ICICI BEAT THE

CURVE –
CASHFLOW BASED
CREDIT APPRAISAL
FOR MSME’S
 ROADMAP : ROADMAP …
1

MSME Sector in India About Cashflow based Financing

3 Findings

4
Research Design Conclusions and
5 Shortcomings

MSME SECTOR IN INDIA
SIZE and NUMBERS
 30 million MSME units
 70 million Employed
 8% of GDP
 40% of India’s exports
VISION OF CUSTOMER
EXPERIENCE
Financial Inclusion of all the
companies irrespective of their
size
Current MSME Banking
products
• Working capital Loans
• Term Loan
• SCF
• Forex Solutions
• Trade Solutions
• Current accounts
Classification

Problems in Funding for MSME’s

• Don’t have a proper Credit Score,
Capital Structure
• Do not have immovable assets that
can be used as collateral
• Eventually Banks treating them as
High-Risk Financing.
 CASHFLOW BASED FINANCING
ASSEST BASED LENDING
• In asset based lending is that FIs are
focused on mainly evaluating the value
of the asset
• This presents a problem as fixed assets
cannot repay a facility.
• The term of the loan and the mode of
repayment are not based on the
borrower’s cash flows
• It be of much higher risk both for the
FIs in relation to reinforcing higher
provisions and bad debts; and for the
SME in relation to the risk of going out
of business
CASHFLOW BASED LENDING
• The loan amount is based on the
MSME’s actual revenue generation and
capacity to repay.
• Collateral can be taken however it is
not the primary consideration for the
loan.
• Advantages for cashflow based lending
is that loan size, terms and repayment
mode are all based on the MSME’s
actual cash generation and hence the
risk of default due to diversion of funds
is reduced
 LIST OF 15 COMPANIES USED IN
RESEARCH DESIGN SECONDARY RESEARCH
Company Name Sector/Industry
Chemcrux Enterprises
5 Ratios Limited Manufacturing Sector
Process Flow Oceanic Foods
 Net profit/ Net operating cashflow Limited
Step1-Analysis of metrics from Manufacturing Sector, Food Processing
which the credit risk of an entity It indicates the quality of earnings of a company. If a Artemis Electrical
could be analysed. company’s ratio is more than 1, it is using accrual Limited Manufacturing Sector
Step2-Five such metrics were adjustments to appear more Profitable than it actually is. Tasty Dairy Specialities
identified and analysed. Limited
 Net operating cash flow/ Interest Expenses Manufacturing Sector, Food Processing
Step3- Finally, standards were set (Cashflow interest cover ratio) Ashok Metacast
depending on the average Limited Manufacturing Sector
It depicts the extent of cash available for payment of Jhandewalas Food
interest, after taking into consideration Working capital Limited Manufacturing Sector, Food Processing
needs Kranti Industries
 Net operating cashflow/ (Interest +CPLTD) Limited Manufacturing Sector
(Financing payments cover ratio) RajnishWellness
Limited Healthcare Services Sector
It shows the extent of availability of cash flows servicing
Relstruct Buildcom
 To analyse the financial debt capital.
Limited Construction and Real Estate Sector
parameters from the cashflow  Total bank debt / Net operating cashflow (Debt 7NR Retail
statements of MSME’s, 15 payout ratio) Limited
companies listed in BSE MSME Retailer
segment were chosen and their It indicates the company’s ability to repay debt on current Shivag Granito
Annual reports were used. The cashflow performance basis. Limited Trading
data required for this IRIS Solutions
calculation were obtained by  Total long-term debt/Net operating cashflow Limited Services sector
secondary research. (Long term debt payout ratio) GG Industries
This ratio is very useful for high tech industries. This ratio Limited Manufacturing Sector
should be compares to useful life of fixed assets. Sashjit Infrastructures
Limited Construction and Real Estate Sector
Jinaams Apparel
Limited Manufacturing Sector, Clothing
FINDINGS

ARRIVING AT THE
FINDINGS
LIMITATIONS
 3 YEARS ‘S FINANCIAL  Cashflow interest cover ratio = 23.84% • The sample size of the MSME’s
REPORTS WERE Average value considered for the cashflow
ANALYSED statement analysis was very less
 Net profit/ Net operating cashflow= - to be conclusive about the
 AVERAGE INCREASE OR 30% Average value parameters arrived.
DECREASE OF THE
 Financing payments cover ratio= 60.89% • The companies were also
RATIOS WERE NOTED
Average value limited to very few sectors
 TOP AND BOTTOM namely Manufacturing, Food
QUARTILE WERE  Long term debt pay-out ratio= -20.38% Processing, Infrastructure and 1
REMOVED TO Average value service sector company.
ELIMINATE OUTLIERS • If the number of Companies and
the sectors they belong are
 AVERAGES COULD BE - VE DEPICTS ANNUAL DECREASE
wider, these parameters arrived
USED AS A STANDARD
will give a broader picture and
will make more sense.
 FURTHER GOING AHEAD WITH THE APPRAISAL PROCESS….

After analyzing the cashflow financials with the standards arrived by us, the lender should also
consider these 3 factors in their appraisal process.

 Seasonality is a factor which the
lenders have to consider while
scheduling the repayment of the
dues.
 Seasonality will affect the
cyclicality in the cashflow
 Borrowers can be made to pay
only the interest during their off
season and 2-3 times their emi
during the peak season
 Increasing the product portfolio
will result in the diversion of risk
which in turn will decrease the
risk for a lender as the sources of
cashflow are diversified.
 Borrowers with more
products/services under their
portfolio will be less riskier
 Moratorium could be set till the
companies achieve a positive cashflow
in each of the Products/Products for
which they have borrowed money.
 Till then they only interest could be
paid by the borrowers.
THANKING YOU