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VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 129
Case Analysis I
Reena Banerjee
DGM-RBI
e-mail: reenabanerjee@rbi.org.in
On the surface, the case deals with the challenges Electronica Finance Limited
(EFL), an NBFC-AFC, faces in achieving its twin goals of high growth target
and becoming a one-stop-shop extending all the necessary financial products and
services to the MSME sector. In the process, it offers an insight into the factors ham-
pering the growth of the MSME sector, including the inadequacies in the existing
credit delivery mechanism of banks, the lack of technical knowhow, the gap be-
tween formulation and implementation of government schemes for economic growth,
and the value that can be created by a successful differentiation strategy.
Case Overview
EFL, an asset finance company (AFC), is a group company of a manufacturing com-
pany, Electronica Machine Tools Limited (EMTL). Set up by two engineering gradu-
ates in 1973, initially for manufacturing machine tools, EMTL later began supplying
both imported and other machines to its target segment of MSME. It has grown to be
a Rs. 4 billion company. EFL (originally Electronica Leasing & Finance Ltd) was
initially set up by the promoters in 1990 with the objectives of getting more business
for the machines manufactured/traded by EMTL and to tap the huge MSME fi-
nance market. EFL played it safe by initially offering only equipment leasing (EL)
and hire purchase services to its customers, but shifted over time to offer term loans
(which have now become the largest earner, accounting for 80% of the income) and
fee-based services like corporate advisory services, loan syndication, and distribu-
tion of insurance products.
The company achieved a steady growth with profits and attained an asset size of Rs.
100 crore, making it a systemically important NBFC (NBFC-ND-SI) as per RBI norms.
The company feels it has gained sufficient experience in the field, and has set a spe-
cific goal of attaining ten-fold growth in the volume of business and fifteen-fold
growth in the number of customers. It also wishes to make available the incentives
and concessions under various government schemes for the MSMEs and all finan-
cial products including non-fund-based businesses like bank guarantee and letter of
Electronica Finance Limited:
Designing the Future of Micro,
Small, and Medium Enterprises
M Manickaraj
The current issue of Vikalpa
has published a case titled,
Electronica Finance
Limited: Designing the
Future of Micro, Small, and
Medium Enterprises
by M Manickaraj.
This Diagnoses features
analyses of the Case by
Reena Banerjee,
Anjan Roy, V Mariappan,
and Ram Jass Yadav
presents analyses of the
management case by
academicians and practitioners
DIAGNOSES
130
credit to MSMEs, under a single window.
Key Issues
The company wants to increase both its overall busi-
ness growth and also the number of customers and has
set specific quantitative targets in this respect. Achiev-
ing both these goals would require a long-term strategy
not just of increasing economic value of customer rela-
tionship and positioning itself effectively in the MSME
market, but also of addressing issues of convincing banks
of its value as a channel partner and persuading regula-
tors of the validity of regulatory approvals.
From the beginning, the promoters have had a very co-
herent and unified vision of their objectives which they
had articulated in their vision statement as “Building
the SME — Driving the Economy” and also adopted a
long-term strategy for achieving it. They identified the
MSME market as the target market, in view of its growth
potential, and for the fact that it was an underserved
market not just in terms of finance but also in terms of
technical and other advisory support.
The MSME market is a diversified one as there are
around 26.1 million MSME units as per the quick esti-
mates of the 4th Census. They are in a variety of busi-
nesses. MSMEs contribute to 45 per cent of the country’s
industrial output and 40 per cent of the exports, and there
are expectations that their performance would be cru-
cial in helping the Indian economy achieve a high growth
trajectory. Traditionally, they have grown faster than the
other sectors of the economy. However, despite the fact
that lending to MSMEs forms part of the priority sector
targets, only 4.55 per cent of the MSMEs in India have
access to institutional credit. Thus this sector is severely
underfinanced. The main reasons why banks are not
interested in financing MSMEs are lack of understand-
ing of the market, lack of sound risk assessment tools,
very high perceived risk, high transaction cost, and avail-
ability of other more attractive lending avenues like
housing loans, personal loans, corporate credit, infra-
structure finance, exports, etc. The fact that MSMEs are
not seen as an attractive business market by other fin-
anciers has helped EFL to position itself as a financier
for this sector. The sector lacks access to formal credit
sources, not just banks but even other NBFCs.
The strategy adopted by the promoters has been ex-
tremely successful from the beginning, not just in this
company but also in the original parent company, EMTL.
The promoters had the technical knowledge but not the
capital to manufacture machinery. They played it safe
by starting small, initially doing job work, and gradu-
ally getting into manufacturing of machinery. They were
quick to identify an unfulfilled need arising from the
fact that the entrepreneurs that consisted of their target
borrowers did not have knowledge, skill, and time to
either identify the kind of machinery they needed or
fulfill the formalities involved in importing machines.
