Financial Inclusion of Microenterprises in the …...Financial Inclusion of Microenterprises in the...

Financial Inclusion of Microenterprises in the Informal Sector - Missing MiddleLearnings and the Way Forward

January 2010

Sustainable Economic Development

Financial Inclusion of Microenterprises in the Informal Sector - Missing Middle

Learnings and the Way Forward

January 2010

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Foreword

There are a large number of micro and small enterprises in the informal sector at various industrial centers

across the country. Most of them do job work for big manufacturers and the exporters. They have necessary experience and expertise in their line of activity and have been operating for decades. They do not have necessary financial resources to manufacture and market their production. The banks/financial institutions are not inclined to grant credit facilities to them because the units are in the informal sector and the owners/promoters of these enterprises are not in a position to provide the comfort of collateral security to the banks. Even for their existing activity of job work they have to borrow from private financers to meet their business exigencies at a very high rate of interest varying from 36% to 200% p.a. depending upon the urgency of their requirement. There is an urgent need to extend a helping hand to this tail of the value chain to provide them with alternative sources of finance at a reasonable rate of interest to enable them to upscale their operations.

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, in partnership with Small Industries Development Bank of India (SIDBI) and Satin Creditcare Network Limited (a leading Microfinance Institution in North India) have supported a pilot in up scaling credit from a Microfinance Institution to the micro enterprises in the informal sector with an innovative financial product and delivery model for the upstream apparel supply chain

operating in the industrial areas of Govindpuri, Sangam Vihar and Tughlakabad Extension in Delhi.

The results of the pilot have been quite encouraging. The availability of credit has enabled these microenterprises to improve their production capacities as well as production efficiency. The microenterprises have utilized the loans to increase their productive assets and to meet their working capital requirements. They have been able to hire more skilled workers and have generated higher revenues and profits. In the process they have also been exposed to credit products from the formal sector. The availability of timely loans has also helped these enterprises in reducing their interest costs as the cost of informally arranged credit is very high. There is also an increase in business confidence among many of the entrepreneurs.

The pilot has also demonstrated that the quality of the loan portfolio generated is inherently sound, as most of the loans are being repaid regularly. A few loan accounts appear irregular due to a mismatch in the production and receivables cycle of the microenterprises and the frequency of the repayment obligations. This mismatch can be taken care of by fine tuning the loan product and alignment of repayment schedule with the receivables cycle.

It is expected that the outcome of this pilot will encourage the other MFIs and banks/institutions to develop innovative financing mechanisms for microenterprises in the informal sector.

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Table of Contents

Executive Summary 1

Chapter 1. Micro, Small and Medium Enterprises (MSMEs) 3

1.1 Financing for MSMEs

1.2 Bank finance for microenterprises

1.3 MFI finance for microenterprises

1.4 Factors affecting availability of finance for microenterprises

Chapter 2. Micro Small and Medium Enterprise Finance and Development Project 7

2.1 Role of GTZ

2.2 Financial services activities being undertaken by GTZ

Chapter 3. The Pilot – Institutional Finance for Microenterprises 9

3.1 Profile of the Cluster

3.2 Collaborating agencies

3.3 Selection of the area of operation

3.4 GTZ’s technical cooperation

3.5 Loan Products offered

Chapter 4. Impact Assessment Research 13

4.1 Methodology

Chapter 5. Data Collected from the survey 15

5.1 Respondents

Chapter 6. Data Analysis 17

6.1 Distributional characteristics

6.2 Impact

Chapter 7. Repayment Performance 25

7.1 Cumulative Repayment Performance

7.2 Takeaways

Chapter 8. Way Forward 27

8.1 Loan Product

8.2 Financial Institutions

8.3 Microenterprises

Chapter 9. Case Studies 29

9.1 VK Verma Embroidery

9.2 Lucky Enterprises

9.3 Ess Emm Enterprises

9.4 Manish Finishers

9.5 Libaas home furnishing

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Executive Summary

Introduction

Micro, Small and Medium Enterprises (MSMEs) contribute significantly to the manufacturing

output, employment and exports of India. Access to timely and reliable financial services at competitive rates, remains a key bottleneck in the growth of these enterprises. The Micro Small and Medium Enterprise Financing and Development Project (MSME-F&D), being implemented by the Small Industries Development Bank of India (SIDBI) with the Department of Financial Services, Ministry of Finance, Government of India acting as the Nodal Agency for the Project, is aimed at facilitating easy access to finance for MSMEs in addition to provision of capacity building supports to them. The World Bank, Department for International Development (DFID) UK, KfW Germany and GTZ Germany are the international partners in the Project. GTZ is implementing pilot projects under MSME-F&D at four different locations – National Capital Region (NCR) of Delhi, Hyderabad, Indore and Dehradun.

Pilot project in microenterprise finance at Okhla industrial area

A part of the pilot project being implemented in the NCR of Delhi involves offering suitable loan products to microenterprises operating in the Okhla cluster of readymade garments. These microenterprises are predominantly engaged in activities relating to readymade garments such as fabrication (stitching), finishing and embroidery. Most of them perform job works for the exporters and large domestic garment manufacturers in Gurgaon, Faridabad and Noida.

GTZ’s support for the partners of the Pilot Project

Satin Credit Care Network Limited (Satin), a leading MFI operating in the NCR, and SIDBI’s Okhla branch were partner institutions responsible for extending microenterprise loans. GTZ helped Satin design the microenterprise loan product. Satin also received a dedicated line of credit from SIDBI, New Delhi office for financing its microenterprise loan portfolio. GTZ provided support to SIDBI, Okhla branch office, to

undertake a market survey to identify eligible borrowers. It also sponsored the services of a firm of financial consultants who helped the prospective applicants in the preparation of financial statements as well as financial projections and filling in SIDBI’s loan application forms. GTZ also organized interactive sessions and workshops to assess the financial needs of the microenterprises as well as to sensitize them about the financial services available to them. Additionally, GTZ arranged for orientation courses on accounting, finance, quality improvement and marketing for the microenterprises.

Impact assessment and documentation study

The objective of this study is to analyze and document the impact of the project on the microenterprises as well as to identify key bottlenecks that constrained the effectiveness of the pilot project. The study involved a primary survey of microenterprises which have received loans under the pilot with the help of a structured questionnaire. Discussions with key stakeholders in GTZ, SIDBI and Satin helped the research team identify the important impact dimensions. The survey covered 40 of Satin’s clients and 8 of SIDBI’s clients. A majority of loans have been disbursed to microenterprises involved in the garment manufacturing processes such as fabrication, embroidery and finishing. These loans have been utilized for meeting the working capital needs of these microenterprises as well as for financing assets such as industrial sewing machines and boilers. Additionally the repayment performances of 54 of Satin’s loans were analyzed.

Impact on microenterprises

There has been an observable and direct impact on the microenterprises as access to credit has enabled them to enhance their production capacity, hire more workers and process more orders. Many of the surveyed entrepreneurs had replaced their old machines with new, more efficient ones. Almost all the microenterprises covered reported an increase in sales and profits. This has been on account of the following reasons:

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• Increase in capacity through addition in machines • Increase in capacity through more efficient machines, which have replaced older inefficient machines• Increased retention of skilled employees

The following table summarizes the average benefits per microenterprise that have been reported:

Pre project Post (as on 31 Oct 09) Change (%)

New machines per enterprise 11 18 61%Old machines per enterprise 12 10 -20%Employment per enterprise 23 28 22%Monthly turnover per enterprise (INR) 168,438 235,660 40%Monthly profits per enterprise (INR) 35,201 50,123 42%

Additionally, the availability of timely loans has also helped these enterprises in reducing their interest costs as the cost of informally arranged credit is very high. There is also an increase in business confidence among many of the entrepreneurs. However, the loans disbursed under the pilot project have not significantly improved the level of formalization of these entities.

Repayment performance

An analysis of the repayment performance of the microenterprises revealed that the cumulative repayment has been good. However, at any given point in time some of the loans may appear to have irregular repayment patterns. Some important points that explain this pattern were revealed during the discussions with the entrepreneurs and Satin’s field staff:

1. Mismatch in the loan repayment schedule and the production and receivable period for the microenterprises;

2. Low level of business during July and August as these were lean months.

Way forward

These issues need to be addressed while designing loan products for the microenterprises. Discussions with the borrowers also revealed that they prefer an overdraft or a cash-credit facility which would allow them to borrow as and when they require it and pay interest only on the outstanding amount. For Satin, such a loan product will also allow Satin to earn interest income close to the theoretical yield of the product. The microenterprises also need capacity building support in order to understand the regulatory requirements of their businesses particularly in areas covered by the factories act and labour laws. These compliances may be required in case these microenterprises have to benefit from the various schemes available for MSMEs as well for banks to feel comfortable while lending to them. This report also presents case studies of five microenterprises and their experience with the loans disbursed under the project.

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Micro, Small and Medium Enterprises (MSMEs)

have been widely accepted as being vital to the

Indian economy given their role in job creation and

their ability to foster entrepreneurship. MSME units

contribute significantly to the manufacturing output,

employment and exports of India. It is estimated that this

sector contributes 8 per cent of the country’s GDP, 45 per

cent of the manufactured output and 40 per cent of its

1Report of the Prime Minister’s Task Force – Micro, Small and Medium Enterprises, January 2010. The quick estimates of the 4th MSME census puts their number at 26 million and employment generated by MSMEs at 59.7 million.2Micro, Small and Medium Enterprises Development Act, 2006. Prior to enactment of the Micro, Small and Medium Enterprises Development Act, 2006 MSMEs were commonly referred to as Small Scale Industries (SSIs). 3Report of the Prime Minister’s Task Force – Micro, Small and Medium Enterprises, January 2010.

Chapter 1: Micro, Small and Medium Enterprises (MSMEs)

exports. The MSMEs provide employment to about 60

million persons through 26 million enterprises. The labour

to capital ratio in MSMEs and the overall growth in the

MSME sector is much higher than in the large industries.

The geographic distribution of the MSMEs is also more

even.1 The following table summarizes the growth of the

MSME sector over the past few years in India.

Table 1.1:

Investment Ceiling for Plant, Machinery or Equipment for classification of MSMEs in the manufacturing and services sector2

Classific0ation Manufacturing ServiceMicro Upto Rs. 25 Lakh Upto Rs. 10 LakhsSmall Above Rs. 25 Lakh & upto Rs. 5 Crore Above Rs. 10 Lakh & up to Rs. 2 CroreMedium Above Rs. 5 Crore & upto Rs. 10 Crore Above Rs. 2 Crore & up to Rs. 5 Crore

The report of the Prime Minister’s Task Force on Micro,

Medium and Small Enterprises3 finds that although Indian

MSMEs are a diverse and heterogeneous group, they face

some common problems, such as:

• Lack of availability of adequate and timely credit;

• High cost of credit;

• Collateral requirements;

• Limited access to equity capital;

• Problems in supply to government departments and agencies;

• Procurement of raw materials at a competitive cost;

• Problems of storage, designing, packaging and product display;

• Lack of access to global markets;

• Inadequate infrastructure facilities, including power, water, roads, etc.;

• Low technology levels and lack of access to modern technology;

• Lack of skilled manpower for manufacturing, services, marketing, etc.;

• Multiplicity of labour laws and complicated procedures associated with compliance of such laws;

• Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable entities to close down speedily; and

• Issues relating to taxation, both direct and indirect, and procedures thereof.

