A NBFC to take care of MSEs in manufacturing sector
A unique experiment to nurse ailing MSEs back to health:
A unique experiment to nurse ailing MSEs back to health
The effort is described as a ‘diagnostic’ and ‘curative’ organizational innovation initiative by the Telangana government for the exclusive benefit of medium and small enterprises in the manufacturing sector. The aim is to resolve the issue of stressed assets of these MSEs, as it was found that all attempts at revival thus far by both the RBI following various committees’ recommendations from time to time and government of India did not bear fruit.
The initiative is Telangana Industrial Health Clinic (TIHCL), which is a fintechdriven NBFC, registered by the RBI and funded by the government of Telangana (to the extent of 10% of the initial corpus of `1 billion) and MSEs availing services from us (5% of the corpus and they invest 1% of the funded loan with a minimum of `10,000 and maximum of `200,000), industry associations, strategic partners, banks and financial institutions and HNIs (to the extent of the balance of the initial corpus). The company has represented to the RBI to classify loans and investments in the company as part of priority sector target of the banks. About 30 MSEs which realized the benefits from the TIHCL through its counselling, mentoring and liaison with banks, have already invested with us `500,000. TIHCL has promised a yield of 7% pa to these investors after a lock-in period of 2 years.
LACK OF COUNSELLING
“We noticed that the manufacturing MSEs operate only in debt markets and are often starved of affordable consulting and credit at the right time and in appropriate doses to scale up the operations,” says Dr B. Yerram Raju, former career banker, economist and risk management specialist, who is an advisor to the Telangana government and one of prime movers behind TIHCL.
“These MSEs,” he says, “are essentially proprietary or family run enterprises and neither the venture capital nor angel funds look at them as viable because of low yields. Service sector enterprises and those in the medium enterprise space have many affordable counsellors for them but not for the manufacturing MSEs. Banks have extended credit due to the compulsive priority sector goals. Post liberalization, banks’ attention to them dwindled due to inadequate supervisory personnel depriving them of the much needed counselling and mentoring to enhance their business operations. Hence, separate institutional mechanism like TIHCL with focus on them would ensure that these MSEs in manufacturing space would have opportunity to scale up their operations.”
TIHCL started its operations as a NBFC in April 2018. It is now negotiating with banks both for MoUs and investments. State Bank of India is a key partner that has been referring cases to the company for counselling, mentoring and revival. The business plan envisages breakeven at the end of second year, says Raju, adding the company intends to revive at least 300-400 firms out of about 2600 sick MSEs during the current year.
FACILITATOR, NOT FUNDER
Raju says TIHCL is more a facilitating than funding platform. It facilitates the ailing manufacturing MSEs with diagnosing their real problems that may have crystallized into deficiency in capital.
“We noticed that 60% of those that approached us during the last 6 months suffered from ownership issues, lack of marketing, diversion of working capital to investment in fixed assets, deficiencies in processes or products or delivery mechanisms due to delayed incentives by the government, poor realization of bills drawn on the government departments and government undertakings. Invariably startups in the manufacturing space would have spent their family silver even by the time they venture to start the firm. Banks would not lend without the stake of the enterprise at least to an extent of 25%. They tend to borrow from outside such margin money at high rate of interest that invariably makes them incipient sick up front. Therefore, TIHCL decided to extend margin money at soft rate of interest with a ceiling of `2.5 million or 20% of investment (up to 5% less than what the bank charges for the balance) to start ups in clusters,” says Raju.
He adds: “We believe stressed asset resolution of MSEs is not a charity but a sound business proposition.”
TIHCL extends margin money on similar terms up to 25% of the restructuring and revival package for viable sick MSEs. The company enters into MoU with willing banks to co-finance the startups in clusters and also to revive and restructure the viable sick enterprises after TEV study. Since several sick MSEs do not have resources to conduct TEV study, TIHCL extends
`50,000 grant support for such study after the concerned bank agree to travel with us on the revival journey.
