What ails SME financing?

By D. Murali

Financing SMEs, though desirable and perhaps necessary for banks to earn decent returns on capital, is not yet easy, say B. Yerram Raju and P. R. Mohan Nataraj in Small and Medium Enterprises in India ( www.iibf.org.in).

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They find that the challenges in risk management while lending to SMEs include: "lack of financial data, intrinsic weakness of the financial structures, and slender resources of the promoters in terms of money and/or knowledge of markets."

The authors argue that analysis of balance sheets, working out ratios and assessing credit based on arbitrary norms were all relevant in an era of credit rationing, not now, when quality of credit is as important as growth.

"Under-financing an operation leads to industrial sickness and the ratio-based approach to SMEs has contributed significantly to NPAs (non-performing assets) in the SME segment."

Where the SME has a well thought-out business plan, and the promoters maintain proper books of account, the banks should be open to finance the cash deficits (on the basis of cash-flow statements) and refrain from over-controlling the activities of the SME, the book suggests.

Essential insights for a basic appreciation of the SME sector.

Waste costing

The real cost of waste (including the value of raw materials, energy and wasted labour) can be up to 20 times the cost of disposal, says Anna Francis in one of the essays included in The Sustainable Enterprise: Profiting from Best Practice, second edition ( www.vivagroupindia.com).

The essay has some startling statistics about office waste: such as that in the UK the average office worker produces each year more than two and a half times his or her own body weight in rubbish, and that the average employee uses nearly 15,000 sheets of A4 paper, the equivalent of one tree's worth of paper every year!

It costs around 30 pounds a tonne to dispose of waste paper, but it can be worth far more, urges Francis, if the paper is sorted and recycled. "More than half of all office waste is made up of paper, most of which is high-grade white paper."

From an energy perspective, too, there are savings. "The production of recycled paper involves between 28 per cent and 70 per cent less energy than producing virgin paper. Producing recycled paper saves 17 trees, 7000 gallons of water and 4200 kilowatt-hours of electricity (enough for an average house for six months)..."

The book, recommended by the Institute of Directors and edited by Jonathan Reuvid, covers dozens of topics on sustainability in a concise and simple style.

Risk management in banks

The banking sector has to be ready to handle the greater degree of risks associated with the new and varied financial structures, cautions Ved Jain in the foreword to a new book from the Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India: A Study on Basel II and Risk-based Supervision ( www.icai.org).

"The Latin American Debt Crisis in 1982 led to a massive strain on the capital of most large banks. This resulted in the Bank of International Settlements located in Basel, Switzerland, to propose regulation requiring banks to hold a minimum capital buffer as Tier I capital," the study opens. Basel I Accord addressed credit risk and required banks to maintain a regulatory capital of 8 per cent of their risk-weighted assets.

A revision became necessary in 2004, in the form of Basel II, to tackle shortcomings in the previous standard - such as, inadequate differentiation of credit risks, limited recognition for collateral and netting, and so on.

The ICAI sees in Basel II "the international convergence of capital measurement and capital standards". The publication is positive that, by putting operational risk management on every bank's agenda, "Basel II encourages a new focus on its management and sound, comprehensive corporate governance practices."

Apt read, at a time when the US is witness to the collapse of some high-profile banks.

Ills of information-addiction

Information has no inherent value; its value comes only when you use it, say Pamela Dodd and Doug Sundheim, citing Jan Jasper, in The 25 Best Time Management Tools & Techniques: How to Get More Done Without Driving Yourself Crazy ( www.macmillanindia.com).

Having stacks of time-sensitive material you rarely read, buying books you forgot you already own, and getting anxious if you can't check the news frequently are a few common signs of information addiction, the authors outline.

"Hoarding information because you might need it some day is a poor use of your time, energy and money. You end up feeling guilty and frustrated every time you think about everything you aren't reading, listening to, or using."

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As antidote, the authors advise that you can change your information-acquiring habits by taking a good, hard look at everything you've saved to read. "Toss out the outdated items. Donate or sell old books and magazines. Organise what's left and schedule a weekly reading session..."

That way you can free up physical and mental space for more important things, the book counsels. Useful addition to your shelf.

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