EMTL, therefore, started trading in imported machines
and later machines manufactured by other companies
in India mainly for MSMEs. This strategy was extremely
successful for EMTL. The promoters then addressed
another need of their target market, viz., lack of finance,
and set up EFL for this purpose. It was envisaged that
the finance provided by EFL would not only increase
EMTL’s sales but also find other customers. The pro-
moters continued the same strategy which had been so
successful in EMTL — though their long-term goal was
extending finance to MSMEs, they initially started by
offering leasing and hire purchase for the purchase of
machine tools only to business units in very few sectors
like plastics and auto components. Over time, they di-
versified both the sectoral and product portfolios and
also began to finance a wider mix of assets.
The company is constantly monitoring its product of-
ferings and reacts very swiftly to market signals. It made
a foray into working capital financing but since this did
not prove profitable, it did not continue in this line. Simi-
larly, it offered bill discounting services but has started
reconsidering this option as that too was not successful.
Due to the recent withdrawal of government concessions
to lease finance companies and the sales tax/value added
tax (VAT) and service tax, EFL has also phased out its
leasing business completely over the last three years and
is also reducing its HP business (previously a major
earner) in states where sales tax and service tax on as-
sets sold under hire purchase is prohibitive.
The management has continued to identify business
opportunities and sub-target markets within the over-
all sector, e.g., though they first financed a few sectors
like plastics and auto components, they did not stop
there. They identified a business opportunity in the phe-
nomenal growth of the Indian housing sector which led
to a demand for ready-made household and office fur-
DIAGNOSES
VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 131
niture, and thereby the proliferation of small woodwork
units promoted by the carpenter-turned entrepreneurs
manufacturing traditional and modern furniture. EFL
has found this sector as an emerging one and has started
financing them since very recently. The housing sector
boom has also created a huge demand for construction
equipments. Accordingly, EFL has started providing fi-
nance for purchase of construction equipments like earth
movers and concrete mixers. Thus, even though the auto
sector was the worst hit by the recent recession, this did
not affect the company.
The company has consciously attempted to create a cor-
porate culture which will promote its goals. It remains a
closely-held one owned by the promoters and their rela-
tives with the three promoters playing active role.
Though the managing directors’ post has dynastic con-
notations, the present incumbent being the daughter of
the promoter and the previous MD, is a qualified pro-
fessional with a post-graduate in information technol-
ogy and training in leadership and business
management from the US, who has worked her way up
in the company hierarchy during the last fifteen years.
Despite the close involvement of the promoters, they
have adhered to corporate governance inasmuch as the
Board consists of two independent non-executive direc-
tors also. In addition, the Board has constituted sub-com-
mittees like Asset Liability Management Committee,
Risk Management Committee, and Investment/Demand
and Call Loan Policies Committee to look after the policy
and strategic issues.
Clarity has been maintained in the functional set up in-
asmuch as the organization is divided into four differ-
ent functional departments, viz., operations, marketing,
finance and accounting, and recovery.
The company has a very detailed and thorough process
of credit appraisal and sanction and post-disbursement
credit which has led to a very low level of NPAs. De-
spite the fact that EFL feels that the issue with its bor-
rower segment is not cost of credit but availability of
credit, it has not succumbed to the temptation of fixing
high interest rates. Even though the rate of interest
charged by EFL is higher than the rates charged by
banks, absence of other incidental charges like auditor’s
fees for valuation certificate and legal charges and docu-
mentation fees makes it comparable with that of com-
mercial banks. Other factors which contribute to making
it a preferred credit source vis-a-vis banks include the
collateral-free lending, which makes the loan decision
process of EFL much simpler and therefore faster as com-
pared to banks.
EFL’s management believes in ethics and values and has
set its corporate philosophy as ‘growth through quality
and productivity.’ It recognizes the impact of employee
satisfaction on productivity and attempts to ensure both
by maintaining good relationship with employees, de-
veloping skills and capabilities by training, and con-
sciously avoiding putting pressure on employees. The
success of their human relationship strategy is evident
in the low attrition rate and high productivity. It carries
this corporate philosophy further in dealings not just
with employees but also with other stakeholders such
as customers, and in fact, attributes its growth despite
the economic crisis to its approach to customers.
The company’s funding sources are also stable as it has
consciously created value through plough back of earn-
ings, leading to a high capital adequacy ratio. Credit from
banks is the main source of funds for the company which
accounts for about 30 per cent of its total liabilities. Banks
are benefitted as credit to EFL counts towards the prior-
ity sector credit targets. EFL has also obtained a credit
rating from ICRA Limited indicating moderate to high
credit quality, to help it get market borrowings like de-
bentures at a cheaper cost.
Recommendations
The conscious strategies of cautious growth, identifica-
tion of a niche market, creation of a corporate culture
which ensures employee satisfaction while providing
customer value, and continuous identification of oppor-
tunities in expanding markets adopted by the company
have so far been very successful. Continuation of the
same set of strategies would help the company achieve
its growth targets. Though the company would need to
expand its operations, including creating required in-
frastructure, training employees, and expanding its
branch network, these requirements do not appear to
be problematic, and would in any case be a logical pro-
gression of its growth now. However, there are issues
related to cost of funds for expansion of the loan portfo-
lio and breach of RBI exposure norms which, according
to the company, have deprived them of valued custom-
ers.
