Panel Discussion on Role of clusters in promoting
Indian SMEs and meeting future challenges
Moderator
Mr. Sanketh Arouje, Leader-Operations, Economic Analysis Group, Dun & Bradstreet Information Services India Pvt Ltd
We have gathered here for a panel discussion on “Role of clusters in promoting Indian SMEs and meeting future challenges”. We have with us today a distinguished panel of speakers.
Let me introduce the panel of judges to you:
• Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
• Dr Thipse, Assistant Director, Automotive Research Association of India (ARAI)
• Mr Umesh Jain, General Manager, IDBI Bank Limited
• Mr Arvind Poddar, Managing Director, Micromax Instruments Private Limited
• Mr Pradeep Bhalwankar, Managing Director, Twin Engineers Private Limited
Moderator
We are here to discuss the benefits of that clusters can bring to the table for us and we are not just looking at SMEs but also at the auto industry. You know there is a concept of collective bargaining that underlies a cluster.
Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
Most players in our industries are able to generate something called as carbon credits. If we save energy, we reduce our carbon emissions. We lower the greenhouse gases emissions by saving energy or by opting for renewal energy resources or more efficient processes.
As the small and medium enterprises (SMEs) do not generate enough credit, we are setting up an SPV for developing countries in collaboration with the German Development Group that will act as a central exchange for SMEs. These enterprises can hand over their carbon credits to this body. This body will then convert these into tradable lots and sell them in the international market, get the funds and upload them in proportion to the carbon credits that are allotted. We expect this to be functional in about six months’ period. We will be launching a programme to make the SMEs aware of this programme before we start it.
A cluster approach provides these SMEs common facilities for testing, and for R&D. In chemical clusters, one thing that is common is the fluid treatment or plants that individual units may otherwise find very expensive to set up, to run and to maintain and which becomes a major drag on profits.
The other very important fact is upgradation of skills among people. If you have just one or two factories, it doesn’t make sense for a training unit to come up and provide special courses that suit your factories’ workers. However, when you have a cluster of units in an area, it makes sense for commercials to offer training institutions to come up in that area and provide training to the staff to upgrade their skills, the technology and the technological skills and thereby to create better skill sets for better quality. In the long run this becomes a circle. These are the advantages and the reasons why this cluster approach works and why it has worked and why it will work even better in the future and why it should be promoted. Thank you.
Moderator
Thank you. You raised a couple of interesting points.
Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
At our chamber we have set up the Centre for Electronic Testing and Engineering and the food testing laboratory, which has made the country proud. As I am from the food industry, we were on the look out for a particular test so that we could save our money on sending samples to Germany, but it was not viable for us to buy a Rs 20,000,000-equipment just to carry out one test in a month. Now we can do the testing in the food testing laboratory with world-class facilities. All the factories in and around Pune, and from Mumbai are sending samples to us for testing, which goes to show how these common testing laboratories, testing facilities, R&D facilities, and skill improvement facilities is working for the betterment of all.
Moderator
Mr Bhalwankar, I believe you and your firm have three patented products. Considering the information shared by Mr Malhotra, what kind of challenges have you faced as an SME over a period of time, did it need you to invest a sizeable amount upfront? I believe such challenges need you to take extra efforts to go and patent your technology and later the whole life cycle when you actually take it to the market. What I am trying to put across is that various stages involve in different kinds of investments, different kinds of skill sets; so what have you learned as an SME over a period of time that you would like to share with the audience?
Mr Pradeep Bhalwankar, Managing Director, Twin Engineers Private Limited
Let me share my experience with you. I had an appointment with the SME Chamber of Commerce in Bombay and the statistics they had was startling. According to the Chamber of Commerce, seven out of 100 SMEs graduate to the mediumscale industry, and out of the seven one graduates to the large-scale industry. These small-scale industries need to graduate to the medium-scale industries.
My personal experience being in a product company is that you need to protect your Intellectual Property (IP). You need to invest a lot of money in protecting IP and in developing these technologies. In India we have a cluster of rating agencies and banks functioning together. It is observed that the balance sheets of companies whose rating is down, gets a high rate of interest from the bank. You get puzzled and confused, whether you still want to go and invest money in this company and on top of that you face challenges from them.