These problems are even more severe for MSMEs in the

informal sector. It is in this light that access to finance as

well as business development services become critical for

the success of MSMEs.

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1.1 Financing for MSMEs

Finance forms the most critical input for a business

enterprise whether large or small. All firms require

financing to grow and survive. The sources of finance

may be external, such as loans, equity infusions, subsidies

and government grants, or internal such as generated cash

flows. Many firms are self- financed in the beginning.

Once the firms reach a certain degree of maturity in

the development of their product line and customer

base, external finance becomes necessary. The flow of

institutional finance is linked with the creditworthiness of

the enterprise.

A large majority of the microenterprises do not have

access to institutional credit. Most of the micro-

enterprises depend on their family and friends and the

local moneylenders for their credit needs. It is also likely

that a large proportion of credit needs of the micro-

enterprises remain unfulfilled. The growth potential of the

microenterprises is severely hampered on account of a lack

of access to credit for them. Without adequate finance,

they are unable to acquire or absorb new technologies.

They are also unable to expand and compete in global

markets or even forge business linkages with larger firms.

1.2 Bank finance for microenterprises

Microenterprises due to their small size and low

capital base, generally find it difficult to satisfy the

conditions laid down by the banks, particularly, in

establishing the viability of the project, meeting

collateral requirements and making timely repayment of

loans. Hence, they do not find a place among the preferred

clients of the banks.

Some trends noticed regarding bank credit to MSMEs

are:

• Inadequate working capital finance,

• High cost of credit,

• Insistence on collaterals even on loan upto Rs.

500,000.

4Microfinance India, State of the Sector Report 2009, N Srinivasan, October 2009.

1.3 MFI finance for microenterprises

Microfinance Institutions (MFIs) have emerged as a

significant provider of small sized credit. MFIs have

adopted the concept of group lending to provide collateral

free loans to the economically underprivileged. These loans

are often utilized in very small businesses in rural and

urban areas. The average loan size under different lending

models of MFIs, as reported in the Microfinance India,

State of the Sector Report 20094, is as follows:

• Individual loans – Rs 8,307

• Joint liability group loans – Rs 5,006

• SHG loans – Rs 3,412

Quite clearly the average loan sizes of MFIs are too

small to support microenterprises. Although some MFIs

have loan products of Rs 50,000 also, a borrower is

not eligible for it unless she has successfully graduated

through three or four lower loan cycles, which means a

time frame of minimum three years. Many MFIs have

shown a willingness to provide finance to microenterprises;

however, they need capacity building support in order

to create such a portfolio. In the present scenario, MFIs

typically extend loans between Rs 3,000 and Rs 30,000.

1.4 Factors affecting availability of finance for microenterprises

The following are the main reasons for lack of financing

for the microenterprises:

Informational asymmetries: Informational asymmetries

emerge when lenders do not have accesses to reliable

information about the businesses of the microenterprises.

The information that microenterprises can realistically

provide to lenders often lacks in detail and rigor. Inability

of the financial institution to reasonably assess the risks

involved in lending leads to the perception among the

lenders that the small businesses are generally high risk.

Faced with this situation, lenders generally insist on high

collateral or simply refuse loans.

Transaction costs: Costs of processing a small loan is almost

the same as that of a large loan in absolute terms. Costs

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are also incurred for monitoring the loans. To some extent,

the problem can be solved by raising the cost of financing

through a higher rate of interest but formal financial

institutions may not have leverage to increase the interest

rates beyond a point.

Lack of collateral: The lack of collateral is probably

The missing middle

MFIs

(Rs 3, 000 – 30,000) Credit needs of microenterprises

Banks

(Rs 500, 000 onwards)

the most widely cited obstacle encountered by

microenterprises in accessing finance. Microenterprises are

not able to provide collateral required by the lenders. To

sum up, the abovementioned information and experience

indicate that microenterprises typically find it difficult to

raise loans ranging between Rs 30,000 and Rs500,000.

Chart-1: The missing middle

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Small Industries Development Bank of India (SIDBI)

is implementing the multi-agency, multi-activity

Project on Financing and Development of MSMEs –

the Micro Small and Medium Enterprise Finance and

Development (MSME-F&D) Project5. The Department

of Financial Services, Ministry of Finance, Government

of India is the Nodal Agency for the Project. SIDBI

has set up a Project Management Division (PMD) at

its New Delhi zonal office charged with the smooth

implementation of this project. The World Bank,

Department for International Development (DFID) UK,

KfW Germany and GTZ Germany are the international

partners in the Project.

The Project is aimed at making MSME lending an attractive and viable financing option as also facilitate increased turnover and employment in the sector. The main objectives of the project are:

• Strengthen growth and competitiveness of micro, small and medium enterprises (MSMEs);

• Make a paradigm shift in the banking sector’s approach towards providing credit and financial services to MSMEs by turning MSMEs into an attractive and viable customer group;

• Improve MSMEs access to market oriented financial and business development services thereby fostering MSMEs growth, competitiveness and employment creation.

The Project has three major components:

• Line of Credit from World Bank and KfW,

• Risk Sharing Facility, and

• Technical cooperation (TC) from GTZ, KfW, and DFID.

Technical Assistance from DFID is being utilized for strengthening the credit information system, credit rating, structuring of innovative products, capacity building of the participating banks, policy and regulatory issues and

5More information on the project is available on its website, www.msmefdp.net.

promotion of market oriented business development services for the sector. Technical Assistance from KFW is focused on improving organizational capacity for retail financing to MSMEs. Technical Assistance from GTZ is targeted at providing MSMEs better access to appropriate financial and non-financial enterprise-oriented services.

2.1 Role of GTZ

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH has established a technical assistance unit that works closely with the PMD of SIDBI. The objective of the technical assistance (TA) is to improve MSME’s access to financial services (including term finance) and business development services. It seeks to achieve this objective through a multi-pronged approach in order to address key bottlenecks in MSME financing and access to business development services in India.

The technical cooperation has two main components:

• The first component promotes the development of strategies and programs concerning market based development of business development services (BDS).

• The second component offers development, training and advisory services to participating banks regarding financial services (FS) for MSMEs.

GTZ related activities in this project also include:

1. Development and implementation of strategies, programs and measures for demand oriented financial and business development services for MSMEs in cooperation with the relevant stakeholder organizations;

2. Institutional capacity building for banks and non-bank financial institutions on development and implementation of profitable demand oriented financial services (FS) for MSMEs;

3. Creation of a demand driven, cost-efficient business development services (BDS) to individual MSME and MSME participants of clusters/value chains by providing technical assistance to private BDS

Chapter 2: Micro Small and Medium Enterprise Finance and Development Project

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providers and business member organizations (BMO) and demand stimulating support to targeted MSMEs.

4. Consultancy services, training and upgrading, fact-finding missions in India and abroad, supply of equipment and materials, as well as partnership development between the MSME sector and public-private institutions.

GTZ’s technical assistance unit cooperates closely with SIDBI’s PMD during project implementation of technical assistance to Banks and MSMEs. The following four regions have been selected for GTZ sponsored technical assistance under the project.

• NationalCapitalRegionofDelhi

• IndoreregionofMadhyaPradesh

• HyderabadregionofAndhraPradesh

• Dehradun/HaridwarandRoorkeeregionofUttarakhand.

Three commercial public sector banks, State Bank of India (SBI), Bank of India and IDBI Bank have agreed to cooperate with and assist GTZ in implementing the technical assistance aimed at assisting selected MSME clusters improve access to financial services from the bank’s regional branches. Bank oriented technical assistance provided by GTZ is focused on developing bank branches in the selected clusters as specialized MSME profit center units. The focus of GTZ’s technical assistance in each region is on upgrading and development of MSME cluster/regional value chain projects.

GTZ has deployed a business development services (BDS) expert and a financial services (FS) expert at its Project Offices in Hyderabad, Indore, Dehradun and New Delhi. Their primary task is to establish good working relations with the participating bank staff, MFIs, MSME business associations and regional BDS providers. Regional BDS providers assist lead firms with business linkages to clusters of local MSMEs to increase value chain project

competitiveness and employment generation. 2 to 3 clusters/value chain projects have been selected in each of the four regions; in total 8 to 10 industrial clusters/value chain projects have been selected.

2.2 Financial services activities being undertaken by GTZ

GTZ is supporting the following activities under the financial services component:

• AnalysisofthefinancialservicesneedsofparticipatingMSMEs, MSME clusters/ value chain projects;

• AssistancetoMSMEs,MSMEclustersandvaluechains in concluding financing arrangements with banks;

• ProvisionoffinancialservicestoparticipatingMSMEs, MSME clusters/value chain projects from banks;

• Capacityandcapabilitybuildingofselectedbankstoenable them to provide profitable financial services to MSMEs/clusters/value chains;

• Provisionoftrainingandincentiveprogrammesforbank staff;

• DevelopmentofadditionalfinancialservicesforMSME clients;

• Developingtrainingmaterialandcoursesforbankstaff in cooperation with Indian and foreign bankers training institutes;

• Conductingworkshops,training,seminarsetc.forbank staff and FS-BDS providers;

In the following sections we discuss the implementation of the pilot project on offering appropriate credit products to microenterprises at Govindpuri, Sangam Vihar and Tughlakabad in the Okhla industrial area, New Delhi, as well as its impact on the microenterprises that have benefitted from the project.

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GTZ along with SIDBI is implementing a pilot

project of providing suitable loan products to

microenterprises operating at Govindpuri, Sangam Vihar

and Tughlakabad in the Okhla industrial area. This pilot

also has Satin Creditcare Network Limited (Satin) as

the partnering MFI. The project involves downscaling

of SIDBI’s loan product meant for the microenterprises

to between Rs 200,000 and Rs 500,000 and up-scaling

of Satin’s loan products to between Rs 50,000 and Rs

200,000.

3.1 Profile of the Cluster

The National Capital Region is a centre of garment manufacturing and it caters to many export markets. Since the time of the Mughal regime, Delhi has been known for its embroidery designs on garments. The Okhla region is one of the important clusters for readymade garment manufacturing in Delhi. It is characterized by a large number of MSMEs involved in different stages of the garment value chain. This sector provides employment opportunities to a large number of people such as entrepreneurs, tailors, designers, fabricators etc.