132
As the company itself has stated, cost of funds is not as
much an issue for borrowers as availability of funds. This
is evidenced from the fact that though bank credit is
much cheaper, it is not the preferred source of funds for
borrowers. Nevertheless it is an issue. EFL’s arguments
that they are a channel partner and not the end user of
bank funds, and further that as they are lending to MSMEs,
they should be provided funds at concessional rates have
not been successful. Accessing bank funds also adds to
intermediation cost. Instead the company could consider
other funding options such as securitization of its loan
portfolio, accessing the market through issue of deben-
tures, etc. It could also identify banks that are more ag-
gressive in expanding their loan portfolios or that have
identified this sector as a growth opportunity and try to
persuade them of the benefits of such lending, as all
banks do not have a similar approach to financing.
Regarding the credit concentration norms which, the
company feels, hamper lending, RBI norms have been
put in place to avoid concentration of risk on single/
group borrowers. EFL’s strategy so far illustrates its risk-
averse nature and therefore it may not itself like to breach
these norms. Further, credit concentration norms are a
prudential regulatory requirement. If the company feels
this to be an impediment to growth, it would have to
increase its capital and reserves so that it increases its
single/group borrower limits.
EFL should also set specific year on year targets based
on past trends. It must analyse the reasons why work-
ing capital finance and bill discounting have not been
successful. However, in its expansion strategy, it should
avoid the danger of shedding its risk-averse strategy in
favour of aggressive lending which might compromise
credit quality, and also would be contradictory to its
well-established corporate culture.
In view of the growing MSME segment, it does not ap-
pear improbable that EFL will increase its growth ten-fold.
Attainment of EFL’s goal of providing all services un-
der a single window is more challenging as it requires
obtaining of regulatory approvals, and convincing banks
and government agencies of the merits of such partner-
ship. Regarding providing all relevant services under a
single window the company should first identify the
kind of services that would be required and put in place
the infrastructure to deal with this. It would need to find
partners like SIDBI with whom tie-ups could take place.
EFL should identify and approach banks that have a
shortfall in attaining priority sector targets, and convince
them of the benefits of such partnership as the partner
would also participate in the benefits that would accrue
from lending to a growing sector. It would need to con-
vince regulators in concrete terms of the value addition
that would be created by its intervention which would
ultimately translate into economic growth.
Case Analysis II
Anjan Roy
Professor
National Institute of Bank Management
Pune
e-mail: aroy@nibmindia.org
The case illustrates the situation of an asset finance
company that aspires to grow and become a strong
player in the market for credit to MSE sector. The com-
pany, Electronica Finance Limited (EFL), has been star-
ted by Electronica Machine Tools Limited (EMTL), a
manufacturer of machine tools, with the purpose of fi-
nancing credit for small borrowers in related industry
sectors. Initially offering leasing and hire purchase serv-
ices, EFL has established and grown in the credit finance
market by adopting certain unconventional practices for
competing such as collateral-free lending, no third-party
guarantee, etc. Now it desires to grow ten-fold in terms
of size of assets and fifteen-fold in terms of number of
customers while delivering all financial products under
a single window to MSEs. Barriers to growth, however,
have now begun to emerge, foremostly, in the form of
capital and organizational capacity.
DIAGNOSES
VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 133
What would be the right strategy for EFL for pursuing
its ambitious growth plan? What would be the struc-
tural issues that it would have to address? These are the
likely questions that the company would be addressing
given its background and situation in the case. How-
ever, there are larger questions even beyond these. These
questions relate to the structure of lending market and
role of big versus small and specialized intermediaries.
Issues in the case are, therefore, both particular to the
company and general for the entire credit system as well.
Strategy and Structure
Small business lenders have traditionally derived their
competitive edge from their close relationship with bor-
rowers. Relationship-based lending enables lenders to
obtain information from otherwise opaque borrowers.
Lenders, therefore, are able to uniquely offer products
suited to the specific financial service needs and obtain
higher returns for their efforts. At the same time, how-
ever, lending institutions have also grown by adopting
other strategies such as transaction-based lending. Be-
cause lending to small businesses is operationally sim-
ple, lending processes are increasingly becoming proce-
dure-based and automated so as to capitalize upon vol-
ume and scale.
Till now, EFL has followed a relationship-based lend-
ing strategy. With just around 11 branches, the compa-
ny’s success in reaching out to the MSE borrowers has
been due to its in-depth understanding of the needs of
the small firms. This has been particularly so as the bor-
rower firms belong to the related industry sectors, as its
parent company EMTL. By virtue of experience and
trade relationships of the parent, EFL is well-positioned
to have the information advantage about the financial
requirements of firms in the niche sector targeted by it.
However, the focus upon such a small market segment
delimits the company’s growth prospects and it needs
to diversify into other industry sectors.
In order to grow at such rapid pace, EFL may need to
adopt the transaction-based lending strategy. Profitabil-
ity in transaction-based lending, depends heavily upon
the size of the loan portfolio. By choosing this strategy,
ramping up the loan portfolio size to achieve scale econo-
mies in regard to both cost as well as risk, will be the
key challenge for EFL. The company needs to open up a
large number of branch outlets. It needs to put in place
a retail strategy involving loan origination, appraisal,
documentation, delivery and most importantly, moni-
toring of the accounts. Decision choices need to be made
regarding the optimal asset quality for the portfolio and
pricing. Financial market instruments for securitization
might also need to be adopted to ensure strategic flex-
ibility.