For instance, Telco has started asking us for six months’ credit for capital goods. We are a product company, and six months’ credit from the capital goods industry is too high. When one faces such kind of challenges he gets confused whether to continue. If you really value this intellectual property, and if the banks start valuing these intellectual property that are big assets and in comparison you look at the small industries and company that are not being valued, you know that the money becomes very handy for the growth of this company. All these numbers are to grow from a small-size company up to a medium-size company and from a medium-size company to a large-size company. These are assets nearly to the value.
The second problem that our company faced, which was commonly faced by all my friends in the industry, is when you face many challenges, you don’t know what strategy is going to work. However, D&B has such in-depth experience and such esteemed members, they can help the small and medium-sized companies in coming out with a strategy that will surely help the SMEs to grow because these are the two challenges that I feel we are facing. One is it of now Mr Malhotra has clarified that how really one can grow with the capital investment available with him and the collateral securities available. And the third point I want to make is, besides getting high funds from banks, that what they are trying to really concentrate more on small and medium-sized companies.
Moderator
Mr Arvind Poddar, what is your experience? You have been involved in product development for a while; you have also lost a few new products. So what are your views?
Mr Arvind Poddar, Managing Director, Micromax Instruments Private Limited
We develop products in the electronic area and this has now turned very easy; however it was not so easy earlier on. In our line of business, information and support guys are the actual manufacturers of components and that is why it is quite easy and straight forward to develop any product. Lack of technical skilled professionals is a challenge that we face. In our business, we have our own skill and expertise, and our growth is limited to these skills only.
Moderator
Dr Sukrut, you probably worked with many industry participants and some of them must have been SMEs. What has been your experience in terms of providing even the basic know how that can be leveraged by SMEs? What do SMEs need according to you?
Dr Sukrut Thipse, Assistant Director, Automotive Research Association of India (ARAI)
As I represent the auto industry and as I am a part of the ARAI, the certifying agency for the Indian government, I have interacted with many SMEs. According to me, the biggest challenge that confront the SMEs is incorporation of new technology. As customers are getting choosy, the OEMs have come under increased pressure to develop innovative, more efficient and environment-friendly products, and this has concomitantly increased the need to lower the cost. So there is a dual scenario here. Majority of the SMEs do not have the technology to go for high-end products and at the same time, they are trying to reduce their cost. Low cost does not mean low technology and even if you have a cheap product you still need to incorporate state-of-the-art technology. The best example in this respect is Tata Nano. So now, if you are a vendor for any automotive supplier or if you are an OEM supplier tier 2 or tier 3, you will still feel the heat in terms of market requirements. Another basic problem with these SMEs is their lack of access to higher markets.
So, as Mr Malhotra has rightly pointed out, firstly, the test facilities are limited, secondly the approach to new technology is limited, thirdly they cannot collaborate because it’s not economical to do so. So the need of the hour is to allow these SMEs to mature in terms of adoption of new technology. Another problem area that exists is the access of skilled manpower.
Education has been one of the areas that has been neglected, in the sense, what we have now is just a system wherein colleges churn out graduates without real technical knowledge per se. We don’t have a single programme under any educational institution that makes an engineer fully aware of these things. At our end we are trying to run a programme that gives practical knowledge to people even though this is just a drop in the ocean considering the immense requirement in the industry.
Another major issue is the funding from different agencies. So I will say today innovation is the key.
Moderator
One of the points raised by Mr Bhalwankar is the cost associated with product development and processes with products being patented. I am sure banks have a system of lending for this particular activity. So could you shed some light on the kind of initiatives taken by banks or anything that the bank could do?
Mr Umesh Jain, General Manager, IDBI Bank Limited
Two decades ago, entrepreneurs were the borrowers who looked for finance from the banks. After legalisation, it is the other way around; now banks are chasing good borrowers. If you have an idea, then finance is not a constraint, only thing is
that you should have a well laid-out business plan. More importantly, communicating and articulating your business plan is really more important to make a difference.
