'A downturn is the right time to invest in capacity.'

N K Maini, deputy MD of Small Industries Development Bank of India, speaks to Shobha Mathur about driving growth for MSMEs in the Indian auto sector.

What is SIDBI's current reach with auto MSMEs and level of their NPAs?
SIDBI’s offices are located in various clusters across India and with 80-odd offices we cover almost all the formal industrial clusters. So our reach would be to most of the auto component manufacturers through these offices.
The NPAs of auto component manufacturers are more or less in line with the industry NPA. There are units which are facing a lot of stress currently because of the market situation, there is a slowdown in orders because of demand. There is also an equal level of units that have diversified their product base across various kinds of automotive segments and are able to weather the storm in a way and continue to show reasonable growth.
Secondly, there are many units that grew at 30 percent at one stage but today even if they are growing by 10 percent it’s a good growth rate. It does not mean that they have slowed down, maybe the growth rate has slowed down but many of them do continue to show growth.
In the MSME sector the average NPA would be 4.5 percent, so the auto MSME NPAs would be on the same line.

How do you perceive the financing trends for automotive MSMEs?
It is a cyclical industry. One trend is that when you are on the downturn in that cycle, the industry does find it difficult to access finance. But that is also the right time to invest in capacity because this is a cycle that will also see a crest at some stage in the near future. And as and when that crest comes and you start investing at that time, you will not be able to take advantage of the market at that point of time.
So in some countries there are investments happening in the industry even today; waiting for that sudden crest that will come as part of the cycle. This is the stage where industry should look at consolidating, investing in capacity, going green and meeting all the environmental norms, adopting cleaner production technologies and building their efficiencies basically.

Which type of collaterals do you require from auto MSMEs for loan disbursals?
By and large, a collateral is not a must in financing a project. The first thing as a banker one would look at is the viability of the project per se and if the project is set up by a good established organisation, which is already in this field, you would normally not require a collateral.
The primary security which comes from the project itself is deemed to be your collateral because the promoter also brings in a certain contribution, say 30-40 percent and 60-70 percent is being put in by way of loans. The project itself offers security in the first instance but in certain cases where, perhaps there is financing of a lot of intangible elements like branding, marketing and R&D, then you may not have tangible security from within the project.
Those are the areas that you may have to look at for collateral securities also and other than that for financing such kind of projects in particular, one can take the benefit of the Credit Guarantee Scheme or the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) which provides a guarantee of up to Rs 1 crore provided the loan is extended without collateral security and without third party guarantee.
The CGTMSE has been floated by SIDBI along with the ministry of MSME, government of India. As on date, over 13.5 lakh units have availed the benefits of collateral free credit with total exposure aggregating around Rs 70,000 crore.

In which region has the SIDBI dispersal of loans been the highest for auto MSMEs?
Wherever the clusters are there – Delhi-Gurgaon-Faridabad would be one region and then there is Chennai-Coimbatore. These are some places where disbursals are definitely high. Individual MSMEs are located in clusters because of the competitive advantage that clusters offer by way of forward and backward linkages.

Is there some mechanism to check whether the loans have been used successfully by the auto MSMEs?
In all cases where we extend loans there is an end-use verification mechanism. For example, if the loan is given for setting up a unit then you would ensure that the land-building has come up, plant and machinery is in place, the production process once it takes off and achieves capacity is as was envisaged at the time of appraisal.
These are all normal mechanisms for all banks and financial institutions to ensure that projects are successfully set up.

What is the minimum and maximum amount of loans that can be availed by an auto MSME?
As long as a unit is within the micro, small and medium size enterprise sector, there is no limit on the size of the loan from SIDBI.

Which are the new government policies in the offing to support loans in new areas from SIDBI?
A recent study has said that the Indian auto sector should become the third largest in the world in a few years. If we are targeting that kind of ambitious growth, then obviously the sector would need a lot of support from banks and financial institutions. However, simultaneously, it is the industry associations and large auto majors which have to play a major role as well. SIDBI has a receivable financing scheme by which we ensure timely payment of dues to the MSMEs.
We have schemes for technology modernisation and upgradation and for introducing energy efficiency and cleaner production technologies. In addition to this, we also have a risk capital scheme for growing units by which we can provide quasi-equity instruments that can be leveraged for getting loans from commercial banks and other institutions. So SIDBI can provide an array of financial loans to meet the needs of the sector.

What is SIDBI’s total exposure to the auto sector and what is the expected YoY growth?
SIDBI would be looking at a YoY growth of about 22 -25 percent in its niche product areas that is direct financing and I feel that the auto component industry is probably at the upper end of that projected growth of SIDBI.

Which are the major constraints in availing finance by auto MSMEs?
There are 3 or 4 major constraints – MSMEs are unable to put together a comprehensive business plan and present it in the way banks and financial institutions need it. To alleviate this problem, we have put together a mechanism – we have registered certain accredited consultants who help the MSMEs in framing their project reports as a bankable project.
Those reports through SIDBI are then sent to accredited rating agencies and the projects are rated and when they are lodged with a bank obviously there is a lot of credibility for such projects. A second problem relates to their presenting their accounts so they have to get their house in order for which they need to get in touch with good chartered accountants to prepare the balance sheets. The third area is marketing. Many of them are linked to one large buyer and need to diversify. They also need timely and adequate loans and capital.