Unique concept-human resource valuation in SME sector

The following is a concept paper presented some months back by Dr Sarath Ranaweera, a pioneer organic food producer based in Kandy, to the National Council for Economic Development on the provision of financial assistance for the development of Small and Medium scale entrepreneurs. Dr Ranaweera says he is yet to get a positive response to this proposal, which he feels will substantially create a new breed of entrepreneurs and steer the SME sector to command a bigger role in the country’s development.

The SME sector contributes to a great extent to the development of any country in all aspects. It has significant influence on economic growth especially in developing countries. It is important for an individual SME study to look at the feasibility of marketing, technical finance and management for its own success. Financial feasibility plays a major role in the success of projects and therefore the SME sector needs to depend on other institutes for financial support. Other aspects of the project can be handled by the members of the own enterprise. Therefore the selection of a correct financial partner has become a crucial decision making event. Entrepreneurs always take a risk in business and all the partners of the project including financial partner must share the same risk.

In Sri Lanka, it is a clear fact that banks hardly act as a financial partner in business since banks don’t take the same risk that is taken by an enterprise. Instead, banks minimize risk by getting all possible guarantees including the property mortgage. Maximizing needs of solid collateral or the securities results in minimizing the risk taken by the bank and some banks act like typical pawn brokers.

In addition, a financial value for the experience and qualifications member/s who proposed the project is not included in the project evaluation. This leads to a situation where the entrepreneur who has some innovative technology with all other result oriented potentials to make project a success will not be able to contribute to the country’s development through his/her innovative technology when he/she does not posses adequate solid collateral.

Therefore a change of attitude of the bankers along with project evaluation procedure is essential to develop the SME sector in order to improve the economic growth of the country. In the present system, banks find many reasons to reject the project proposals or delay instead of providing alternative proposals for financial support to proceed with the project in timely manner.
It is evident that the banking sector shows tremendous growth alone whereas the SME sector struggles for survival, resulting in slower economic growth of the country. It is a partnership and team effort that is mostly needed today for development of the industrial and agricultural sectors. For that both sectors must take risks jointly in project designing and implementation. The following proposal is submitted as a solution.

* Experience and qualifications of the key member/s in the project operations should be valued up to 30% of the total project cost.

* 40% of total project cost has to be covered with solid collateral/ property mortgage acceptable to financial partner (bank).

* Banks can act as a financial partner of a selected project and should guarantee the balance 30% of the total project cost.

* Cost for any basic infrastructure needs such as supplying connection of water, power and road facilities for project implementation has to be covered by a special loan component at zero interest rate along with recovery grace period of at least 18 months. When government is unable to provide the basic infrastructure facilities, the SME sector should not be over burdened with an additional investment for arranging basic needs at high interest rates.

* Public banks and private banks who believe in social responsibility and their true contribution to country’s development could initiate a new system and that will show a clear impact on the country’s development through sustainable development of the SME sector.
This can be used as a guidance document and figures given there can be adjusted after more consultation.

Here is a possible example:
PROPOSED NEW SYSTEM FOR RISK SHARING AND FINANCING OF PROJECTS

Total project cost = Rs. 30 million
This is made up of:
1. Value for the operators experience and qualifications (Max 30%) = Rs. 9 million
2. Bank risk sharing collateral (Max 30%) = Rs. 9 million
3. SME solid collateral/ security property mortgage requirement = Rs. 12 million

Depending on the operational experience and qualifications, No. 2 can be decided from 0 up to 9 million. Therefore, total security requirement for the SME project of Rs. 30 million can vary from 12 million to 21 million.

However, the present requirement for solid collateral or property mortgage for SME is Rs. 42 million (70% from value of property /solid collateral).

Note:
Infrastructure facilities – 3 million (for 0 interest rate
with at least 18 months grace period.)

Rationale:
1) Bank has become a financial partner taking the same risk in the project success and automatically will be a stakeholder in the development process of the country.

2) SME with proven operational background can proceed with the project with limited initial assets and this will result in encouraging the SME sector to develop the country by starting new projects.

3) When the government fails to provide basic infrastructure facilities to develop rural areas, the bank should be able to absorb at least the interest component of the loan used for the infrastructure development.