There are a large number of microenterprises operating in the industrial areas of Govindpuri, Sangam Vihar and Tughlakabad Extension. They are engaged in activities relating to readymade garments such as fabrication (stitching), finishing and embroidery. Most of them do job works for the exporters and large domestic garment manufacturers in Gurgaon, Faridabad and Noida. They have the necessary experience and expertise in their line of activity and many of them have been operating for the last 10 to 20 years. However, they do not have necessary financial resources to manufacture and market

Chapter 3: The Pilot – Institutional Finance for Microenterprises

their production. The banks/financial institutions are not inclined to grant credit facilities to them because the units are in the unorganized sector. The owners/promoters of these enterprises are not in a position to provide the comfort of collateral security to banks.

Consequently, these micro and small enterprises do not have access to finance from banks and institutions though many of them have been running their units for many years. Even for their existing activity of job work they have to borrow from private financiers to meet their business exigencies at very high interest rates of between 36% and 200% depending upon the urgency of the requirement.

3.2 Collaborating agencies

A careful selection of collaborating agencies was important for the project as their complete buy-in and cooperation was essential for success of the pilot. Satin Creditcare Network Limited and the Okhla branch of SIDBI were chosen for the implementation of the pilot project.

Satin Creditcare Network Limited (Satin) is a leading microfinance institution (MFI) that has significant operations in the National Capital Region (NCR) of Delhi. It is a unique MFI as it has pioneered and demonstrated the viability of collateral-free lending to individuals without first going through group based activities. Satin has stood out among MFIs with three particularly unique features of operations: daily finance schemes, a self-sustaining model, and highly professional management6. In addition to its individual loan portfolio, Satin also has a significant rural joint liability group (JLG loan portfolio). The following table presents the growth of Satin’s portfolio over the years:

Table 3.1: Growth of Satin’s Portfolio over the years

Description x 31 Dec 09 30 Sep 09 31 Mar 09 31 Mar 08 31 Mar 07No. of Active Clients 108,000 85,700 56,000 20,600 13,500Total Portfolio* (Rs. Crore) 99.85 90.85 76.00 39.64 26.46

*Includes loans securitized by the MFI

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Satin’s clients include those who do not have banking accounts and lack access to credit. Within this segment, Satin has also found that it is often the case that while salaried individuals are more easily served by commercial banks, self-employed men and women, who typically lack proper documents required to satisfy institutional/legal formalities, turn to MFIs. Its experience of operating in urban markets, as well as its belief that lending to micro-entrepreneurs operating in industrial clusters is profitable made it an ideal partner for the pilot project.

SIDBI is an important stakeholder in the pilot project and has buy-in from the highest level of the management and it has chosen to implement the pilot project through its Okhla branch.

3.3 Selection of the area of operation

The ready-made garments cluster in Okhla was selected for this pilot project. SIDBI as well as Satin have selected Govindpuri, Tughlaqabad Extension and Sangam Vihar areas for the pilot.

6Satin Creditcare Network Limited – Unique in its field, Navneet Daga, Centre of Microfinance – Institute of Financial Management and Research, Nov 2006, available on www.ifmr.ac.in/cmf/casestudies.html

Considerations for area selection

Some important characteristics considered before

selection of the localities were:

• Concentration of Micro-enterprises: localities selected had heavy concentration of micro, small and medium sized enterprises engaged in readymade garment manufacture – fabrication, embroidery and finishing.

• Need for credit support: Given the nature of the business, enterprises in the locality are regularly in need of capital to run their operations smoothly. Due to irregularity of their business and lack of documentation of the businesses and assets, these enterprises are considered high risk entities. Capital requirement of these entities are also small so commercial banks do not perceive them as economical to their operations.

• Ease of operation: The Okhla branch of SIDBI is in vicinity of these localities. Satin had already been operating in these areas.

3.4 GTZ’s technical cooperation

With an objective to upscale credit from MFIs to micro enterprises in the unorganised sector, an innovative financial product and delivery model for this upstream apparel supply chain has been designed by GTZ in association with SIDBI and Satin Credit Care Network Limited. The partnering agencies are trying out this product on a pilot basis. SIDBI’s New Delhi branch has sanctioned a dedicated line of credit to Satin for onward lending to the micro and small enterprises in this apparel supply chain.

Support to Satin

GTZ had a series of discussions with the senior management of Satin to motivate them to take limited risk on at least a small select group of micro and small enterprises in the identified cluster. Inputs to Satin by GTZ were provided on design of a special loan product with the following features

• Higher loan sizes preferably in the range of Rs50,000 to Rs200,000

• Loans to be available for investment in machinery or for work for capital needs

• Repayment period to be of up to two years

• Repayment in fortnightly/monthly installment instead of daily installment depending upon cash flow of the borrower

• No collateral security

GTZ also helped in supplementing financial resources of Satin by organizing a dedicated line of credit from SIDBI’s New Delhi branch for the purpose of the pilot project. Further support was provided to Satin for human resource development in the area of risk-assessment and credit appraisal.

Support to SIDBI

Support to SIDBI was provided by the way of a stock taking survey to identify the eligible borrowers. GTZ also provided the services of a financial consultant who helped the prospective applicants in preparation of financial statements as well as financial projections and filling in SIDBI’s loan application form.

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Capacity building of entrepreneurs

GTZ has also provided support to enhance the capacities of the entrepreneurs. The following initiatives were undertaken for capacity building of the microenterprises.

• Interactive sessions were organized to understand the credit needs of the micro-enterprises. One of the key issues that emerged was that these units have credit requirements ranging from Rs 50,000 to Rs 500,000 depending on the volume of operations for working capital as well as investment requirements.

• Sensitization workshops were held to motivate them to borrow from banks and from MFIs.

• They were given orientation course in accounting, finance, quality improvement and marketing in the evening after their working hours.

Chart-2: GTZ’s role in the project

Micro-enterprises

Deficits

• No access to institutional credit

• Borrow from money-lenders at high cost

Intended Impact

• Increase in turnover

• Employment generation

• Poverty alleviation

• MFIs scales up their product

• Banks scale down their products

Satin Credit care limited

SIDBI

• Productdevelopment• HRsupport

• Capacitybuilding• HRsupport

Loan Loan and subsidies

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Table 3.2: Loan products offered by Satin and SIDBI

Features Satin Credit Care Ltd SIDBI Purpose of Loan Working Capital, Purchase of Assets,

Technology up gradationWorking Capital, Purchase of Assets, Technology up gradation

Loan Size Rs 25,000 to Rs 200,000 Rs 200,000 to Rs 500,000Interest Rate calculation Flat Rate Diminishing BalanceInterest Rate 18-22% 12%Processing Fee 3% (selected) 0%Loan Tenure One to Two Years Three YearInstallment frequency Fortnightly/Monthly Monthly Moratorium None Six months (optional)Subsidy None 15% subsidy on purchase of Machines

provided by Ministry of small industriesDocuments required Identity proof, Address proof, Bank

accountIdentity proof, Address proof, Bank account, ITR returns

Minimum eligibility criteria Capacity to repay. Installment size should not be more than 12% of sales.

DSCR>1.5

• Proof of address was necessary for both residence of the promoter and establishment

• Married borrowers were preferred. In case the borrower was unmarried then his/her parents were taken as co-borrowers.

Loan applications of the clients were appraised against following eligibility criteria:

• Financial performance of previous years

• Future planning.

• Feedback of exporters

• Feedback of suppliers and other related enterprise owners.

• Personal interviews were conducted of the enterprise owners to understand their knowledge of business and their intent for utilization of loan.

• Minimum criteria for approval of loan from SIDBI was a Debt Service Coverage Ratio7 (DSCR) of greater than 1.5

Satin started lending to enterprises in the year 2008 and SIDBI started lending in the mid of 2009.

7The debt service coverage ratio (DSCR), is the ratio of cash available for debt servicing to interest, principal and lease payments.

3.5 Loan Products offered

As the project is aimed at making credit accessible to microenterprises, whose credit requirement is typically more than the loan sizes offered by MFIs but below the levels that commercial banks offer, Satin and SIDBI offered the following loan products to the microenterprises:

Satin and SIDBI had a low key marketing of the products. It was mainly through client survey and personal meetings with the potential clients. After the client survey, loan applications were invited from the entrepreneurs. Some of the important criteria for selection of clients were:

• Enterprise must either be functioning from its own premises or else if it is functioning from rented premises, it must have been operating there for more than three years.

• Enterprise should have bank account preferably in the name of the enterprise.

• Owner must have proof of identity.

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This research conducted in Nov-Dec 2009, tried

to ascertain the impact on the beneficiaries of the

project. It has utilized a sample of 40 MSMEs which have

received loans from Satin and 8 which have received loans

from SIDBI. The primary objectives of the study were:

• To assess the impact of the project on beneficiary clients

• To identify bottlenecks in transfer of maximum benefits

• To document qualitative and quantitative changes in the microenterprises after the loans

• To present learning from the pilot project for improvement in implementation strategy of the project.

4.1 Methodology

The study utilized secondary as well as primary research. We reviewed the literature available on the status

Chapter 4: Impact Assessment Research

of MSMEs and conducted a primary survey of the microenterprises which have received loans under the pilot. We also interviewed the agencies involved in the research. The key aspects of the study were:

• Discussions with key stakeholders in GTZ, SIDBI and Satin

• Profiling of clients of SIDBI & Satin

• Collection of present status of clients through a survey with the help of a questionnaire. Information generated from the clients through questionnaire was: Change in turnover, Profit margins, Change in assets, employment generated, their banking habits and other qualitative aspects.

