Keep your banker in the loop

Dinesh Bhagat, owner of an Ahmedabad-based textile mill, suffered a temporary financial setback when a client cancelled a large order at the eleventh hour.

Since he desperately needed working capital to get things moving again, Dinesh approached his bank. To his shock, the bank manager said that since Dinesh already had a substantial loan obligation pending, the bank could not extend any further credit. Dinesh pointed out that he had been servicing the earlier loan in a timely manner. However, he was unable to persuade the bank manager to change his mind. Unfair? Perhaps. But it’s a common story.

Like Dinesh, promoters of many small and medium-sized enterprises (SMEs) complain that while banks see no harm in lending thousands of crores to a Kingfisher Airlines, they would hesitate to give a fraction of that amount to a smaller firm. Admittedly, they are right to some extent.

Despite evidence that lending to SMEs can be very profitable, bank credit to the segment isn’t growing at the rate it should. However, there is another side to the story. Banks don’t feel comfortable in lending to SMEs because the latter often see them as a necessary evil — a source of funding, nothing more.

In Dinesh’s case, while he was signing the loan instalment cheques every month, he never bothered to keep in touch with the bank. This made the manager less sympathetic to the ups and downs in Dinesh’s business.

The nature of the SME-bank relationship has to change if the sector has to move forward. SMEs need to treat banks as partners and develop a healthy relationship with them based on transparency and mutual trust. This will serve both well in the long run.

Bridge funding gap

The micro, small and medium enterprise (MSME) sector, which contributes 8 per cent of the country’s GDP, plays a vital role in job generation. Thus, greater allocation of public and private funds to this segment is critical.

As per an estimate of the Ministry of MSME, the sector needs to grow at 14-16 per cent (as opposed to the present rate of 12-13 per cent), during the Twelfth Five Year Plan period (2012-17), to create 100 million manufacturing sector jobs in the next decade. Therefore, the Ministry recommended a budgetary allocation of around Rs 20,000 crore to the sector under the credit vertical of various schemes.

The banking sector must now follow suit and meet its MSME lending targets. It’s not as if funding them is a risky proposition — quite the opposite, actually. A recent McKinsey report says that banking revenues from MSMEs in South Asia could triple between 2010 and 2015, from $20 billion to $64 billion. Despite this, however, bank lending hasn’t kept pace with the demand in India.

While there is no magic pill to remedy this challenge, small businesses can certainly do their bit to ensure that they work together with banks to allay the common concerns of opacity in operation or ‘unorganised’ internal processes.

By addressing these concerns, they can put the bank at ease and may even find themselves having access to better terms of credit.

Banks will be much more willing to lend to businesses that involve them to a greater degree in their day-to-day operations.

Here are my five mantras for SME promoters who want to build better relationships with their banks.

5 mantras for SMEs

Share data : Small businesses are wary of sharing information, even with financial institutions. For obvious reasons, this puts the latter in a quandary. Banks have strict internal guidelines for sanctioning advances and when SMEs stonewall their efforts to get information, they find it very difficult to proceed. Sharing relevant financial or sales information will help the banker to have a more accurate picture of where the firm stands and what kind of products might suit its needs.

This doesn’t mean that the SME has to give out all its confidential information. Being transparent is the first step towards creating a long-term sustainable relationship with the bank.

Maintain proper accounts : Another challenge faced by banks is that of inaccurate or dubious accounting practices followed by some small businesses. Sara Mathew (name changed), a Bangalore-based techie, ran a small but successful software firm.

However, she didn’t see the point of hiring a professional accountant, with the result that her books were, at best, haphazard. With no proper statements of accounts, she had to run from pillar to post to raise funds.

To inspire confidence in the bank, an SME should put in place formal accounting processes and software accepted by the industry. This is important even if it doesn’t plan to access bank funding immediately. The more streamlined and transparent the company’s books, the easier it is for a bank to lend to it.

Conversely, SMEs that try to hide or report inaccurate financial information will soon find themselves shunned by all and sundry.

Be open to advice : It may be great to have clarity on what exactly you want from the bank.

However, there are certain areas where you can learn something new by listening to the relationship manager. For example, you may be seeking credit when all you need is an overdraft facility. Working with the bank is not a one-way street; mutually beneficially solutions emerge when both parties work together with open minds.

Save for a rainy day : In this challenging business environment, no business is immune to shocks. Banks like to deal with companies that have prudent business practices to tide them over lean times.

A reserve or escrow account helps deal with sudden demands on your cash flow — such as loan instalments, sudden changes in taxation, receivables not coming in on time, etc. A company that takes these into account creates the impression of being a reliable borrower.

Stay in touch : Don’t underestimate the power of staying in touch with your bank on a regular basis. Keep the bank informed about the trends in your business, opportunities you are targeting and the challenges you face.

Bring bank officials to your premises and explain how your business works. Keep them in the loop whenever your organisation undergoes any major change, such as expansion, acquisition, tie-ups, etc.

This ensures that even if you hit a rough patch tomorrow, the bank is likely to be more accommodating and may even offer convenient terms to service your loan.

(The author is Senior Director, CRISIL SME Ratings.)

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