Management Discussions And Analysis
Macro Economic Environment:
Today, the Indian economy is dynamic and expanding, the countrys GDP is soaringand one significant contributor to this are the Micro, Small and Medium Enterprises. Withincreasing global competition, SMEs Small and Medium Enterprises are globally reckonedwith as a strong contender to develop the baseline economy, especially in emergingcountries such as India.
According to a study by Associated Chambers of Commerce and Industry of India(ASSOCHAM), it was estimated that Small and Medium Enterprises (SMEs) contribute 22% toIndias GDP by 2012
According to the Quick Results of the fourth All India Census of MSMEs (2006-07), therewere 26 million MSMEs in India, which provided employment to about 60 million people.Rural enterprises account for 52 per cent of all MSMEs. The majority of the enterprisesare in the service sector; manufacturing units make up around 28 per cent of the total.
The largest sector within the MSME sector is retail trade and repair and maintenance ofpersonal and household goods, which accounts for a little over a third of total employmentin the sector. The bulk of MSMEs fall in the unregistered category. Registered units, orthe enterprises permanently registered up to March 31, 2007 at District Industry Centresof the respective State Directorate of Industries, comprise just 5.94 per cent of thetotal MSME units.
One of the biggest problems facing the MSME sector is the lack of access to qualitycredit. More than 90 per cent of the units are self-financed; Institutional finance isonly for a minority. There is also a significant difference in access for registered andunregistered units - more than 10 per cent of registered MSMEs have received financethrough institutional sources, while less than 5 per cent of unregistered MSMEs have hadthat advantage. Although the small-scale sector, now designated as micro and small units,has been a part of priority sector lending for commercial banks, small units continue toface significant credit constraints.
|RESOURCE CRUNCH || || |
|2006-07 (%) ||Registered ||Unregistered |
|Share in total MSMEs ||5.94 ||94.06 |
|Enterprises by source of finance : || || |
|Self-finance/ No finance ||87.77 ||93.08 |
|Finance through institutional sources ||11.21 ||4.80 |
|Finance through non-institutional sources ||1.02 ||2.12 |
Source: Quick Results of 4th Census of MSME, Ministry of Micro, Small and MediumEnterprises
Financing of MSME's:
While the Small & Medium enterprises drive economic evolution with their capabilityto modernize and engage in significant amounts, the largest challenge encountered by themis access to finance. Small enterprises, such as brick kilns, grocery stores, smallrestaurants etc., need finance to purchase raw materials, procure stock, meet workingcapital requirements and support expansion plans.
Despite the efforts of Ministry of Small and Medium Enterprises, SIDBI and support fromthe RBI by inclusion under priority sector, there continues to be a huge demand-supplymismatch in small enterprise financing.
One of the major reasons for banks/financial institutions (FIs) being unable to bridgethis gap is on account of difficulty faced in assessing credit needs for smallenterprises. This is primarily on account of non-availability of valid bills, properaccounting systems and lack of known buyers.
To overcome, banks typically look for collateral in the form of property / Bankdeposits which cannot be brought in by most entrepreneurs. Further, due to their smallsize and local presence, the transaction costs involved in financing them are very high.
Assessing Lending Risks
In the face of banks'/FIs' reluctance to lend, these enterprises are compelled toresort to high cost, non-continuous financing from money lenders and other informalsources, or continue to operate at sub-scale.
Risks faced by any business can be broadly classified as idiosyncratic or systemic.Idiosyncratic risks are specific to an enterprise, like location of business or skill ofthe entrepreneur. Systemic risks, on the other hand, are beyond the control of anyenterprise.
The key to financing any enterprise lies in the ability of the financier to evaluateand manage such business risks. High quality origination can help evaluate idiosyncraticrisks well. A high quality local originator with geography and business specificinformation about such enterprises in the operational area will be able to evaluate andmanage this risk well
A financier searches for cues to establish that the business has a current and futureability to service loans, even in an uncertain business environment. For small enterprisesthat have large number of cash transactions, poor record of sales, produceundifferentiated goods and lack known clients, assessment of systemic risk becomes verydifficult.
Financier with a localized presence and who has a domain knowledge, understands theworking capital cycle, seasonality, procurement place and mode, point of sales, and demandfor the product or service, can finance small enterprises based on an understanding of thegeography in general and various aspects of the business in particular. Ascertaining theturnover, income and other key financial information are pre- requisite to arrive at acredit decision about the enterprise.
Financing of MSME's by Shriram City:
Shriram City sees huge opportunity availability for financing by NBFC's - as theCompany has well- developed techniques to assess and evaluate the credit worthiness ofthese classes of customers.
Also the major challenge found in financing to this sector as explained above has beenwell managed by Shriram City, by way of its localized presence, field force being drawnlocally and the domain knowledge.
Year 2010 - 11 at Shriram City:
During the year ended March 2011, the performance of Shriram City has been robust.Shriram City has continued its growth through the leveraging of the business outlets andoffering the highest quality of services to its customers. The customer base of theCompany touched 62.5 Lacs in the lending side alone and 90 Lacs customers as depositors.
The company in its Silver Jubilee year recorded a profit after tax of Rs.24059 Lacs asagainst Rs. 19426 Lacs during the same period previous year , recording a year on yeargrowth of 24%. The same has been on account of the growth in the total income of thecompany by 20% to Rs. 132091 Lacs during the year ended March 2011. The assets undermanagement of the Company stood at Rs. 799805 Lacs, recording a 53% growth over theprevious year. The Company's EPS for the year ended March 2011 stood at Rs. 48.78/-
Borrowing Profile: The Company has a judicial mix of borrowings from the retailsources and institutional sources. The ratio of the borrowings through retail andinstitutions are in 28: 72 respectively.
