Policy makers, banks and SMEs in India are espousing novel ways for stepping up flow of credit to SMEs from banks. Cluster-based financing is one such approach, where attempts are made to identify, select and finance clusters of SMEs, based on the broad characteristics. Thus, apart from financials and industry grouping, knowledge of a cluster is vital for fully understanding, assessing, and rating SMEs in one.

Through cluster-based financing, approach banks are expected to economize upon their time and resources, by extending credit to SMEs in a cluster based on the standardized procedures and paperwork and reduced due diligence. This approach gives credibility to the SMEs, as well as providing a cost-effective and efficient way to access credit. Besides extending the outreach of banks, it reduces the transaction cost which ultimately helps in a competitive offering to SMEs. The RBI Working Group on Flow of Credit to the SSI sector (chaired by AS Ganguly), had recommended adoption of a full service approach (4-C approach) by banks for cluster financing, viz. customer focus, cost control, cross sell and contain risk.

A cluster is a geographically proximate group of connected companies and associated institutions having a critical mass and linked by commonalities or complementarities. Based on origin, the clusters are classified into natural or induced ones. Availability of raw material, high demand from a single or a group of large companies in a particular location, or private initiatives are some factors that may lead to creation of a natural cluster. Policy incentives, development of infrastructure (e.g. software or technology parks, SEZs, etc) may lead to creation of an induced cluster. Clusters are sometimes also classified based on the relationship among the cluster constituents. Horizontal clusters consist of units that process raw materials to produce and market the final products. Units in a vertical cluster supply larger firm or firms with components.

There are over 1,223 industrial SME clusters in India, some of which are natural and others induced. Most SME clusters operate in a traditional manner, with only a small percentage of viable units in each. Only a few banks have a presence in all the clusters and their enthusiasm in extending finance may be further limited to only the viable and forward-looking ones.

While each of the clusters has certain distinguishing peculiarities, many of the advantages and the risks are common to all SMEs in a particular one. SMEs in the same industry segments in different geographic locations could have different characteristics. Thus, it becomes imperative for a SME rating model to capture the cluster-specific characteristics of SMEs and factor these in. To enable this, clusters need to be profiled on incidence, extent, nature and possible causes of various kinds of risks in each. Given the unique characteristics of each cluster, cluster-based benchmarks need to be evolved and utilised for assessing and rating SMEs.

For enhancing efficacy of the rating system, the profiling of the clusters, including the risks associated in each is very important. Further, it could provide valuable inputs to the bankers, SMEs and policy makers. Based on the assessment of associated risks and characteristics for a particular cluster, banks could strategise their lending interventions, aligning these with the special generic characteristics of SMEs. With standardisation of application forms to improved due diligence through better understanding of risks involved, these profiles could help the banking system reduce its transaction cost, extend its outreach and devise innovative cluster-specific products.

As far as SMEs are concerned, cluster profiles have the potential to help facilitate the undertaking of suitable measures and enhancing the flow of bank credit at a competitive price. This would also be in conformity with the policy objectives of extending the outreach of banks in making available “timely” and “adequate” credit at fair terms to the SME sector.

Besides, the identification of policy issues in terms of infrastructure, technology and sensitivity to changes in government policy could also be of use. Recognising the importance and utility of cluster risk-profiling, our agency is taking up such projects for SME clusters in different parts of India.

Source: http://www.financialexpress.com/