EFL’s organizational structure is market-oriented and
should be able to support its expansion plans. Account
origination being pursued by field executives positions
the company well within the market. Not only are the
field executives accessible to the customers, they would
also have the information and updates on local market
about the customers, thereby creating a preliminary data
base efficiently. Appraisal and inspection by the bran-
ches further enriches the customer information as well
as embeds the ownership of the account to the branch.
This is, perhaps, the most critical pillar for relationship-
based lending. Finally, the segregation of ultimate sanc-
tion and disbursal at the Head Office creates a robust
back end to the credit decisions made by the company.
The company just needs to scale up its front and back
office lending organization to embark upon its growth
journey.
However, the weakest link in the organizational setup
seems to be the monitoring of the borrower accounts
and recovery mechanisms. Under its current strategy of
relationship-based lending, EFL minimizes risks by fi-
nancing only capital goods, obtaining security deposits,
tying up with suppliers, setting exposure limits, and
hand-holding the customers. The company is able to play
a role, via its parent EMTL, in influencing the perform-
ance and credit behaviour of the borrower firms and thus
its NPAs have been relatively lower. It has not estab-
lished a robust departmental structure for monitoring
and recovery. With increase in the number of custom-
ers, the current approach to maintaining the loan book
might be difficult. EFL needs to systematically address
this crucial function so as to manage the NPA accretion
with business growth. Developing credit risk rating
models in-house is a step in the right direction towards
adopting the transaction-based lending strategy, while
levera- ging the organizational knowledge of borrower
relationships within the company.
134
Institutional Relationships
Lending to the micro and small sector has lately emer-
ged, within the rubric of “financial inclusion,” as a mat-
ter of national concern. The effectiveness of large finan-
cial institutions, even as they tend to become larger, for
channeling credit to small enterprises has come under
question. Voices have been raised against mergers of
banks for this reason. Various other institutional forms
are now being conceptualized, such as business corre-
spondents, etc., to ensure enhanced access to credit.
In this regard, the importance of small business lenders
such as EFL and their relationship with large financing
organizations such as the banks needs to be critically
viewed here. While EFL has a good relationship with
SIDBI for refinance, it operates as a funding intermedi-
ary between other commercial banks and the customer.
There are obvious synergies in such inter-institutional
arrangements in that, the banks can provide a larger
source of funds while the company provides the needed
specialization and skill sets for addressing the needs of
the MSE sector.
However, the current structure of institutional relation-
ships does not so much suggest mutual sharing of in-
centives between institutions. Sustainability of the
business model adopted by EFL will not only depend
upon its capacity to ramp up but also its competitive-
ness with regard to interest rates. The company has been
continuously retaining substantial portion of its profits
to build a capital adequacy ratio of 26.11 per cent (against
a regulatory minimum of 12%). Despite that, both the
long- and short-term ratings indicate moderate credit
quality. Consequently, it does not enjoy any interest rate
advantage in its borrowing from banks. In turn, given
its competitive arena in the small business market where
informal sources of finance reign, the incentive to re-
duce lending rates may not be highly significant. There-
fore, even though access to finance might be improved
by such institutional arrangement, costs would continue
to come as a barrier for utilization of credit.
The arm’s length dealing between the bank and EFL fails
to address certain other issues of sustainability. It has
been debated that policies followed by commercial banks
in extending long-term credit at floating rates shift the
interest rate risk to the borrower who, due to reasons of
having much lower wherewithal of risk management,
are likely to be affected by rate fluctuations leading to
credit default. Herein, firms such as EFL play an impor-
tant role in sharing the interest rate risk with the banks.
Banks must recognize the value provided by such inter-
mediaries and duly compensate for the same. The cur-
rent bank-firm relationship is not founded upon such
vision and, therefore, its sustainability would remain a
concern.
Conclusion
EFL is poised to grow rapidly in the market for credit
to MSEs. However, the company must be extremely
cautious in charting its growth path given the choice
and constraints that it faces. Firstly, it must ensure that
its choice of strategy leverages its core capabilities and
that the chosen organizational form enables the devel-
opment of new ones. Secondly, it must seek to highlight
its role within the institutional structure of the credit
finance industry in order to obtain better terms of value.
The success of EFL is, however, not only important
for the company but also for the entire lending system
that needs to create a robust institutional network to
channe- lize credit to the micro and small sector of the
economy.
Case Analysis III
V Mariappan
Reader, Banking Technology
School of Management Studies
Pondicherry University
Puducherry
e-mail: vmarisin@yahoo.com
The case is an eye-opener for most of the commercial
banks, both traditional and new generation, and also
for other Non-Banking Finance Companies (NBFCs) in
the Indian financial system. While many financial insti-
DIAGNOSESDIAGNOSES
VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 135
tutions in the system fail to notice the vast scope of busi-
ness opportunities that exist in the neglected MSME sec-
tor despite categorizing it under priority sector financing
by Reserve Bank of India, EFL’s decision to focus on this
neglected sector demonstrates not only its courage but
also its ability to think differently and more creatively
from the rest of the players in the industry.
