitter at @Smallbinsight.
Banks' lending in South Africa to large corporate companies over the last five years grew at almost double the pace of that to SMEs, reveal Reserve Bank figures.
While lending to corporates expanded by 60% in the last five years (between November 2012 to November 2017), loans to SMEs grew at a slower 39%, but still faster than the overall expansion in credit of 32% over the same period (see Graphic 1, below), figures drawn from the Reserve Bank by Small Business Insight show.
The figures are from the Reserve Bank's Bank Supervision department BA200 forms (see them here).
Those for SME lending include two categories – namely: SME Retail lending (retail loans of up to R7.5 million - or $600,000 for businesses) and SME corporate (loans to firms with an annual turnover of up to R400m - $33m).
The latest report follows a 2016 Financial Mail story which revealed that banks' credit exposure to small businesses had remained almost flat since the 2008 recession, while increasing for large businesses (see this post).
The financial sector code compels banks to invest billions of rands for various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing. This should therefore be driving far more lending to small businesses.
Will new code driving SME lending?
Yet increased credit does not necessarily mean more black SMEs are getting funding. While Nedbank’s loans to black SMEs increased from R1.5bn in 2012 to R4.5bn last year, the number of firms financed fell from 4,300 to 2,500.
The new amended financial sector code was gazeted by Trade & Industry Minister Rob Davies in December last year.
Banks must lend a further R32bn collectively to finance equity deals for big investors to buy stakes in large companies (B-BBEE transaction financing) as well as for black business growth and SME funding.
It remains to be seen whether the new, higher targets will drive up the increase in bank lending to small businesses, in line with the recent increase in credit to large companies.
To do so, the Reserve Bank should look at regularly publishing easily accessible figures -on both overall bank lending to SMEs in general and that to black SMEs in particular.
This may go some way to clearing up whether indeed banks are (as they claim) doing enough to fund small businesses and black-owned small firms - or not.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
The Small Industries Development Bank of India (Sidbi) has revealed that it will lend directly to SMEs, rather than through banks in a new change of direction.
A report earlier this week by Indian business daily Economic Times said the move could benefit almost 50 million small businesses with loans with an interest rate of three percentage points lower than those banks lend out.
Sidbi chairman and managing director Mohammad Mustafa told Economic Times that the state agency had received regulatory approval to lend directly to small firms at 8.1% (Sidbi gets them at 5%) through its 80 branches or on the internet via loans of up to five years.
The report says the funds are drawn from the Reserve Bank and form part of the penalty that state and commercial banks are forced to make if they don't meet SME lending targets (under the Reserve Bank's priority sector policy). The shortfall has to be paid over has a penalty by banks (see this earlier post for more).
The state agency does currently do some direct lending, but on a small scale, and only in niche financing support such as risk capital and receivable finance. In the 2016/17 year (the most recent for which figures are available, almost 85% of its total loan amount were via financial intermediaries.
There are risks for the state lending directly - as the state, unlike the private sector can't afford to retain the services of highly skilled bankers necessary to ensure write-offs are kept low. The choice of loan recipients is also more likely to be politically influenced.
Yet something has to be done - over four in five rupees lent out by banks to businesses, go to large firms.
Loans to small and micro businesses made up just 17.4% of total credit extended by banks as of November last year, according to the Finance Ministry's Economic Survey of 2017-18,
On top of this loans to small business fell 0.4% to 3,683 billion rupees between end of March and December 22 last year, according to latest Reserve Bank data.
Measures to boost SME finance
Meanwhile Finance minister Arun Jaitley (pictured above) outlined several measures yesterday in his budget speech to boost SME lending.
The government hopes that these measures might go some way in driving lending to small businesses.
This might be wiser, than to fiddle the system by changing the definition of non-performing assets that banks report for small businesses, from loans not paid after 90 days, to those not honoured after 180 days, as a report last year suggested the state was considering.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
China’s ban of initial coin offerings (ICOs) this week has raised questions on whether other jurisdictions will do the same, and on how viable the vehicle is for SMEs to raise finance.
The Chinese government banned ICOs on Monday (September 4), effectively cutting about 40% of the ICO market out, while last month in the US the Securities Exchange Commission (SEC) began moves towards regulating ICOs.
In China 65 ICOs raised closed to $400 million over the year to July, according to Chinese news agency Xinhua.
Statistics by CoinSchedule, a cryptocurrency tracking site, show that to September 7 over $2.1 billion has been raised in 139 ICOs, up from just 46 valued collectively at $96m last year. The biggest ICO last year was $16m raised by a company called Waves.
So far this year four ICOs have each topped $100m, with the highest – Filecoin – having raised $257m. The majority of ICO funds – 44% - have been to raise funding for infrastructure, followed by data storage (13.5%) and trading and investing (10%).
In June, ICO funding hit over $550 million and it was the first month ever that it surpassed angel and seed VC funding.
Meanwhile Russia’s central bank said it won’t allow (for now) the trading of cryptocurrencies on official exchanges, nor the use of their technology for clearing and settlement infrastructure.
Despite this a Russian Blockchain venture fund, FinShi Capital said on Wednesday that it plans to will invest in ICO-related projects worth up to $1bn.
The fund aims that it has already raised $1.3m in a pre-ICO campaign, and aims to generate another $50m in an ICO in October.
'SARB offers no protection'
South Africa’s Reserve Bank also weighed in. It said as cryptocurrencies are not guaranteed by the Reserve Bank, there would be “no recourse or protection to consumers thereof”.
The Reserve Bank’s position on virtual currencies is set out in the Position Paper on Virtual Currencies issued in 2014, the bank recently established a dedicated fintech programme to increase focus and assist the existing working groups to research and analyse technology innovations in the financial services industry.
Part of the review is aimed at assessing the impact on cross border financial flows and stability of the financial system.
'Only temporary setback'
Despite this Bitcoin Foundation executive director Llew Claasen (pictured above) told SA tech publication Ventureburn that he reckons China’s ban is only a temporary setback for startups looking to raise capital through ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However he said regulators should allow utility tokens to be raised - those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
It will however be hard to convince regulators. In the end more jurisdictions are likely to clamp down on what many believe is merely a massive casino game.
The sooner regulators get on top of things and issue clear guidelines - the better for real SMEs looking to raise cash.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a