Promoting alternate platforms of MSME Finance

The Small and Medium Enterprise sector (SME) contributes to more than 45% of the GDP besides 45% to the total manufacturing output and 40% to the exports. The Annual Repo of Ministry of MSME 2015-16 states that MSME require about INR 44 trillion of which 35 trillion is debt demand and 9 trillion for equity. The 4th All Indian survey of MSME’s indicates about 90% of their financial requirements is met through informal sources. Public sector reach and access to finance for MSME is limited..  Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by Govt. of India and SIDBI, was expected to drive credit based on the viability of the project rather than on collateral. However, data indicates that less than 6% of the loans were disbursed to start-ups and Small and tiny businesses. Many a needy entrepreneurs could not access the credit as on several parameters such as DSCR, leverage, etc, their business plans fell short of the traditional lending norms.

Government’s latest initiative like Startup India and Standup India need more pronounced support for IP, scaling up and capacity building. Amongst alternate platforms of SME finance, Peer-to-peer (P2P) lending and merchant finance show huge promise. Peer to peer lending platforms have succeeded growing rapidly by using technologies, eliminating the middlemen and allowing the borrowers and lenders to communicate directly. P2P institutions adopt an online reverse auction approach.  Most marketplace lending platforms do not require collateral which is a boon especially for service-oriented businesses. SMEs can also benefit from the fact that their performance on these platforms can be driven by various non-conventional data points. What regulatory changes are required to drive development of P2P lending. US administration under President Obama has implemented Regulation A+ route for crowdfunding. Regulation A+ provides an exemption for US and Canadian issuers seeking up to USD 50 Million in a 12-month period from filing reports with the SEC. Since these securities are unrestricted they can be traded in the secondary market. Listing on India’s SME Exchange would cost about 0.49 per cent of the total offered amount which is one of the cheapest for SME Exchanges worldwide. It is likely that an Indian adoption of Regulation A+ could prove to be even more economical for SMEs. To encourage P2P lending spread governments across the globe are pursuing innovative changes on personal tax front. UK laws now allow earnings to be treated as personal savings allowance and exemption from tax up to GBP 1000 for basic tax payers and GBP 500 for higher tax payers is allowed. This allows them to net off losses from loans if any.

E-commerce giants in India such as Amazon, Flipkart, ShopClues and so on have been aiming at expanding their sellers base by providing a range of services, including financial support. SMEs who supply for e-commerce platforms can now receive loans for working capital requirements either from financial institutions or sometimes from the e-commerce platform itself. To promote India GI and cultural products government can consider special purpose programs by rerouting marketing subsidies offered at various level to all major platforms. Such an initiative would help increase the reach and profitability of many India centric product companies.

Aishwarya Nair, BCom (Professional), CIMA, Junior Consultant (Finance)

New defence policy long on getting production in place, short on innovation

Government policies can drive a substantial impact on an industry growth, more so if government happens to the buyer. Defence industry is peculiar because in many countries, government is the major supporter, manufacturer and end user. Mr Manohar Parikkar, Defence Minister on 28th March 2016 announced new defence procurement policy (DPP-2016) at the DEFEXPO happening at Goa. The core of the new policy is to boost home grown defence industry and further Prime Minister’s “Make in India” initiative. The focus of new defence procurement policy is heavily on promoting India designed and made weapon systems (IDDM). The policy has clear directions on the procurement preferences: India designed and manufacture (IDDM) weapon systems would get the highest priority compared to license manufacturing or global import. While the policy has announced local content for qualifications, lets understand what DPP-2016 is attempting to do.

First, it is trying to address the legacy issue the defence industry faces, monopolistic defence public sector units (DPSU). Services (Army, Navy & Air) have long suffered inordinate delays, corruption, and misplaced engineering and R&D focus.  In the last few years, the DPSU have been flushed with so many orders that one of the PSU head jokingly said they could completely lay off their marketing team for next decade.   Defence ministry recognizes the need to bring in dedicated partners to de-risk delays in production of imported systems and subsystems. Under DPP-2016, defence ministry can seek private or DPSU units compete for weapon system design and development. Defence Ministry can select two “development agencies (DA)”, will subsidize 90% of the agencies weapons development cost and assure the DA of major share of the production order.  Pursuing this strategy is not going to create large defence innovation engines, but contractors like Raytheon or Northrop Grumman to ensure production schedules are met.  DA is not a silver bullet to drive innovation or “Startup India” program of Prime Minister, but a well thought out and practical policy to create private facilities.  DA’s may work on technologies, systems and subsystems from abroad, bring in system integration efficiencies. The game plan is to excite local players like Tata, Reliance, Mahindra’s to partner, build large facilities and develop local system integration capabilities. In medium run, this policy may have a spill over effect on Aerospace and Cryogenic Industry’s manufacturing requirement and allied services. The new policy envisages more industry involvement right from feasibility stage for major weapon buys and service requirements. This should eliminate the frictions that arise in design-delivery cycle as requirement gathering, standards and integration are detailed and purposeful.  We will see better design coordination in large complex projects like IFCOS and others. Hopefully, we will not see the lack of ownership and creep in multi-agency defence projects.

