A NBFC to take care of MSEs in man­u­fac­tur­ing sec­tor

A unique ex­per­i­ment to nurse ail­ing MSEs back to health:

Banking Frontiers - - Contents - Mo­han@bank­ingfron­tiers.com

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.


“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.


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.


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.


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

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