• Data analysis

• Identificationofsuccessstoriesandpreparationofcase studies

The following is the list of enterprises that formed the sample for this study:

Table 4.1: List of clients (Satin)

Sl. No. Name of the Borrower Name of the Enterprise Cluster

1 Mohd. Ikram Ansari, Naseema Khatoon

Afsana Garments Malviya Nagar

2 Mohd. Sadiq, Khatoon Amina Enterprises Tuglakabad3 Mohd. Alamgir, Shera Bano AS Fashion Malviya Nagar4 Ram Avtar Yadav, Kailash Ashish Garments Tuglakabad5 Sahnawaz, Shidha B4U Garments Khirki Extension6 Mohd. Nizam Khan, Nargis Begam BB Fashion Tuglakabad7 Kabir Sardar, Anjaaka Begam Beauty Art Embroidery Garhi, East of Kailash8 Mahindra Singh, Shakuntala Devi Chakravarty Garments Govindpuri9 Subhash Chandra, Shobha Chandra Garments Kalkaji10 Atiqur Rehman Choudhary International Tuglakabad11 Rajinder Singh, Geeta DN Finishing Tuglakabad12 Preeti Sharma, Manoj Sharma ESS EMM Fashion’s Tuglakabad13 Firoz Khan, Saira Faisal Enterprises Malviya Nagar14 Hasib Khan, Anwari Begam Faisal Smart Training House Malviya Nagar15 Mohd. Gohmr Ali, Mehru Nisha Lucky Enterprises Tuglakabad

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16 Ram Avtar Yadav, Kailash Manish Finishers Tuglakabad17 Raj Kumar, Renu Gagneja Mohan Cloth House Kalkaji18 Mohd. Munney, Issadhan Nahid Garments Tuglakabad19 Veer Singh, Kamal Singh Nandni Fashion Tuglakabad20 Md Sobir Noor Garments Tughlakabad21 Vikas Kumar Singh, Meena Devi Om Sai Fashion Point Madangiri22 Pankaj Sawhney Pankaj Garments Govindpuri23 Sheikh Abdul Khalak Raju Embroidery Govindpuri24 Usman, Munni Begam Reehana Garments Govindpuri25 Rekha Devi Rekha Garments Sadiq Nagar26 Mohd. Hasan, Noori Royal Embroidery Malviya Nagar27 Sabir Hussain, Bilkish Begam Rozi Fashion Tuglakabad28 Mohd Suleman, Firoj Rubina Enterprises Tuglakabad29 Banarasi Dass, Chandan Lal SB Embroidery Kalkaji30 Mohd. Siddique, Afroj Bano Sai Impex Tuglakabad31 Shankar Ghosh Sapana Fep Care Tuglakabad32 Surinder Kumar Sethi Sethi Sewing Machine Co. Govindpuri33 Rasool Ahmad, Ashiya Shabnam Tailor Dakshinpuri34 Shahjahan, Dr. Anis Shaheen Fashion Govindpuri35 Manish Kumar, Kiran Shivam Handloom Malviya Nagar36 Tanveer Ahmed Tanveer Ahmed Malviya Nagar37 Nitin, Preeti UNI Garments Malviya Nagar38 Vijay Kumar Verma, Asharani VK Verma embroidery Govindpuri39 Tej Bahadur Singh, Urmila Devi Vikas Enterprises Tuglakabad40 Bishwa Nath, Rashmi VPK Embroidery Govindpuri

Table-4.2: List of clients (SIDBI)

Sl. No. Name of the entrepreneur Name of the Enterprise Cluster

1 Hari Badan Anju Enterprises Sangam Vihar2 Navi Ahmed NS Fashion Sangam Vihar3 Mohd Naim NK Exports Govindpuri4 Shamshad Libas Home Furnishing Prahalladpur5 Jiauddin Praveen Fab Tuglakabad6 Tulsi Mehta Ravi Overseas Sangam Vihar7 Rafi Mohd PB Fashion Sangam Vihar8 Asha Rani AVA Embroidery Govindpuri

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5.1 Respondents

The respondents for our study were the promoters of

the enterprises that had availed of loan facilities from

Satin and SIDBI. We surveyed 40 of Satin’s borrowers

and 8 of SIDBI’s borrowers for the impact of the loan.

Additionally we analyzed the repayment performance of

55 loans disbursed by Satin to these microenterprises based

on the data provided to us by Satin.

Satin’s Borrowers

Data for the survey was collected from a total of 40 of Satin’s clients representing 49 disbursed loans. Of these disbursed loans, 12 had been repaid in the first cycle – with seven of the borrowers choosing to take second cycle loans and five choosing to close their loan account. Two borrowers had outstanding balances against both their first cycle and second cycle loans. Thus, 38 loans had outstanding balances with 30 being in the first cycle and 8 in the second cycle and one client having two loans outstanding against his name. It must be noted here that Satin’s second cycle loans represent second tranche of loans that had already been approved. This is represented in the table below:

Table 5.1: Distribution of loan accounts

(As on 31 Oct 09) Nos.

1st cycle 302nd cycle 8Total active loans 38Repaid and account closed 5Repaid and new loan (second tranche) taken

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Total 49

Chapter 5: Data Collected from the survey

SIDBI’s Borrowers

Our survey covered eight of these borrowers. Data was collected from these entrepreneurs on the following parameters:

1. Business profile

2. Loans disbursed

3. Repayment schedule

4. Loan purpose

5. People employed

6. Asset creation

7. Monthly sales and profits

8. Banking habits

9. Repayment performance

In the next section we present an analysis of the data collected.

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6.1 Distributional characteristics

Business Profile

Delhi is a centre of garment manufacturing and it caters to leading clothing brands. The loans have

been disbursed to microenterprises involved in the garment manufacturing processes such as fabrication, embroidery and finishing. The fabrication process involves stitching of cut materials and components provided by export houses. The embroidery process is in order to impart designs on the clothes. The finishing process involves fine-cutting of threads, performing quality checks and packing of the garment.

Chapter 6: Data Analysis

Loans disbursed

The highest loan-amounts have been disbursed to microenterprises engaged in cloth fabrication followed by embroidery. Satin’s average loan size was around Rs 50,000 in the first cycle (first cycle refers to the first loan disbursement made by Satin to a client). While there are only eight loans in the second cycle, the average loan size in this cycle is significantly higher at Rs 75,000. All of SIDBI’s loans were in the first cycle and each of these loans has a size of Rs 500,000.

Loan utilization

The clients have used the loans for working capital as well as purchase of machinery. The following matrix presents the loan utilization by the clients for all the 49 sampled loans of Satin and eight sampled loans of SIDBI.

Table 6.1: Business Profile

Activities Satin SIDBI

Fabrication 14 5Embroidery 6 2Fabrication and embroidery 4 0Finishing 2 0Fabrication and finishing (cut to pack) 4 1Garment shops 7 0Others 3 0Total 40 8

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Table 6.2: Loan Utilization

Satin’s cycle-I loans Working Capital Machine purchase Purchase of Boiler Debt repaymentFabrication 12 2 - -Embroidery 5 2 - -Stitching and Embroidery 1 3 - -Fabrication and finishing (cut to pack)

4 - - -

Finishing 1 - 1 -Others 8 1 - 1Total 31 8 1 1Satin’s cycle-II loans Working Capital Machine purchase Purchase of Boiler Debt repaymentFabrication 2 1 - -Embroidery 3 - - -Stitching and Embroidery - - - -Fabrication and finishing (cut to pack)

- - 1 -

Finishing - - 1 -Others - - - -Total 5 1 2 -

SIDBI’s cycle-I loans Working Capital Machine purchase Purchase of Boiler Debt repaymentFabrication - 5 - -Embroidery 2 - - -Fabrication and finishing (cut to pack)

- 1 - -

Total 2 6 - -

6.2 Impact

In the subsequent section we present a comparative pre/post-loan analysis of the status of the micro enterprises covered in the sample. The pre status refers to the situation of the microenterprises before the first loan. The post loan status refers to the situation of the microenterprises as on 31 October 2009.

People Employed

The units involved in garment manufacturing provide contractual employment to skilled workers such as tailors and embroiders. The skilled workers are hired as and when

the units get work and are remunerated on a weekly basis. Sometimes their wage payments are made in advance. A look at the table below reveals that the microenterprises have employed larger number of contractual workers across the 40 sampled microenterprises that had received loans from Satin.

Among SIDBI’s clients, there is a fall in the number of skilled workers employed in the embroidery activity. This is on account of the problems faced by one of the enterprises NKA Exports, whose business would have failed had it not been for SIDBI’s loan support. While the enterprise could survive it had to scale down its operations and reduce the number of its employees.

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Table 6.3a: Skilled Workers – Total Numbers

Activities (Satin’s portfolio) Number of Skilled Workers (contractual)

Pre loan Post loan ChangeFabrication 297 358 20.5%Embroidery 199 248 24.6%Fabrication and embroidery 52 73 40.4%Fabrication and finishing (cut to pack) 86 100 16.3%Others 9 14 55.6%Total 643 793 23.3%

Activities (SIDBI’s portfolio) Pre loan Post loan ChangeFabrication 113 218 92.9%Embroidery 170 135 -20.6%Fabrication and finishing (cut to pack) 30 35 16.7%Total 313 388 24.0%

Table 6.3b: Skilled Workers – Averages

Activities (Satin’s portfolio) Average Skilled Workers (contractual)

Pre loan Post loanFabrication 21 26Embroidery 33 41Fabrication and embroidery 13 18Fabrication and finishing (cut to pack) 22 25Finishing 0 0Others 1 2Average of the sample 16 20

Activities (SIDBI’s portfolio) Pre loan Post loanFabrication 23 44 Embroidery 85 68 Fabrication and finishing (cut to pack) 30 35 Average of the sample 39 49

An analysis of the average skilled workers employed by Satin’s clients reveals that the average number of skilled workers employed per enterprise was higher for all the activities except for “finishing”. This is intuitive as the units involved in the finishing activity employ workers on a permanent basis. The post loan average for the sample was significantly higher than the pre loan average.

Apart from the skilled workers, all the micro enterprises covered in the study had some permanent employees who were responsible for other non-line functions. Also, the units involved in finishing need to employ workers on a permanent basis. The number of salaried staff employed by the micro enterprises has increased only marginally as presented in the table below.

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Table 6.4a: Salaried Staff – Total Numbers

Activities (Satin’s portfolio)Number of Salaried Staff

Pre loan Post loan ChangeFabrication 26 28 7.7%Embroidery 30 30 0.0%Fabrication and embroidery 6 6 0.0%Fabrication and finishing (cut to pack) 8 8 0.0%Finishing 67 72 7.5%

Others 39 39 0.0%Total 176 183 4.0%

Activities (SIDBI’s portfolio) Pre loan Post loan ChangeFabrication 9 15 66.7%Embroidery 22 22 0.0%Fabrication and finishing (cut to pack) 3 5 66.7%Total 34 42 23.5%

The change in average staff per enterprise is insignificant as presented in the table below.

Table 6.4b: Salaried Staff – Averages

Activities (Satin’s portfolio) Average Salaried Staff


Activities (SIDBI’s portfolio) Pre loan Post loanFabrication 2 3Embroidery 11 11Fabrication and finishing (cut to pack) 3 5Average of the sample 4 5

Asset Creation

Industrial Sewing Machines: The most important asset utilized in the garment manufacturing activities that most of the surveyed micro enterprises were involved in are the sewing and embroidery machines. Our survey revealed that there is a trend among the units involved in stitching clothes to use new automatic industrial sewing machines (new machines) that can efficiently perform multiple tasks such as straight stitching, zig-zag stitching,

scallop stitching and blind stitching. These machines such as Juki industrial stitching machines are replacing the traditional black machines, as the traditional machines are less versatile and at times lead to oil-spill on the cloth being fabricated. However, some of the microenterprises continue to use the black machines for embroidery because they are slow and workers can easily handle them.