The case discusses the very generation of the idea of the
company to its graduation from a small leasing and hire
purchase company to a service provider in the corpo-
rate advisory, sale of insurance products etc., in a span
of 20 years of its existence. Currently, EFL is providing
hire purchase loan, term loan, bill discounting, and mi-
cro enterprise loan funded by SIDBI. Besides, the com-
pany is engaged in corporate advisory services and
insurance sales.
An intelligent entrepreneur always sees new business
scope in a crisis situation as it opens up greater business
opportunities. This helps the company not only to sur-
vive and stay in the business but also accelerate the
growth. According to C K Prahalad, one of the widely
respected management gurus of our times, “every prob-
lem opens up a number of opportunities in the growing
economy.” The birth and growth story of EMTL and EFL
vouches for this saying as both the companies are doing
good business in the neglected segment of manufactur-
ing of machine tools and financing of MSME sector re-
spectively while the mainstream machine tools compa-
nies and financial institutions failed to capitalize the op-
portunity. When most players in the financial system
considered financing MSME as highly risky, EFL spot-
ted the opportunity and ventured into the business with
little or no competition.
Unlike most financial companies, EFL was not born with
a well-planned and thought-out strategy by the promot-
ers. The case gives an impression that EFL in its current
form was not at all under consideration in the minds of
the promoters at the time of their first business venture
(EMTL) but as the business progressed, the promoters
were able to see a good scope in the so far neglected
sector and hence responded appropriately. This displays
the business scouting skills and leadership qualities of
the entrepreneurs (promoters), an important learning for
the future managers. They have also planned, designed,
and blended EFL’s business in a way as to complement
their core business of developing, manufacturing, and
marketing of electronic discharge machines, machine
cutting tools, wire cutting machines, and injection
modeling machines by providing financial assistance to
the MSME customers’ of the parent company EMTL.
This displays the strategic business diversification and
cross-selling of product strategy of the company.
Another important learning from the case is that, with
the establishment of EFL, the promoters could finely lev-
erage the already established relationship by the parent
company to benefit both the companies (EMTL and EFL)
and also the MSME borrowers (customers), thereby cre-
ating a win-win situation for both the companies and
customers.
The collaboration with SIDBI is a strategic decision by
EFL for Credit Delivery Arrangement and Micro Enter-
prise Loan as these loans are refinanced by SIDBI. This
allows EFL to increase the volume of business without
committing its own resources as these loans are refi-
nanced by SIDBI.
The registration with CIBIL is a good decision as it would
help the quality of lending and recovery. The pricing of
the products plays a vital role in selling and retaining
customers in a competitive market environment. As the
cost of loan products of EFL is comparable with the com-
mercial banks and very attractive in comparison to other
NBFCs in the country, EFL positioned its loan products
very strongly in the MSME sector with their innovative
approach to sanction and disbursement of loan amount.
The added advantage for the borrower from EFL is the
absence of collateral security and non-insistence of third-
party guarantee which is generally considered as a bot-
tleneck in MSME financing. All these unique features of
EFL’s MSME products position itself at a very different
level in the market. It also challenges the traditional
wisdom that supports the security backed loans and
advances.
Though the RBI norms look as a hindrance to the com-
pany’s growth of volume of business due to the expo-
sure norm prescriptions as stated by the company
executive, it acts as a hump in the flow of funds into a
few portfolios and individuals. This helps to mitigate
the concentration risk and acts as a deterrent against
business failures. Remember, these kinds of proactive
measures only safeguarded the Indian financial system
and the institutions from the onslaught of global finan-
136
cial crisis. At times, it is necessary to take tough deci-
sions in the interest of the financial system in general
and institutions in particular. The exposure norms came
into existence because of the business failures of finan-
cial institutions due to concentration of credit risk.
As far as the lending process is concerned, it is more
scientific and methodical like most new generation
banks. However, the speedy disposal of money and cor-
roboration the customer details with the tax and vat re-
turns increases the trust-worthiness of the information
and improves the recovery of loans.
The “handholding” approach discussed in the case from
loan sanction to loan recovery is paying off very well
for the company. This approach is a learning for the
banks, particularly the niche ones. EFLs net NPA level
of 0.21 per cent for the year ending March 31, 2009 is
considered very good by industry standards and in com-
parison with most of the other NBFCs’ performance. The
most noticeable feature is that the company is able to
grow even in the adverse economic situation, where
most of the banks are experiencing slump in their busi-
ness growth and increasing default. This has been
achieved because of its customer-centric approach of
EFL. This emphasizes the need for customer centricity
in financial service organizations.
EFL’s in-house customized risk management mechanism
with regard to credit risk rating and business delivery
also helped the company in managing the risk better to
reduce the potential losses. M-Cril rating also improved
the image of the company.
Dovetailing of the government incentives and subsidies
for the MSME entrepreneurs, who are generally una-
ware of the Government schemes and programmes with
regard to subsidies and incentives attached to loan fa-
cilities improves the company’s customer centricity and
also increases the creditability and repaying capacity of
the borrowers. This also helps the company to move very
close to the customers (borrowers) and empowers them.