As you know, banks have made it mandatory to grant loans up to Rs 1 crore without seeking any collateral. In fact, entrepreneurs who have good ideas are truly appreciated now. So we have the advantage of a fully core network bank that enables us to give you the best of the products. IDBI Bank gives you the sense of no less than a private bank but at the pricing point of a public sector bank.
The bank has products right from equity funding, the entrepreneur development fund, to working capital, forex, and derivatives. We have identified the SME as the growth engine of the bank. The bank has carved out this separate business vertical to meet the requirements of this segment. The Unique Selling Proposition (USP) of our business model is that we have relationship manager concept where the entrepreneur does not have to run from pillar to post; all he has to do is contact our relationship manager and he will get everything done for him in the bank itself.
Recently, RBI has issued a guideline that states that loans up to Rs 2 crore particularly for micro and small enterprises.
Moderator
Mr Malhotra, as you are aware, access to funds is difficult for SMEs; moreover, patenting cost, documentation filing, is also a problem. A number of SMEs are just not able to elaborate what they want. So what kind of support can be offered?
Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
We have an Intellectual Property Committee that has a free helpdesk in our chamber where a member of our chamber who is involved in intellectual property rights gives free advice.
Also we have set up the Senior Executives Forum (SEF) that handholds and advices entrepreneurs on making their business plans, and for developing their business plans. Nonetheless, very few people are coming forward to take advantage of this benefit.
Moderator
Since all SMEs are not aware of this, is there some way in which we could package it as a cluster, the identity being a cluster?
Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
I agree with Mr Balwankar’s point of view that banks are not in a position or do not as of today value intellectual property as a part of assets on their balance sheet. Moreover, just like in FMCG companies, your brand sometimes is a very big asset that you cannot value because these are all intangible assets. So I think some kind of attempt has to made by the banks to value intangible assets of this kind and the RBI has to come to a method of how these things can be valued, if not at full at least at some part value so that you know funds can be made available for such values. I think it’s very important that we do something in this respect and move some sort of out of the box thinking, especially for SMEs.
The other point that he made was with regard to intellectual property rights protection. As we know our legal system is so slow and so cumbersome that protection is easier said than done. Any party with muscle power can always wrestle out a small party into making a protection non-existent. This is where again I think we need to have something, but then this leads us back to reforming our complete legal system.
One other thing that I would like to counterpoint is that a large part of patent laws pertaining to intellectual property rights in our country have been formulated with a focus on the fact that most intellectual property rights are MNC and foreignowned. Thus, we need stronger patent laws to protect the Indian industry from being overly, let’s say, prevented from doing what they need to do.
I think the laws have been made in such a manner that for a very long time Indian companies were not having intellectual property rights. It’s only in the last few years that Indian companies have gone out of their way to patent products to make patents. I think till the 90s or 80s hardly one in few Indian companies ever got some patents or needed protection. It was always the other way around that foreign drug companies, especially in the pharmaceutical sector, were trying to enforce their property rights and prevent Indian companies from using some technology of similar kind or different routes. The Indian laws were made to protect Indian companies that didn’t have property rights.
So I think that as we are changing and we are becoming sort of creators of Intellectual Property Rights (IPR), we should get these laws changed, and in that I think we have a great champion right here in Pune, Dr Mashelkar, the Director General of CSI. Mr Mashelkar is a great champion of IPR. I think, through the chamber we could raise these issues with him. He has the stature and the reach to be able to talk to the authorities and to the government and get these laws changed for the protection of Indian property rights.
Moderator
Thank you, Mr Malhotra and thank you gentlemen. I’ll throw the floor open to questions. If any one has any question for us, please feel free.
Mr Kaushal Sampat, Chief Operating Officer, Dun & Bradstreet India
Now summing up what Mr Malhotra said, most banks today normally tend to assess a company by a template even though the RBI has given various directives. This template is probably 10-years-old, and needs a little bit fine-tuning to make it suitable for today’s template across various sectors.