We analyzed the change in the number of the new as well as old machines. This analysis is presented in the tables below.

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Table 6.5a: Change in New Machines – Totals

Activities (Satin’s portfolio)Number of New Machines

Pre loan Post loan ChangeFabrication 239 354 48.1%Embroidery 100 100 0.0%Fabrication and embroidery 45 75 66.7%Fabrication and finishing (cut to pack) 119 129 8.4%Finishing 7 7 0.0%Others 27 28 3.7%Total 537 693 29.1%

Activities (SIDBI’s portfolio) Pre loan Post loan ChangeFabrication 32 190 493.8%Embroidery - - 0.0%Fabrication and finishing (cut to pack) 20 35 75.0%Total 52 225 332.7%

There has been an increase in the number of new machines in all the enterprises that perform some cloth fabrication. While all of Satin’s clients had stated that they needed loans for working capital purposes, some of them had utilized the loans for purchasing machines as well. Also, as the working capital loans freed up the enterprise’s own capital, they were able to purchase more machines. However, there has been no increase for enterprises involved in embroidery and finishing.

A look at the average machines per enterprise shows significant increases for those involved in fabrication, as well as fabrication and embroidery both. The increase in average for enterprises involved in cut to pack activities is less significant. This suggests that the former category of enterprises have used the loan amount, or capital that was freed up because they received the loan for increasing the number of sewing machines.

Table 6.5b: Change in New Machines – Averages

Activities (Satin’s portfolio) Average New Machines


Activities (SIDBI’s portfolio) Pre loan Post loanFabrication 6 38 Embroidery - - Fabrication and finishing (cut to pack) 20 35 Average of the sample 7 28

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Table 6.6a: Change in Old Machines

Activities (Satin’s portfolio)Number of Old Machines

Pre loan Post loan ChangeFabrication 160 60 -62.5%Embroidery 128 160 25.0%Fabrication and embroidery 15 15 0.0%Fabrication and finishing (cut to pack) 0 0 0.0%Finishing 0 0 0.0%Others 9 9 0.0%Total 312 244 -21.8%

SIDBI’s Portfolio Pre loan Post loan ChangeFabrication 90 50 -44.4%Embroidery 170 170 0.0%Fabrication and finishing (cut to pack) 10 - Total 270 220 -18.5%

Table 6.6b: Change in Old Machines-Averages

Activities (Satin’s portfolio) Average Old Machines


SIDBI’s Portfolio Pre loan Post loanFabrication 18 10 Embroidery 85 85 Fabrication and finishing (cut to pack) 10 - Average of the sample 34 28

An analysis of the number of old machines reported by the micro enterprises reveals that those enterprises that are involved in fabrication have reduced the number of old machines while those involved in embroidery have significantly increased them.

Boilers: A couple of Satin’s borrowers involved in finishing have also used part of the loan to purchase steam boilers that enable them to press-iron their garments more efficiently before packing them.

Monthly Sales and Profits

The enterprises across all the activities have reported a significant increase in peak season monthly sales and profits. The sales have increased because the enhanced production capacity has allowed the microenterprises to cater to more demand. In particular the two units involved in finishing have significantly increased their business. The change in average monthly sales turnover is presented in the table below.

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Table 6.7: Change in Monthly Sales Turnover

Activities (Satin’s portfolio)Average Monthly Sales Turnover (INR)

Pre loan Post loan ChangeFabrication 162,500 226,786 39.6%Embroidery 233,333 333,333 42.9%Fabrication and embroidery 115,000 172,500 50.0%Fabrication and finishing (cut to pack) 287,500 400,000 39.1%Finishing 60,000 200,000 233.3%Others 147,143 168,571 14.6%Average of the sample 160,875 226,125 40.6%

SIDBI’s Portfolio Pre loan Post loan ChangeFabrication 165,000 318,333 92.9%Embroidery 450,000 325,000 -27.8%Fabrication and finishing (cut to pack) 125,000 275,000 120.0%Average of the sample 231,250 314,583 36.0%

NKA Exports, which has received a loan from SIDBI and is engaged in the embroidery activity, has faced a significant loss of business in 2009. This has resulted in a significant loss of revenue for it. This is the reason for the decrease in the sales turnover reported against the embroidery activity in SIDBI’s portfolio. Similar to the revenues, the monthly profits of these enterprises have also shown significant increase. With the exception of NKA Exports, the profits have increased on account of higher sales as well as improved margins.

The sales and profits in the readymade garment industry are primarily volume driven. As the revenue sharing in the segment is more or less standardized and the microenterprises have little say in determining the prices, it is very important to increase capacity to get orders of larger volumes. We could observe the following as the primary reasons for the increase in revenues and profits:

• Increase in capacity through addition in machines: Increase in the number of sewing machines as well as boilers have translated in improved capacity.

Economies of scale have also improved increasing the profitability of the enterprises. The availability of timely loans has allowed them to steadily increase the number of new machines. Informal credit is expensive and therefore these are seldom utilized for the purchase of new machines or replacement of existing machines.

• Increase in capacity through more efficient machines: All the enterprises involved in fabrication have shifted to new industrial stitching machines which are more efficient in their working than the local made machines. Efficiency in terms of time taken per piece has increased with the change in machines.

• Increased retention of skilled employees: Having access to working capital loans has also played a role in enabling these enterprises in retaining their skilled workers and prevents loss of business.

Additionally the availability of timely loans has also helped these enterprises in reducing their interest costs as the cost of informally arranged credit is very high.

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Table 6.8: Change in Monthly Profits

Activities (Satin’s portfolio)Average Monthly Sales Turnover (INR)

Pre loan Post loan ChangeFabrication 37,589 51,250 36.3%Embroidery 63,750 90,000 41.2%Fabrication and embroidery 26,938 41,125 52.7%Fabrication and finishing (cut to pack) 80,625 111,250 38.0%Finishing 18,000 60,000 233.3%Others 23,929 29,071 21.5%Average of the sample 38,563 54,763 42.0%

SIDBI’s Portfolio Pre loan Post loan ChangeFabrication 39,750 78,583 97.7%Embroidery 102,500 81,250 -20.7%Fabrication and finishing (cut to pack) 38,889 91,465 135.2%Average of the sample 55,330 80,860 46.1%

Banking habits

Loans from formal sources: The loans disbursed under the project have increased the experience of the microenterprises in maintaining borrowing relationships. 35 of the sampled 40 borrowers of Satin had no prior experience of taking loans from a formal financial institution. Many of them perceived borrowing from banks in a negative way as they needed to disclose a lot of personal information to the banks. As the experience with the loans has mostly been favorable, their opinion regarding loans from formal institutions has become more favorable.

Bank Accounts: All the enterprises surveyed had a bank account either in the name of the enterprise - 35 of Satin’s clients and 5 of SIDBI’s clients had bank accounts in the name of their enterprises or in the name of their promoters. However, they had opened these accounts before getting the loans and the loans disbursed under

the pilot project has not been an influence as far as bank accounts are concerned.

Formalization of the enterprises

The pilot project has not resulted in the micro enterprises seeking SIGNIFICANTLY greater formalization in terms of SSI registrations, audit practices and report keeping. There is a perception that greater formalization increases the vulnerability of their enterprises.

Summary

There has been an observable and direct impact on the microenterprises as access to credit has enabled them to enhance their capacity, hire more workers and process more orders. There is also an increase in business confidence among many of the entrepreneurs. However, the loans disbursed under the pilot project have not improved the level of formalization of these entities.


The risk associated with repayment of loans is a primary concern for financial institutions and their

reluctance to lend to MSMEs is due to their high risk perception regarding the MSMEs. In this context, the repayment performance of the microenterprises assumes very important role for the future of this project. We have analyzed the cumulative repayment performance of the microenterprises in order to assess the quality of the portfolio generated under the pilot.

While the repayment of SIDBI’s loan had not started, Satin’s portfolio had reasonably seasoned. Our analysis covered 55 loans to 46 clients. Seven clients had gone ahead with the subsequent cycle of loan representing a total of eight second cycle loans as one client had to be issued two loans in order to meet his total requirement. This reflects Satin’s confidence in providing second cycle loans to these clients. The average loan size for the 55 loans was Rs 50,000. This indicates that Satin has ventured into a zone where MFIs do not usually venture.

7.1 Cumulative Repayment Performance

As on 31 Oct 2009, there were 43 active clients of Satin with a loan outstanding of Rs 938,135. This suggests that clients have repaid Rs 1,726,865 with Rs 351,275 being paid back as interest.

14 loans out of 55 disbursed loans had a repayment rate of 100%. Out of these 14 loans, 12 loans had been completely repaid while the remaining two were clients with a repayment rate of 100%. 29 loans had repayment rate8 of more than 80% which is reasonable. The overall repayment performance of the clients had been good with the repayment rate being 82.4%. The fact that most of the loans have been recovered in the past despite delays suggests that there is no inherent portfolio quality problem. The fact that Satin’s loan officers have closely followed up with these borrowers has helped in ensuring loan repayments.

7Repayment Rate has been calculated as (Loan collected-Prepayment)/Due loan amount as on 31st Oct 2009. Here Prepayment means the amount that has been paid by the clients but was not due to be paid as per the repayment schedule.

Chapter 7: Repayment Performance

7.2 Takeaways

Our analysis suggests that while over a period of time the loans are likely to be repaid, at any given point in time some of the loans may appear irregular. Some important points which can explain this trend were revealed during discussions with the clients and Satin’s loan officers.

• There is a need to better understand the production cycles of the garment industry. Usually the fabricators have a production cycle of minimum two months i.e. they get their payment after 2-3 months of the order. They have to maintain their cash balance for those three months to meet their fixed expenses. As a result, clients are not able to repay first few installments as they have to worry for the working capital expenses. These clients repay the overdue amounts once they get the payment of the orders.

• The peak season of the sector is mainly from September to June with July and August being the lean months because of rains. During this period, clients do not have much business and find it difficult to meet their loan obligations. In 2009, adding to the woes of the clients was the fact that payments of the past orders had been delayed due to recession.

During discussions, it was also apparent that all the borrowers were willing to repay and were waiting for their own payments to be cleared. Experience also suggests that though there has been some erratic repayment behavior by the clients, they have repaid the full amount and gone for next cycle of loan. Satin’s staffs also agree with the view expressed by the clients and agreed that repayments are coming though clients face problem in fortnightly repayment of loan.

Yield for Satin: Our analysis revealed that the observed annual yield on this portfolio loans for Satin was 27%. This is low when compared with the theoretical yield of 35% to 38%, that these loans must have given their interest rates and processing fees. This issue can be sorted out in case Satin charges an interest on the outstanding amount rather than on the disbursed amount.