The corporate philosophy, “growth through quality and
productivity,” by satisfying all the stakeholders in the
circle including employees, suppliers, and customers
sounds very nice. The approach of less work pressure
for generating creativity among employees is certainly
innovative and non-traditional. However, many com-
panies that claimed employee empowerment with pro-
employee measures are not very successful in achieving
the company objectives. For instance, many of our Pub-
lic Sector Enterprises which attached importance to
employee empowerment programmes and schemes
miserably failed to produce positive results. Ensuring
economic well-being of all the stakeholders in a system
is practically very difficult as the interests of each of the
sections are different and many times clash with each
other’s interests. As a small company with limited cov-
erage and portfolios, it may be possible to ensure the
satisfaction of all the stakeholders. But when EFL has
sets its future goal to grow ten-fold in terms of size and
fifteen-fold in terms of customer base, it will be a diffi-
cult task and challenge to truly carry this philosophy
across the stakeholders.
The financing of construction companies for purchase
of construction equipments is expected to swell as the
sector is slowly recovering from the slump. The pro-
posed entry into financing MSMEs engaged in wood
work is expected to further benefit its business to achieve
its future growth objectives.
However, the future growth plan of the company re-
quires some bold initiatives to expand the activities and
coverage in terms of range of products and geography.
With the success EFL has achieved so far, it needs to
transform itself into a one-stop provider of all financial
services by completely meeting all the needs of the
MSME sector.
EFL’s expectation of securitizing the priority sector lend-
ing by issuing “Priority Sector Lending Certificate” as
recommended by the Raghuram Rajan Committee on
financial sector reforms is very genuine and the Gov-
ernment has to act on this recommendation if it is truly
committed to the development of the MSME sector.
Though EFL came into existence in 1990, with about 20
years of experience in the business, the growth so far
indicates only a conservative approach in its risk-taking
ability. To grow big in the future, from now onwards
the EFL has to show more courage to take calculated
risk.
DIAGNOSES
VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 137
An Overview – Small Pays High
This case is a success story of the passionate techno-
crat promoters of Electronica Finance Limited (EFL),
who had developed customer-centric technology for
manufacturing several cutting and injection moulding
machines. Their technologies and products were well-
accepted in around 45 overseas markets besides having
a huge demand in the domestic market. The customer
target group of their parent company (EMTL) was
MSMEs in India who were lacking the desired compe-
tency in completing formalities for import of machines
and also capital to acquire technology and machines.
Since MSMEs do not access credit from banks despite
classifying MSE advance under Priority Sector Lending,
promoters formed EFL in 1990 for financing and leasing
to capture the emerging SME credit market. The com-
pany has performed exceedingly well in the field and
today it enjoys good status in the market which is re-
flected in the following:
• Recognized as Systematically Important NBFC
(NBFC-ND-SI) by RBI
• Rated Alpha minus (symbolizing reasonable safety)
by Micro Credit Ratings International Ltd.
• Rated LBBB and A3+ for Long-term and Short-term
respectively by ICRA Ltd indicating moderate credit
quality
• Signed MOU with SIDBI, the apex organization of
our country to take care of institutional credit to the
MSME sector.
This has been possible because of fine-tuning in the com-
pany to understand the right need of money and ma-
chine of customers and catering to their requirements
in time with a very simple and easy credit delivery mode;
bankers normally make the system knotty with rigid
approaches.
A critical analysis of the case from a bankers’ point of
view reveals that small enterprises preferred loans from
private lenders mainly due to easy, adequate, and timely
credit availability even though the rate of interest on
loans from private lenders/NBFCs are higher than what
is charged by banks. The case is testimony that small pays
high but needs speedy attention with a simplified mode
of delivery. The success of EFL leaves a message for the
bankers to simplify their processes and transform the
rigid approaches and mindset to be a partner in national
growth through MSME development, which is a very
profitable business today for the banks.
MSMEs are Cash Cow Metaphor of Growth Matrix
Credit is a vital input for growth. MSMEs primarily rely
on finance for a variety of purposes including purchase
of land, buildings, plant and machines and also for work-
ing capital. Availability of timely credit at a reasonable
rate is the need of the sector. Despite the fact that there
is no dearth of credit in the system, there exists a gap in
the perception of lenders and SME clients. While lend-
ers feel that credit to the sector is expanding, the SME
borrowers feel that lenders are not doing enough for
them and are catering more to the needs of the large
corporates. As only 4-5 per cent of the MSMEs is cov-
ered by institutional funding, given that approximately
95 per cent of the villages are not covered by banks,1
there is a huge gap to bridge for inclusive growth. Policy
makers have taken a good number of initiatives/meas-
ures to make the MSME credit safe, secure, simple, and
lucrative. A few of them relating to credit growth are:
• The limit of mandatory collateral free loans doubled
to Rs.10 lakh for MSEs, though CGTMSE guarantee
cover is available up to Rs.100 lakh.