While the retail borrowings are through deposits, non-convertible debentures andsubordinated debts from the retail public. The institutional borrowings are by way of bankborrowings by way of term loans and working capital limits. The company also raises fundsby issuing non-convertible debentures and commercial papers to institutions.
The Company has been taking constant effort to contract the liabilities with a prudentmix of floating rate and fixed rate borrowings in order to effectively address interestrate risk.
Credit Ratings: During the year, the Company had witnessed improvement in itsexternal credit rating.
FITCH Ratings upgraded the Companys long term rating from A+ to AA- and alsoupgraded the Short term ratings to F1+.
CRISIL rated the Company for the first time and has assigned rating of AA- on the longterm and P1+ on the short term rating
All the three rating agencies has assigned rating of AA-inthe Long term and have all soassigned the highest rating (F1+, P1+, PR1+) in the Short term.
|Instrument Rated ||FITCH ||CRISIL ||CARE |
|Long Term Ratings ||AA- ||AA- ||AA- |
|Short Term Ratings ||F1+ ||P1+ ||PR1+ |
|Bank Loan Ratings ||AA- ||- ||- |
Capital Adequacy Ratio: The capital adequacy ratio of the Company as at 31st March2011 stood at 20.52%, out of which the Tier I capital adequacy ratio was at 16.35% and theTier II capital adequacy at 4.17%.
Asset Quality: Maintenance and constant improvement of the asset quality remainsthe prime focus of the Company. The Company while increasing its assets base has also beenable to maintain the Non- Performing Assets (NPA) under control and the same is evidentfrom the fact that the company has been recording lower NPA year on year.
The Gross NPA for the year ended 31st March 2011 stood at 1.86% as against 2.27% as at31st March 2010, while the Net NPA levels recorded a drop to 0.43% from 0.71% in March2010.
The strong credit evaluation techniques, localized presence and individual knowledge ofthe customers, combined with the well- established collection skills have attributed tothe maintenance of NPA Levels.
Internal Audits and Controls:
Internal auditing is an independent, objective of assurance and consulting activitydesigned to add value and improve an organization's operations. It helps an organizationaccomplish its objectives by bringing a systematic, disciplined approach to evaluate andimprove the effectiveness of risk management, control and governance processes.
Internal auditing is a catalyst for improving an organization's effectiveness andefficiency by providing insight and recommendations based on analyses and assessments ofdata and business processes. With commitment to integrity and accountability, internalauditing provides value to the senior management as an objective source of independentadvice.
In the Company, internal audit is an independent, appraising activity for the review ofthe various functions. The Company also takes continuous efforts to upgrade the system ofinternal audit to make the same contemporary and relevant with change in business.
The internal audit is operative in the Company in three layers- InternalAudit, Management Audit and the Audit Committee. While theinternal audit team is responsible for conducting the audits in various departments of theCompany, the Management audit team reviews the adequacy of the internal controls andfindings thereof. The improvements required system to make the same more effective aresuggested by the Management Audit team. The Audit Committee reviews the internal auditreports and monitors the implementation of the suggestions if any along with theManagement Audit team
The Company has been effectively implementing latest technologies, the uniqueness beingthat the up gradations are all being handled by the in-house team. All thebusiness outlets of the Company are all connected through the technology platform withCentralized Server Application - controlled and hosted centrally; the same has enabled thereal time information access.
The Company during the year had introduced the Handheld Devices, with anobjective to remove the usage of manual receipt books and bring in online receipting. ImageScanning, have also been introduced during the year, to capture the image of all loandocuments & use the same for various purposes without disturbing the physicaldocuments.
Human Resources Management:
The Company takes continuous HR initiatives, to ensure the team is empowered to performto their fullest extent towards achieving the Company's growth plan. The effective HRmanagement becomes more critical, as the business model of the Company is more towardsrelationship - based business. However the effectiveness of the HR management system isevident from the relatively low -attrition levels of the Company.
The Company's compensation package includes performance based incentives and EmployeesStock Option Plan (ESOP) for eligible employees.
Training and development are an integral part of the HR Management and that the Companyhas been conducting various training sessions for its employees to develop and enhancetheir skills and experience.
Risk is inherent part of any business and that the risk management function helps toidentify the vulnerabilities through quantitative and qualititative techniques. TheCompany has well - developed risk management techniques and also takes efforts toconstantly upgrade the same to make the same in line with the best practices available inthe industry.
|Type of Risk ||Mitigating Factors |
|Operational Risk || Comprehensive internal controls effective risk management system |
| || Efficient Credit Management policy effectively addresses the credit risk |
|Market Risk || Multiple products ensure risk diversification. |
| || Localized presence and domain knowledge, helps in addressing the market risks |
|Interest Rate Risk || High External Credit Ratings |
| || Balanced mix of fixed & floating rate loans. |
| || Optimum mix of retail & institutional borrowings |
|Asset Liability Mismatch Risk || Constant efforts to borrow long term funds |
| || Conformed availability of borrowings lines |
| || Prudent mix of retail & institutional sources of funds |
|Human Resources Risk || Continuous upgrading of skills through various trainings |
| || Compensation package includes Performance based incentives. |
| || Promising career growth for deserving employees evident from the low attrition rate |