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Microenterprises need funds for purchasing assets

as well as for their working capital needs. Access

to financial resources helps the enterprises not only

in realizing their full potential but also in expansion.

This results in increased opportunities of employment.

Enhancement in capacity directly increases the

employment potential. Having ready access to working

capital also enhances the employment potential as it

leads to higher capacity utilization. Provision of financial

services to the microenterprises therefore, has multiplier

impacts in terms of employment opportunities and socio-

economic development.

Microenterprises lack timely and reliable access to institutional loan funds on competitive terms. Financial service provision to microenterprises has always been considered a high risk proposition. This project was aimed at dispelling some of the myths regarding the risks associated with lending to microenterprises. While a reasonable repayment performance by the enterprises has shown that the inherent quality of the loans can be good, some of the important lessons that have emerged from the pilot project are discussed below:

8.1 Loan Product

Most of Satin’s loans were required to be repaid in fortnightly installments. This made it difficult for the borrowers to make regular repayments. Borrowers prefer monthly installments. Many borrowers also felt that a moratorium period would help them match their installments with their receivables cycle.

Discussions with the borrowers also revealed that they prefer an overdraft or a cash-credit facility which would allow them to borrow as and when they require and pay interest only on the outstanding amount. As delayed repayments adversely affect the yield on portfolio for Satin, such a loan product will also allow Satin to earn interest income close to the theoretical yield of the product. Another relevant issue that came out during the discussion was the loan size. The loan size should be able to at least

Chapter 8: Way Forward

help them cover the working capital expenses for their production cycles.

When only assets are financed and the microenterprises do not have access to the required levels of working capital, idle capacity is created. In the absence of working capital, entrepreneurs find it difficult to utilize the increased production capacity to their advantage. Thus a working capital component should also be provided in addition to asset financing.

We need to consider the following points in future designing of the loan product:

• Loan product should be customized according to the production and credit cycles of different activities/ businesses.

• Microenterprises prefer cash credit products or over draft facilities for meeting a part of their working capital needs.

• Interest rate being charged by Satin is on flat basis which results in higher effective interest rate for clients if the loan is prepaid and lower IRR for the MFI (resulting in loss for the MFI) if the loan is delayed. In other words, the client who delays repayment gets benefitted, which is not desirable. Hence, it is recommended that the interest should be charged on declining basis.

• Loan sizes should be sufficient to impart some significant changes to the enterprises.

• In case loan is provided for expansion of capacity, provision of working capital should be maintained.

8.2 Financial Institutions

Administering microenterprise loans will require the financial institutions to make some changes in their structure and operating procedures. This is listed below:

• Specialized personnel are required as the loans are characteristically different from the conventional loan portfolios of the financial institutions.

• Loan evaluation process should be designed to

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properly assess the risks involved in lending to a particular microenterprise.

• Lending institutions particularly MFIs, may need modifications in their existing software to make them compatible with the loan product.

• Lending institutions need to develop internal control mechanisms with special focus on utilization of the loans.

• Motivation of personnel is very important for the organizations. Staff remunerations should be designed so that they are incentivized to identify the right set of microenterprises for lending.

• Lending institutions should have full understanding of the businesses of enterprises and they should understand the production and credit cycles and seasonality of the business.

• In case, a Bank and an MFI are operating among the same clients, they can complement each other with the bank providing loans for asset creation and the MFI lending for working capital purposes.

8.3 Microenterprises

Microenterprises face several constraints which make it difficult for them to access formal financial services on the one hand, leave them susceptible to regulatory closures on the other:

• Inadequate compliance to regulations which may discourage formal financial institutions from taking credit exposures;

• Limited negotiating power with their clients (export houses);

• Limited access to market research;

• Inadequate managerial skills including accounting and costing.

These microenterprises need support on the following aspects:

• Compliance with regulations such as the factories act, sales tax and labour laws: The microenterprises surveyed were unaware of the laws they need to comply with. Their awareness needs to be built up so that they operate with the right regulatory clearances. These clearances and approvals may be required in case the microenterprises want to register as SSI units.

• Statutory Audits: Most of the entrepreneurs covered under the pilot do not get their accounts audited. In

some cases, once the turnover of enterprise reaches to auditable level, they divide the enterprise in two to avoid statutory audits. Entrepreneurs should be encouraged to get their accounts audited.

• Capacity Building of entrepreneurs: Entrepreneurs need capacity building trainings on following topics to ensure sustainable changes in the enterprise:

o Business planning

o Cash Management

o Accounts

o Market research

o Legal modalities, registrations and government benefits for SSIs

o Negotiation

• Awareness on facilities available for MSMEs: The microenterprises need to be made aware about the different incentives available to them such as:

o Priority sector lending and differential rates of interest etc.

o Excise Exemption Scheme

o Exemption under Direct Tax Laws

o Statutory support such as reservation and the Interest on Delayed Payments Act.

The development of an efficient MSME lending environment requires that economic agents involved i.e. the lenders and borrowers should receive incentives to make appropriate economic choices. For this, they must have the relevant information needed to make such decisions. Available evidence suggests that in the case of lending to even larger microenterprises, these requirements are not always met. In a market led economy, in view of information asymmetries, prospective lenders may not be able to correctly appraise the true value of the project proposals. The protection of creditor’s right is of particular importance in the case of bank finance. In this scenario there is need for developing an innovative instrument that addresses the concerns of FIs and MSMEs both.

Microenterprises need financial services to smoothen up their business process and prevent sudden business shocks. While designing a loan product, the points presented above need to be considered so that the intervention is sustainable and impactful. The task of financing MSMEs is challenging but not unachievable. In the subsequent section, we take a look at five microenterprises and their experience with the loans disbursed under the project.

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9.1 VK Verma Embroidery

Background

Mr V K Verma belongs to Himachal Pradesh. In the

search of better economic prospects, his family

came to Delhi in 1980. They found an opportunity in the

garment industry in the city as Delhi is a centre of garment

manufacturing. Since the time of the Mughal regime,

Delhi has also been known for its embroidery designs.

Mr Verma along with his father and three brothers started

processing embroidery job work orders for exporters from

rented premises in Govindpuri. The exporters procure

direct export orders and then they distribute the orders

and the garments to embroider like Mr Verma for them

to work on. The finished products are then exported to

various countries.

Name: V K Verma EmbroideryPromoter: Mr V K VermaAddress: 1382/13, Govindpuri, Kalkaji, New Dehi-19Number of employees: 100 skilled workers and 20 staffs

Mr Verma started his own embroidery work unit in 1989 with 10 machines. With his hard work, Mr Verma had gradually been able to grow his business to 30 sewing machines in 2001 and 60 sewing machines in 2005. By 2008 end, he had 100 machines.

Business growth: hand embroidery along with machine embroidery

At present Mr Verma uses 100 Indian made industrial sewing machines for machine embroidery. He has

Chapter 9: Case Studies

sufficient orders to fully utilize all his machines and employs around 100 skilled workers.

Additionally, he also takes orders for hand embroidery works. He gets these orders processed by around 200 women artisans in rural villages of Sikandrabad, located in the Bulandsahar district of Uttar Pradesh. Mr Verma uses an agent to contract these works to the women. The women on an average are able to earn Rs 1,500 per month for the work they perform for Mr Verma.

Although Mr Verma gets the garments and the designs from the exporters for performing the embroidery works, he has to procure materials such as colored threads, zari, wool, stitching threads, beads and thin chain on his own. He purchases these materials from the local markets in Govindpuri and Chandni Chowk.

Problems in Securing Institutional Credit

Mr Verma revealed that while he had approached banks in the past to get finance, they insisted on collateral of over 100% of the loan amount. Given the uncertainty that surrounded his business Mr Verma decided against borrowing from the banks.

Loans from Satin

As Satin did not insist on collateral for lending Mr Verma could take loans from the MFI. He had received two loans of Rs 150,000 each from Satin for his embroidery unit until 31 October 2009. Interestingly as Satin has a policy of not proving loans greater than Rs 100,000 against a single loan file, two loan files and hence two loan accounts were created for Mr Verma on both the occasions. While Mr Verma has paid back his first cycle loan, he had an outstanding amount of Rs 144,397 against his second cycle loan as on 31 October 2009.

Date of Loan Application

Date of Finance Rate of Interest (%) Loans amount (in Rs)

Starting date of loan

17-Mar-09 19-Mar-09 21.34 150,000 28-Mar-0914-Sep-09 21-Sep-09 21.34 150,000 3-Oct-09

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Mr Verma has used the loans to expand his hand embroidery works. He has been able to contract around 100 more women in the rural areas, as he now provides work to 200 women against 100 earlier.

Loan repayment record

Mr Verma has been prompt in making repayments on his first cycle loan from Satin, as can be seen from the table below.

Date Amount due 28 Feb 10 (Rs) Amount paid (Rs)Total 172,845 172,845*

*While Mr Verma has not been able to pay strictly according to his repayment schedule, he has been able to repay the entire loan within six month period by September 09.

Evolution of the enterprise through the loan period

Over the period of the loan Mr Verma said that his monthly sales turnover has increased from Rs 400,000 to Rs 500,000 on an average. While this is primarily due to the improved demand conditions, Mr Verma also attributes this to the fact that he is now able to take more orders for hand embroidery works because he has access to Satin’s loans.

Mr Verma felt that the loan support from Satin had been helpful in reducing his dependence on informal sources of finance. He however, felt that the loan size was low. He also would have preferred a cash credit facility so that his interest liability was only on the outstanding amount.

Particulars Pre loans* Post loans**Buyers 6 6Skilled machine workers 100 100Hand embroiders 100 200Staff 20 20Expected monthly sales revenue (Rs) 400,000 500,000Expected monthly profits (Rs) 100,000 125,000

* Pre loan refers to the period before the disbursement of 1st loan

**Post loan data collected as on 31 October 2009

Artisans at work

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Future plans and growth needs

Mr Verma plans to formalize his business in the future. He also wants to be an exporter and have his own manufacturing factory. He realizes that this will require some capital expenditure and has been saving for the purpose. He felt that if he had to realize this ambition

he’d need loan support from formal financial institutions. While Mr Verma wants to utilize government schemes in order to grow his enterprise his awareness regarding them is low. He said that if he had more awareness, he would be able to formalize his enterprise and obtain the necessary regulatory clearances.

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9.2 Lucky Enterprises

Background

Lucky Enterprises has been promoted by Md Gohmar Ali. It undertakes cloth fabrication for garment exporters, who provide job-work orders to the enterprise. The fabrication of garment is the most important activity of the readymade garment manufacturing industry. The big houses/exporters provide the cut material/components to fabricators like Lucky Enterprises. The fabricators stitch the garments and send them back to the main units for further processing.