• Prime Minister’s Task Force on MSME constituted
by GOI to consider various issue and three impor-
tant recommendations made by the Task Force2 re-
lating to credit has been considered for immediate
action –
– 20 per cent YoY growth in credit to micro and
small enterprises
– 60 per cent of the MSE advance to micro enter-
prises to be achieved in stages, viz., 50 per cent in
year 2010-11, 55 per cent in 2011-12, and 60 per
cent in 2012-13.
Case Analysis IV
Ram Jass Yadav
Chief Manager & Head, SME Loan Factory
Bank of Baroda, Agra (UP).
e-mail: ramjassyadav@rediffmail.com
138
– 10 per cent annual growth in the number of mi-
cro enterprises accounts.
• Adoption of at least one MSE cluster made manda-
tory by each lead bank of a district.
•Simplified computation3 of working capital limit to
MSE units on the basis of a minimum of 20 per cent
of their estimated annual turnover up to a limit of
Rs.500 lakh.
• Loans granted by banks to NBFCs for lending to
MSEs are reckoned advances under priority sector
lending. Direct finance to NBFCs or any tie-up with
NBFCs like EFL is a new opportunity for banks.
Cash cows are low growth, high market share business.
The banks therefore consider the MSME sector as the
cash cow for the strategic business plan because of the fol-
lowing obvious reasons:
• MSMEs generate cash at a low cost, and are hence a
viable credit business.
• They are established and successful and need less
investment to maintain their market share.
• In the long run, when growth rate is slow, STARS
(e.g., MNCs and big corporate clients) become cash
cows.
The EFL case testifies that recognizing MSMEs as the
cash cow metaphor in the strategic business plan by the
company resulted into impressive achievements of op-
erating income, profit, and capital adequacy during the
last three years. And management of EFL is still very
optimistic and grows ten-fold in loan assets and fifteen-
fold in number of customers. Also considering that
MSMEs are cash cows in the BCG (Boston Consulting
Group) growth matrix, the promoters have coined the
phrase, “Building the SME … Driving the Economy” as
the vision statement for the company.
SWOT Analysis– Challenges, Prospects and
Operational Regulations
SWOT analysis provides a logical framework for sys-
tematic and sound examination of issues having bear-
ing on business situation, generation of alternative
strategies, and choice of a strategy. While analysing the
strengths of EFL presented in the following matrix, it
can be inferred that the company has a good number of
strengths to capitalize opportunities to come over ap-
prehended weaknesses and threats.
Based on the SWOT matrix (Table 1), future business
problems and prospects for the company have emerged
as under:
• EFL being NBFC-ND-SI has a leverage of higher CAR,
i.e., it has 26.11 per cent as against stipulated capital
adequacy of 15 per cent as on 31.03.114.
• In light of MSME finance as productive/economic
activity, EFL may have the privilege to be an AFC
which is permitted to exceed its single party/group expo-
sure up to 5 per cent of the owned fund with the ap-
proval of its Board.
• EFL has the option to augment its capital fund by the
issue of Perpetual Debt Instrument (PDI) which shall
be eligible for inclusion as Tier-I capital to the extent
of 15 per cent of the total Tier-I capital as of 31st March
of the previous year
• EFL has since obtained the status of NBFC-ND-SI; it
Strengths Weaknesses
• CAR was 26.11% against the stipulated level of 12% • Branch network limited to 13 cities
• Backed by qualified and passionate promoters • Credit users have limited choice of vendors to their
• Tied up with SIDBI to collaborate for MSE finance machines
• Assets size is over Rs.1 bn and enjoys the status of • Lack of core competency of working capital assessment –
NBFC-ND-SI fund-based & non-fund based
• Collateral-free loans make processing and appraisal simple • Centralized lending decisions powers at Head Office
Opportunities Threats
• Business diversification to multi-financial service products • Cost of credit is higher than banks’ ROI
– WC, LC, BG, advisory services, etc., from single-term • Limited exposure limit, e.g., 5% of net worth for single
finance business borrower
• Prospects to be channel partners for MSME lenders • Migration of high valued clients from its fold to other FIs/
• Target group of company, i.e., MSME beneficiaries is one Banks
of the top agendas of union government for equity and • Net NPA level shoot up from 0.02%, 0.04% in past to
inclusive growth. 0.21% in March 2009.
DIAGNOSES
Table 1: SWOT Matrix
VIKALPA • VOLUME 35 • NO 3 • JULY - SEPTEMBER 2010 139
shall come under regulatory requirement even if as-
set size falls below Rs.1 billion due to temporary fluc-
tuation. EFL should submit monthly returns on
important financial parameters to RBI for which the
company should make its MIS effective.
• Banks have encouraged finance to NBFCs registered
with RBI and ceiling on bank credit has been with-
drawn. EFL is therefore, eligible for the desired
amount of credit line from banks including loans
against second hand assets5 by EFL.
• EFL has challenges on certain operational issues like to
review lending decision powers, to broaden capital
base to have leverage of large credit line for growing
clients, to expand branch network, recruit/groom
credit skills for working capital finance and other fi-
nancial services to make the company a one-stop-
shop.
•NBFCs are a good target group for channel finance or
direct lending to MSEs for achieving their lending
target to micro enterprises in a phased manner as
directed by RBI.