Raju says MSEs will be charged up to 5% less than the primary lender - either commercial bank or NBFC.
HARDSHIPS IN OPERATIONS
He points out that MSEs face several hardships in their operations, which render most of them in the sick list. For example, banks have their own priorities with limitations on manpower, costs of lending and supervision for revival, while the state government has not been releasing the promised and sanctioned incentives. Working capital of these MSEs erodes due to the delayed incentives and additional interest burden. Expected capital subsidy taken out of the working capital makes the unit incipient sick. They are also low on financial literacy, low on compliance of bank regulations and many of the bills drawn on government departments and PSUs are invariably delayed for one reason or other. It was thus felt that both from the supply side and demand side, issues required resolution at the hands of separate institutional mechanism of a different genre.
3 DEFINITE VERTICALS
TIHCL works on 3 verticals:
(i) revival and rehabilitation following a diagnostic exercise through highly qualified and experienced consultants with margin support for revival, where needed; and prevent enterprises becoming NPAs due to non-payment of bills drawn on the PSUs and the government departments beyond 90 days through a new model of factoring; (ii) margin financing for establishing new startup micro manufacturing units in clusters; and
(iii) providing equity support to the consistently profit-earning small enterprises.
These verticals would function on co-financing platform but TIHCL as mentioned earlier is more of a facilitating organization than a financing company and the aim is to prevent accounts moving to NPA status. During its short span of operations, the company has received 47 applications for the revival and sustained the employment for around 470 persons through its resolution process.
Raju says TIHCL is in the process of developing a customized and automated workflow software application, which it has named ‘i-Health’. “Technology interventions using ‘i-Health’ would help quick and transparent decisions with high user interactions. It will aid potential entrepreneurs to submit application forms in two minutes online, to build knowledge base for new entrepreneurs, to create platform for potential entrepreneurs and prospect investors, minimize TAT and online handholding of enterprises using ERP solutions etc,” he adds.
He elaborates that as a fintech company, TIHCL is building MSEs datahubs and aims to develop a rating tool for MSE startups, a diagnostic tool that helps in identifying the multitude of reasons for sickness and a method for tracking behavior of entrepreneur with AI and machine learning that helps in quick decisions. It is also in the process of developing standard accounting systems for MSEs.
It has won Skoch Platinum Award for the innovation under Smart Governance category for 2017.
TIHCL has done a social cost benefit analysis and found that if 560 manufacturing units of MSEs get revived, then they could sustain employment for 5900 people in the area where the units are located. These units could then generate a revenue of `155.75 billion, which in turn help collection of taxes amounting to around `38.94 billion for the government.
TIHCL has studied the needs of secondary steel and handloom sectors, which are in the grip of stress. It is also engaged in identifying the sectors that need facilitation as well as policy support from the government.
In a recent study, it found that out of 47 units declared as NPA or partially closed, which had approached it for resolution, 60% were on sick because of non-financial problems - like power failure or irregular power supply/ heavy commercial tax dues and strategic management issues. As much as 38% were due to delayed release of incentives. Some 12 units in the steel and aluminium sectors suffered due to high power costs and lost their competitiveness compared to other neighboring states.
TIHCL is also part of a study on skill requirements of MSEs in the manufacturing space, which is being done by a private organization at the behest of state government.
The company undertook data analytics for the state’s flagship initiative TS-iPASS. The study had revealed that a few enterprises have registered their units for multiple activities at multiple centers either in the same district or other districts, but with the same names. A district wise position reveals that caution is needed both in the registrations and likely consequence of misuse of incentives.
Dr B Yerram Raju emphasizes that TIHCL is a facilitating platform rather than a funding platfor for manufacturing SMEs
Dr Yerram Raju and K.T. Rama Rao, Telangana minister for Information Technology and Municipal Administration, at the launch of TIHCL logo