Name: Lucky EnterprisesPromoter: Md Gohmar AliAddress: RZ-536, Gali no.24, Tuglakabad Extn, New Delhi-19Number of employees: 18 skilled workers and 3 staffs

Mr Ali had started working as a tailor in 1985 and gradually became a master tailor in 2000. He started a partnership firm which did cloth fabrication in 2001. However, the partnership did not work out and he started Lucky Enterprises on his own in 2007 with 20




12-Aug-08 14-Aug-08 18.14 25,000 28-Aug-0816-Mar-09 30-Mar-09 21.41 50,000 11-Apr-09

Mr Ali has utilized these loans for purchasing some of his new machines as well as for meeting some of his working capital needs.

Tailors working hard

conventional sewing machines. For close to a year he serviced orders received from a single exporter.

Current status: more orders because of the new machines

Mr Ali has sold all of his old sewing machines and has replaced them with 18 modern industrial sewing machines. He employs 18 tailors working for him and caters to two exporters. He also employs three salaried staffs. Mr Ali gets the clothes for fabrication from the exporters. He, however, has to purchase thread, elastic bands, lace, chain and fusing material on his own. He procures these materials locally.


Mr Ali had tried securing loan funds from banks. However, he found the banks requirements and paper work difficult to fulfill. As Satin provides convenient credit without too much of paperwork and also without any collateral, he decided to borrow from Satin.

Loans taken

Mr Ali is currently a second cycle borrower of Satin. He availed of the second cycle loan after having successfully repaid the first loan. The following table presents the details of the two loans:

Loan repayment

While Mr Ali has largely been regular in paying in installments, he has missed out on a few installments. He has repaid his first cycle loan and had an outstanding of Rs 37,400 against his second cycle loan as on 31 October 2009.

His repayment pattern through the two loans has been presented in the table below:

Lucky enterprises through the loan period

Mr Ali reports a 50% increase in his turnover and profits in the post loan period as compared to the pre loan period. Access to working capital as well as replacing old machines with new ones have helped him in significantly improving his performance as:

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• Fabricators who have better access to working capital are in better position to negotiate with the exporters. They are able to retain experienced tailors who ensure superior work. In turn they are better placed to negotiate on rates. The production cycle also requires that an entrepreneur has access to working capital in order to deliver on time and get more orders.

• Availability of good quality machines also helps in getting superior rates. Fabricators with local made

machines face problem in getting orders from exporters. They are forced to operate in local non lucrative market.

Mr Ali’s economic condition has improved significantly from the days when he used to work as a tailor. He is satisfied with the loans he has received from Satin and wants to continue the relationship. He expects that in the future he will be able to expand his business and increase profitability.

1st cycle loan Amount due 31 Aug 09 (Rs) Amount paid (Rs)Total 29,536 29,5002nd cycle loan Amount due 31 Oct 09 (Rs) Amount paid (Rs)Total 34,050 15,300

Particulars Pre loans* Post loans**Buyers 1 2Tailors 18 18Staff 3 3Average monthly sales revenue (Rs) 100,000 150,000Average expected profit (Rs) 10,000 15,000No. Of machines (old) 20 -No. Of machines (new) - 18



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9.3 Ess Emm Enterprises

Background

Mr Manoj Sharma started a partnership firm along with his friends in 1992 to fabricate garments for exporters. As the partnership didn’t work out, Mr Sharma promoted Ess Emm Enterprises on his own in 1993. Mr Sharma started on a modest scale with 20 sewing machines. His business grew to 125 machines in 1995 and he continued to operate at that level until 2000. He however, suffered a decline in his orders between 2000 and 2002, and accumulated losses in this period. Exporters no longer favored garments fabricated on the traditional machines. Sensing the changing trend in the market he started replacing the traditional machines with the automatic industrial sewing machines. Mr Sharma was able to replace all his traditional sewing machines with 60 new machines by 2008. EMM Fashion’s

Promoter: Mr Manoj SharmaAddress: Pili Khoti, Walmiki Mohalla, Tuglakabad Village, New Delhi-19Number of employees: 50 skilled workers and 5 staffs

As Mr Sharma’s fabrication business stabilized at 60 machines and around 45 tailors, he felt he was losing out on opportunities that are available to cut-to-pack

enterprises. Many buying houses prefer a single-stop service. Thus, they give orders to units that can provide both garment fabrication and finishing (cut-to-pack services).

Elements involved in garment manufacturing and export

However, Mr Sharma needed to invest in a boiler in order to provide finishing services and he lacked the capital required for this investment.


Mr Sharma found the formalities associated with borrowing from banks difficult to fulfill. So he could not avail bank finance. However, as Satin provided loans on convenient terms, he could borrow from Satin.

Satin’s loan and business diversification

Mr Sharma had received a working capital loan of Rs 50,000 from Satin in May 2008. He had used this loan for paying wages to the tailors as he usually receives payment for his work after a lag of 2 months. Given his satisfactory repayment performance Satin extended a second cycle loan of Rs 100,000 in March 2009. Mr Sharma has used the second cycle loan for purchasing a boiler and three pressing tables. These assets have allowed him to provide finishing services in addition to cloth fabrication. Mr Sharma is now able to provide complete cut-to-pack services to his clients.

Stitching work at in progress

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Loan details and repayment performance

The following table presents the details of the loans Mr Sharma has received from Satin.

The following table presents the repayments made by Mr Sharma on Satin’s loans. Our analysis revealed that Satin had closed Mr Sharma’s first loan although he still had to pay Rs 3,300 as per the repayment schedule as on 31

October 2009. However, as Satin agreed this was because of oversight on the part of Satin itself and not intentional. While Mr Sharma’s repayment of the second cycle loan had not been very regular until 2009, this was due to the fact that Ess Emm had a large amount as receivables, which was likely to be realized soon. Mr Sharma was confident that he would be able to pay back the full second cycle loan within the contracted period of one year.

Ess Emm’s business has grown significantly after Mr Sharma started providing finishing in addition to fabrication. The increase in sales has been on account of two factors:

1. Orders for finishing

2. More orders for cut to pack services

Ess Emm has recorded a 30% increase in its sales and profitability after it started providing cut-to-pack services. It has also added another buyer to its clientele. Given the growth in the business, Mr Sharma has moved his unit to a larger building in Tughlakabad village.

Ess Emm’s evoloution: From fabrication to cut-to-pack

Export

Buying houses

EmbroideryEmbroideryFabrication (Stitching)

Cut to pack




7-May-08 15-May-08 18.04 50,000 28-May-0827-Mar-09 30-Mar-09 21.34 100,000 22-Apr-09

1st cycle loan Amount due 31 May 09 (Rs) Amount paid (Rs)Total 68,215 64,915Date (2nd cycle loan) Amount due 31 October 09 (Rs) Amount paid (Rs)Total 63,560 29,850

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Particulars Pre loans* Post loans**

Buyers 3 4Tailors 45 50Staff 5 5Sewing Machines 60 60Boilers 0 1Monthly average sales revenue (Rs) 700,000 900,000Average monthly profit (Rs) 200,000 270,000

* Pre loan refers to the period before the disbursement of 1st loan**Post loan data collected as on 31 October 2009

Mr Sharma feels that with the current assets he can potentially earn Rs 10 lakh to 11 lakh per month. This will require him to take large orders. However, the production cycle for large orders is longer (upto 1.5 months), and the

production and credit cycle can extend up to six months. In order to successfully service such orders he needs a reliable source of working capital loans of Rs 5 lakh to Rs 6 lakh.

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9.4 Manish Finishers

Introduction

Mr Ram Avtar Yadav was employed as a finishing-in-charge at an export house. Through experience he realized that finishing was a critical element in the processing of ready-made garments. Export houses, generally send out fabricated and processed garments to microenterprises (finishers) who provide the finishing touches before the garment can be exported. The finishers are responsible for thread cutting, sampling, quality check, pressing and packing of the garment.

Name: Manish FinishersPromoter: Mr Ram Avtar YadavAddress: RZ-9/72, Gali no.13, Madhya Marg, Tuglakabad Extn, New Delhi-19Number of employees: 37 Staffs

As garment exports grew very substantially during the later part of 80s10, Mr Yadav found that there was a lot of business potential for finishers. He started Manish Finishers in 1991. As his business grew, he diversified to cloth fabrication in 1995 with 35 sewing machines. After initial success, he made losses and had to sell-off all his sewing machines in 2001. Since then, Mr Yadav has concentrated solely on finishing works.


Mr Yadav was not able to borrow from banks as they required collateral security. As Satin did not place a collateral requirement, he could borrow from the MFI.

Loans taken

Mr Yadav is presently a second cycle borrower of Satin. He

10India’s Garment Exports, Somnath Chatterjee and Rakesh Mohan, Economic and Political Weekly, Vol. 28, No. 35 (Aug. 28, 1993)

has successfully repaid his first cycle loan of Rs 100,000 and had an outstanding of Rs 39,912 against his second cycle loan as on 31 October 2009. The following table presents the details of the loans he has taken:

He has utilized part of the loan in purchasing a diesel boiler and tables, and part of the money in meeting his working capital needs. Given that finishers have to keep salaried staff, and the business production and credit cycle can stretch up-to three months, the loan ensured that Mr Yadav could retain his staff and process orders.

Finishing and packing

Loan repayment

Mr Yadav could not pay back his loan strictly according to his repayment schedule; still, he was able to pay back the entire loan amount in a period of nine months. Also, while his second cycle loan showed an overdue on 31 October 2009, he was confident that he will be able to pay back the entire loan amount on time.


Date of Finance Rate of Interest (%) Loan amount (in Rs)


14-May-08 27-May-08 18.04 100,000 9-Jun-0831-Jan-09 10-Feb-09 21.34 100,000 26-Feb-09

1st cycle loan Amount due 30 June 09 (Rs) Amount paid (Rs)Total 126,280 126,2802nd cycle loan Amount due 31 October 09 (Rs) Amount paid (Rs)Total 90,664 72,911

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Manish enterprise through the loan period

Mr Yadav’s business has gained significantly from the loans. With the additional boiler he has been able to service more than double the orders as compared to the past. He feels that his monthly profits have surged by more than 250%. While he has not hired many new employees, he has been able to better utilize his existing employees.

The following table provides a comparison of his pre first cycle loan status (pre-loan) and status as on 31 October 2009 (post loan):

Mr Yadav is planning to take up cloth fabrication again as he feels he now has adequate market knowledge. Adding a fabrication department would allow him to service cut-to-pack orders and result in even higher revenues.