DPP-2016 has clearly failed how it would support innovation and MSME development. Traditionally innovation in defence industry has come from multi-party development involving government, large contractors and research institutes. In recent years, several disruptive technology innovations have emerged from rank outsiders as the demarcation between military and civilian applications is eroding.   SME play critical role in not only developing new technology, but also develop subsystem components where OEM support ceases or design appropriate digital replacements for analog components. Antiquated procurement procedures with norms such as minimum number of operative years, or capital adequacy norms and L1 pricing discourage SME’s. Defence programs can only be successful if the defence ministry shift away from tender based to need based procurement wherein the Services (Army, Navy and Air) and DRDO labs can procure novel technologies.  Most MSME operating in the sector are underinvested and need flow of cash to sustain. Defence ministry should consider support to private sector through targeted R&D incentives, access to low cost capital, priority lending and increased slab of CGSTME Scheme.  DPP-2016 is a definitive program to boost home grown defence industry and remains a work-in-programs. Hopefully when it is reviewed after six months the new DPP-2016 will address all concern areas and boost India’s defence industry growth.

Dr TR Madan Mohan is managing partner of Browne & Mohan. He is associated with several MSME defence companies advising them on scaling up, growth and global expansion.

Strengthen M&E to gain from efficiency and impact of Government projects

Across the world, governments are the major sponsors of multi-year multi-million projects. Most government projects, whether infrastructure like hospitals or roads or developmental like vaccination or HIV intervention program often do have well defined project development objectives (PDO) and well supported investments from lending agencies such as World Bank or Asian Development Bank.  Many of these projects expect to gain from improved processes and capacity building at various governmental units.  In several cases the lending organizations tie the loan component to specific areas of improvement termed tied loans. In cases where the institutional arrangements are satisfactory, lending organizations allow block grants that may be used at the discretion of the users and the government agencies. The assumption in block grants is that consumption units can prioritize their areas of improvement, plan and allocate funds in line with their prioritization.  Despite noble intentions, many lending organizations realize the funds are misused. In China World bank funds were diverted to speculative investments. Uganda and Zambia governments reported misuse of debt-relief funds to non-scheme areas. Scams in construction, animal welfare, healthcare and other schemes in India and the subcontinent are clear indication to the misuse of development loan funds.  Administrative reforms projects, including judiciary have seen large scale misuse of funds from Philippines, Russia, Sri Lanka, Ukraine and Greece.

What is the weak link in the execution of government sponsored projects. Our analysis of several World bank lent projects reveal absence of a tight leash on the PDO, activities and outcomes is the real culprit. While World Bank and other lending organizations insist on describing in detail the project context, developmental objectives, design, key indicators , safeguards and implementations, many a slip happens between the project  fund allocation and implementations. It is not uncommon to see many department heads putting their heads together in stitching a formidable Implementation completion report (ICR) to the lending agencies for their approval or extensions. While World Bank and other lending organizations insist on using result based management framework to capture YoY outputs, Outcomes and Impact, many a gaps exist in the government organization and limited knowledge of junior consultants sent by lending organizations. No formal analysis and alignment of outcomes and secondary effects are planned ahead by the implementation agency. The result, many assets and works get completed without significant long-term effect.  Lending organizations must insist on a strong M&E organization within the government departments. Formal and up-to-date data analysis must be conducted before release of YoY grants. Half yearly reports detailing the nature of assets being created or programs planned is a good indicator of what would be the expected outcomes and impact of the investments. World Bank consultants must seek an intermediate completion report with sufficient use of latest ICT technologies including images, and videos.  New age institutional lending requires lending organizations deploying more investments in M&E to reduce fiduciary compliance.

Program for results” success depends on strengthening M&E function in donor countries

Outcomes and their quality of government projects is a hotly contested area. Many of the government projects suffer from overrun, inconsistent standards of measurement of evaluation, planning paralysis, greater reliance on ad hoc experts committee with little ownership and weak stake holder consultation. Development agencies including lending banks have embarked upon “program for results” approach with an objective of greater ownership and management by borrowing governments. The objective is quite laudable but comes with lots of assumptions and ignores ground level happening.

In a recent meeting of government officials involved in a project was an eye opener. The government agency had received a development loan and pursued infrastructure, policy and procedural changes. Rural roads have been tarred or cemented, self-income generating buildings such as shops have been constructed, primary schools equipped with better toilets and cultural infrastructure built across the nooks of the state. What was appalling was the governance and project management was weak in initial years. Transfer of a technocrat to head the division to manage the outcomes after two years of initiation of program set the ball rolling. Post completion of the project period the bureaucracy and the expert team guiding the program were caught in a peculiar problem. The lending organization was ready to roll out the next phase of the financing and the state machinery had no clue how to present the achievements in completion reports. Program for results is a results-based financing instrument, tied to prior agreed development indictors.  These indicators are identified by the borrowing agency and approved by the lender and often the indicators get changed after approval.  Another challenge is the borrowing agencies present a high level roll out plan and do not detail the low level indicators clearly.

A deeper discussion with the concerned officers revealed where the challenge was. Monitoring and evaluation is the key to successful implementation of any government projects. These projects, often spanning multi-years requires management of multiple organs of government machinery simultaneously. Program owners, are often senior bureaucrats who also carry additional burden of managing the day-to-day tasks and a program within its life-cycle can witness transfers or retirement of senior administrators. M&E is often relegated to a data management role, often managing post-hoc information. Project approvals, sequencing of tasks and projects and quality of outcomes is not a proactive function. While per functionary log frames or resultant frameworks are created, annual work plans (RAWB) are not detailed, resulting in diffused ownership and outcomes.  The lending agency’s officers need to clearly define the outputs, outcomes and impacts of the program. The government officials need to align their tasks and goals with the results.

Dr TR Madan Mohan