EFL, being among the highly rated NBFCs and having
received the status of NBFC-ND-SI from RBI, has vari-
ous doors open for raising its resources at economic costs
from the banking system to achieve its ambitious target
of a ten-fold growth in loan portfolio. As revealed from
the above analysis, regulatory guidelines are in favour
of the company. Banks are in search of a borrower like
EFL in the market. On the bankers’ front, there are op-
portunities to explore the new business of channel/di-
rect financing to NBFCs like EFL that has expertise in
MSE lending. Signing up of an MOU with SIBDI is a
beginning in this area, which other banks in the field
can replicate for building an MSME portfolio in their
loan books.
Ways of Offering MSME Credit by
Banks vis-à-vis EFL
Indian MSMEs are a diverse and heterogeneous group
and are considered to be the growth engine of the
economy. However, they face certain common problems
in getting bank credit. Bankers consider MSME lending
more risky because of the following reasons:
• No requirement of collaterals for loans
• Low equity base
• Absence of marketing tie-up
• Diversion of funds
• Poor management and book-keeping
• High transaction costs and low technology level
• Inability to provide a trustworthy financial track
record and so on.
Despite the above weaknesses in MSE lending, EFL as-
sumes that small is good for sustained growth and finds
level playing field favourable due to the following con-
tributing factors in its business growth:
• High yield in MSME accounts
• Dispersed credit risks
• No complexities of legal search of properties as loans
are collateral-free
• 100 per cent financing of assets
• Getting 25 per cent as security deposit and also in-
surance cover for the borrower
• Less than 1 per cent default rate due to handholding
and conciliatory approach
• End use of funds ensured by arranging timely deliv-
ery of machines.
Banks have the following and many more unique sell-
ing points (USPs) in their products as compared to the
single-term loan products being offered by EFL that have
leverages over the EFL product:
•Collateral free loans up to Rs. one crore are secured by
CGTMSE which is highly liquid.
•Rate on interest charged by banks is more economical
than those charged by NBFCs.
• Customers have freedom to buy machines/equipment
from the supplier of their own choice with better bar-
gaining relating to prices, quality post-sale services
etc., that is normally not available in case of private
finance as observed in the EFL case.
• Banks’ exposure limits is much higher than any NBFCs
to cater to the financial needs of a big amount.
• Banks are one-stop-shop, i.e., loan syndication, advi-
sory services, insurance, working capital, LC/BG and
so on are offered by banks.
• Wide branch networks and vested lending powers are
available at branch levels for MSMEs.
In spite of the above, USPs in the banks’ products, pri-
vate lenders or NBFCs are preferred over FIs/banks. It
is mainly because of the rigid approaches, complex
documentations, insisting collaterals and so on which
are self-generated problems from individual percep-
140
tions. Business environment is by and large the same
both for the winners and the losers, but attitude and pas-
sion are the most influential factors in credit decisions.
EFL’s default rate below one per cent is a testimony that
over 99 per cent MSMEs are successful and barring a
very few most of them might have defaulted because of
external factors which are normally beyond their con-
trol. To differentiate between the credit practices of banks
and that of EFL, in short, banks have better products
with them; what they need is positivity while dealing
with MSMEs. This warrants attitude transformation
which changes DRISTI (vision), not the SRISTI (world) be-
cause it is one and the same for all.
Sum Up – EFL Model for Inclusive Growth
MSMEs are cash cows for banks to improve their returns
on assets and management of concentration and repu-
tation risks. Both banks and EFL have almost similar
environments but to become the first choice, bankers
should develop the habit of taking decisions today instead
of tomorrow, change this mindset from a desisting attitude
to having a helping approach, and value the credit busi-
ness like the clinical treatment of clients, which should be
given at the right time with the right diagnosis and the right
dosage. On the credit users’ front, the money must be
used for the purpose it is given and should be repaid in
time enabling the lenders to offer a novel lifeline to the
productive/economic activities which are the key to
national growth. The lesson that we learn from the EFL
case is that one should be customer-centric and have
positive attitude in order to understand each others’
business.This approach builds strong association and
partnership in the journey towards total growth.
References
1 Address by Deputy Governor of RBI – Dr K C Chakarbarthy
on 21.05.10 at the formal release of the Indian Micro, Small
and Enterprises Report 2010 at ISED, Kochi.
2 Recommendation of the Prime Minister’s High Level Task
Force on MSMEs circulated by RBI to all scheduled com-
mercial banks vide its circular number RBI /2009-10 /510,
RPCD.SME & NFS.No.BC.90/06.02.31/2009-10 dated
29.06.10
3 Lending to MSME Sector – Master circular by RBI per its
number RBI/2010-11/79, RPCD.SME& NFS.BC.No. 9/
06.02.31/2010-11 dated 01.07.2010
4 Miscellaneous instructions to NBFC-ND-SI by RBI vide its
master circular to all NBFC number RBI/2010-11/28: DNBS
(PD)CCNOS/188/03.10.001/2010-11 dated 01st July 2010
5 Master Circular on Bank Finance to NBFC by RBI per its
number RBI/2010-11/51, DBOD. BP. BC. No. 5/21.04.172/
2010-11 dated 01.07.10
DIAGNOSES