Particulars Pre loans* Post loans**Buyers 3 3Staff 35 37Boilers 1 2Monthly average sales revenue (Rs) 70,000 250,000Average monthly profit (Rs) 21,000 75,000



9.5 Libaas home furnishing

Background

Mr Shamshad Khan is a first generation entrepreneur. His father works in the capacity of General Manager in an export house. Shamshad himself worked as a marketing manager in an export house after completing his education. During his tenure as a marketing manager from 1999 to 2006, he learnt the nuances of trade and realized that the garment industry had great potential. He also observed that fabricators were not able to extract their due rates from the exporters because of a lack of education, negotiation skills and professionalism. He acquired the ambition of becoming an exporter himself someday.

Name: Libas Home FurnishingPromoter: Mr Shamshad KhanAddress: 477/A1, Shivdurga Vihar, Lakkarpur, Prahalladpur, New DelhiNumber of employees: 35 skilled workers and 5 staffs

In the year 2006, Shamshad started his own stitching unit, with capital supports from his family as well as his own savings. He started his enterprise with 30 stitching machines, out of which 10 were local machines while 20 were imported machines. He also purchased two overlocks, one cutting machine and one generator of 12kv. He employed two masters for designing, sampling and cutting of garments, one helper and one checker. He employs skilled tailors on a contractual basis, depending on the volume of the orders.

Enterprise

Libaas has been getting good orders from exporters as Shamshad has linkages with them. As is the norm in the industry, exporters (buyers) provide the fabric to the enterprise and the sample of the order. They fix a rate for the garment, and give the order to the enterprise. The enterprise has to bear the production cost of the garment along with the raw material cost.

After completion of the order, enterprises raise the bills to the buyer and get the payment. Usually enterprises get the payment in a month period but time may also increase. So usually it takes 15-45 days for payments to be received after the bills have been raised. An enterprise like Libaas may have to manage a minimum of 3 months of expenses before they get the payment.

Libaas home furnishing also provides finishing work on the garment. Finishing work includes, thread cutting, buttoning, checking of samples, ironing and packing of the garment. Enterprise procures additional materials such as buttons from the local market on cash basis.

Opportunities

While Shamshad has a vision to become an exporter but he is also realistic in his expectations. He knows that, to be an exporter, he will need to have a high amount of cash to cover working capital requirements. As he did not have the requisite cash, he decided to start with a fabrication unit. The working capital needs in such units are comparatively lower.

Constraints

• Thoughhisunitrequireslessworkingcapital,hestillhad to manage it through loans from the informal market and pay very high interest rates.

• Initiallytheenterprisewasgettingordersforfabrication, but he was not able to make inroads into big brands exporter, who used to pay well. This was due to the fact that, these brands were interested in giving orders to those enterprises who could give them one point service i.e. stitching and finishing both, to save the cost. Due to this reason enterprise was missing out on lucrative, high value orders.

• Tenofthesewingmachinesintheenterpriseswerelocal made machines that were not favored by the buyers.

Considering the abovementioned bottlenecks, Shamshad wanted to shift to cut to pack services. But he was finding it difficult to raise funds for the expansion. Being an unregistered enterprise was also not helping the matter, as banks were unwilling to lend to him. He could not fall back on the family members as they had already supported him. The informal credit market provided an option, however, the cost of such credit was exorbitantly high.

Project loan

While Shamshad was running around for funds, he came to know about the pilot project from another fabricator. He came to know that SIDBI was offering loans to microenterprises without any collateral. Shamshad visited the Okhla office of SIDBI and presented his requirements. He asked for a loan of Rs 700,000 but the bank officials explained to him that he could get a maximum loan of Rs 500,000. The positive response from the bank surprised

him as his previous experience with banks had been disappointing. Shamshad applied for a loan of Rs 500,000 – Rs 400,000 for the purchase of machines Rs 100,000 for working capital expenses. To fulfill the documentation requirement of SIDBI, GTZ provided the services of a CA to Shamshad. His application was approved by the Bank and the loan was disbursed to him.

Loan utilization

Shamshad sold all his local machines and generator and purchased 15 Japanese machines and one new generator of 18kv. He also purchased a boiler with two tables which additionally allows him to provide finishing services to the exporters. In the meantime, he also shifted his factory to a larger place capable of housing his stitching and finishing unit. He refurbished the enterprise to make it presentable to buyers.

Perceived benefits

While only a few months have passed after Shamshad got the loan from SIDBI, yet there are visible signs of improvement.

• Hehasalreadygot3ordersthathewouldhavelostifhe did not have the finishing unit.

• HehadalreadycompletedordersworthRs13lakhstill 15 December 2009, for the current year, and he expects to double his revenue through stitching.

• Heexpectsthatonfullpotentialhewillbeabletoachieve a turnover of around Rs 50 lakhs per annum.

• Heplanstogethimselfregistered.

• Healsoplanstogethisenterpriseauditedforthiscurrent year.

Despite raising capacity of his enterprise, Shamshad is facing the problem of accessing sufficient working capital. That is one challenge he is hoping to overcome soon.

Loan From Loan Amount Purpose of Loan Activity before the Loan

Present Activity

SIDBI Rs 500,000 in September 2009

Rs 400,000 for Machine Purchase, Rs 100,000 for working capital

Stitching Cut to Pack

Satin Creditcare Network Limited (Satin) was formed in 1990 as a non-banking finance company (NBFC) with the simple concept ofproviding individual loans to urban shopkeepers to purchase generators for their businesses. Since that time, the company has shifted its focus as a microfinance institution.

Satin provides loans to both the urban and rural poor to meet their productive requirements in starting new businesses or growing existing businesses. The company’s urban microfinance operation is based on the individual/mutual-liability model and serves clients throughout Delhi, Uttar Pradesh, Punjab Haryana, Rajasthan and Uttarakhand. The rural microfinance operation is based on the Nobel-prize winning Grameen Bank, Joint Liability Group (JLG) model and currently operates in the state of Uttar Pradesh, Rajasthan and Madhya Pradesh.

Mr H P SinghChairman and Managing DirectorSatin Creditcare Network LimitedWebsite: http://www.satincreditcare.com

M2i Consulting was set up in March 2006 with the mission of catalyzing the growth of microfinance by bringing in professionalism in the microfinance and microenterprise sector. To achieve this mission, M2i endeavours to work with start-up as well as established organizations, entrepreneurs, investors and donors and provide services, which facilitate integration of microfinance with the mainstream economy.

M2i brings in the most recent applications of modern management principles, by continuously assimilating knowledge from diverse fields and building on the body of knowledge within the microfinance domain. M2i uses rigorous analysis to solve complex management problems, while maintaining absolute clarity in the recommendations it makes.

Mr AtulPartner, Prime M2i Consulting Pvt LtdWebsite: http://www.m2iconsulting.com

Satin and M2i Consulting

SIDBI, set up on April 2, 1990 under an Act of Indian Parliament, functions as the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and Co-ordination of the functions of the institutions engaged in similar activities. Financial support is provided by way of (a) refinance to eligible Primary Lending Institutions (PLIs) such as banks, State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs), Micro Finance Institutions (MFIs) etc. for onward lending to MSMEs and (b) direct assistance to MSMEs which is channelised through the Bank’s network of 103 branch offices reaching out to more than 600 MSME clusters.

The micro credit programme of SIDBI is designed with the objective of reaching financial services to the unbanked segment of the population as a step towards financial inclusion. The Bank provides a complete range of financial and non-financial services such as loan funds, grant support, equity and institution building support to the retailing MFIs so as to facilitate their development into financially sustainable entities, besides developing a network of service providers for the sector. Till December 31, 2009, the cumulative sanction and disbursements had surpassed Rs. 6400 crore and Rs.4800 crore, respectively. SIDBI’s micro credit assistance through the MFI route has benefited more than 200 lakh persons in the rural areas, mostly women. To further upscale the micro finance operations, the Bank has opened 7 dedicated microfinance branches in Lucknow, Hyderabad, Chennai, Bangalore, Kolkata, Bhubaneswar and Guwahati to deliver micro finance services through intermediaries in a timely and customer-friendly manner.

The credit operations of SIDBI are supplemented with Promotional & Developmental (P&D) activities, which are designed to support enterprise creation in the MSME sector and strengthening of the existing MSMEs to face the emerging challenges of growing globalisation and increasing competition. SIDBI has also been constantly working on building various institutional mechanisms to cater to the emerging needs of the MSME sector and has set-up various subsidiaries / associates which include SIDBI Venture Capital Ltd. (SVCL) for venture capital, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for collateral free loans , SME Rating Agency of India Ltd. (SMERA) for credit rating, India SME Technology Services Limited (ISTSL) for technology transfer and India SME Asset Reconstruction Company Ltd. (ISARC) for Asset reconstruction.

The Small Industries Development Bank of India (SIDBI)

India has been a priority partner country of German Development Cooperation and both countries celebrated 50 years of development cooperation in 2008. Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH has been active in India on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) for almost all of this period.

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH supports the German Government in achieving its development-policy objectives. It provides viable, forward looking solutions for political, economic, ecological and social development in a globalised world.

It was established in 1975 as a company under private law by the German Federal Government. The German Federal Ministry for Economic Cooperation and Development (BMZ) is its major client. The company also operates on behalf of other German ministries, the governments of other countries and international clients, such as the European Commission, the United Nations and the World Bank, as well as on behalf of private enterprises.

To address India’s development priority of sustainable and inclusive growth, GTZ’s joint efforts with the partners in India currently focus on the following focus areas of work:

• Energy• Sustainable Habitat and Industrial Development• Natural Resource Management• Private Sector Development• Social Protection• Financial Systems Development• HIV/AIDS-Blood Safety

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH

Partner for the Future Wordwide


Notes

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Impressum:

Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbH

German Technical Cooperation

SME Financing and Development ProjectB-5/1, Safdarjung Enclave, New Delhi – 110 029, IndiaTel: +91 11 2671 5952/ 5826Fax: +91 11 2616 6844Email: [email protected], [email protected]:www.gtz.de

AuthorPrime M2i Consulting Private Limited

Cover photographs: Avishek Sarkar

Designed and printed byEdge Communications, New Delhiemail: [email protected]

SATIN CREDITCARE NETWoRk LIMITED.5th Floor, kundan Bhawan, Azadpur Commercial Complex,Azadpur Delhi- 110033Office Number: 011-47545000Fax: 91-11-27671003E-MAIL: [email protected]

SMALL INDuSTRIES DEvELoPMENT BANk oF INDIAProject Management DivisionVideocon Tower, Ground FloorE-1, Rani Jhansi Road, Jhandewalan ExtensionNew Delhi-110055Tel: 011 - 23682474-77E-mail: [email protected]

Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbH

German Technical Cooperation

SME Financing and Development ProjectB-5/1, Safdarjung Enclave, New Delhi – 110 029, IndiaTel: +91 11 2671 5952/ 5826Fax: +91 11 2616 6844Email: [email protected], [email protected]:www.gtz.de

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