I mean to say that when you say clusters, automotive, electronic or whatever it is, they follow the same template. Then when you try to go out and look for their stocks, you actually try to evaluate a company that is into intellectual domain and does not have any stock. So your balance sheet is bolted up as you do not give any value to the intellectual property that has been created, the investment that has gone into it.
In spite of all the RBI directives, I’m seeing not a single bank, which includes nationalised banks, forget about private sector banks, because private banks are not for this purpose. The nationalised banks do not give a bit to this aspect. Now what IDBI Bank has to say in this?
Mr Pradeep Bhalwankar, Managing Director, Twin Engineers Private Limited
More products we have done and that is the biggest problem of the Pune SMEs at the moment. I hope this panel will address this Puneites problem.
Mr Umesh Jain, General Manager, IDBI Bank Limited
Today, the banks do not have a system to evaluate intangibles. However, coming to your specific industry of IT and ITenabled services, we do have a product for the IT sector where we provide loans that facilitate working capital up to Rs 2 crore assessed on the basis of their performance. And I think we have addressed that concern to some extent.
Then comes the issue regarding financing of the plan. Well I don’t have any answer to that at this stage. The valuation of the brand is equity and not all of us are really equipped to handle that. The funding against the intangibles doesn’t exist in our banking system as of now. However, as regards to the funding of specific services, we have initiated different products, as mentioned earlier in lieu for the IT and IT-enabled sector with the help of bank.
Mr T R Bajalia, Executive Director, IDBI Bank Limited
Today anybody can come forward to banks and say that my turnover during the next years is going to be Rs 20 crore or 30 crore. Banks straightway grant 20% of such companies’ turnover as working capital without any enquiry. The requirement of the client is mainly for either term loan, which is required for any capital investments. If you are giving the proper project and the estimates, the banks finance up to 75%.
As far as your working capital is concerned, it is based on your performance. Up to Rs 10 crore of your performance we immediately go ahead and 20% of your performance can be given.
Again here, whether you are debtors for six months or eight months or nine months, varies on a case to case basis. There are cases where even debtors for one year are being considered and there some cases where debtors for three months also become obsolete or cannot be recovered. So things have changed. It differs on a case to case basis.
As regards to IPR, there is no method. But if one has a good brand then immediately the rating improves and your rate of interest comes down based on the rating. Banks give preference to the brand. Anybody having a good brand I think it carries the weight in the banking industry.
Audience I
I am already banking with IDBI Bank. I think one and half years or one year back, bank never mentioned about the schemes, which is otherwise being talked by the nationalised banks. And recently I had a chance of interacting with IDBI Bank and found that they were not at all focused on intellectual property.
Obviously on the basis of what’s the turnover, now for the product company till the product is developed, the turnover always remains major. Now when you’re trying to look at the way things are happening the format that you actually proposed already or proposed to share with the prospect and the bank is actually a format that is probably valid for companies or traditional companies that have certain inventories or that make finished goods — finished goods also become finished inventories. It is typically for that and I have gone through that format. There is nothing that you can actually express from the company that is otherwise a product and intellectually-driven company.
Mr T R Bajalia, Executive Director, IDBI Bank Limited
Our business was set-up about a year back and it is at a nascent stage.
When somebody is giving you money, it has to be backed by something. Tomorrow if stocks are there and if you are in a position to show me the stocks immediately that’s good enough, after all it is public money. When we are investing it has to be against something. If you can simply say this is the intellectual property rights, this is the value on that and the system is well, perhaps, definitely banks will be in a position to take. But today I think our regulator does not allow this. Once that is allowed, definitely banks will be doing that.
Audience II
SMEs don’t invest as much in intellectual capital. So, what is it that banks or in bodies like D&B or bodies like (MCI) can do kind to encourage their members and their customers who are for this continuous learning, continuous development programmes for technical knowledge.
Mr Mukesh Malhotra, President, Mahratta Chamber of Commerce, Industries and Agriculture
Too many handouts and too many incentives that we have provided for the small industry has encouraged a kind of a mindset of staying small because if you go big, then those sort of crutches are taken away. We need to change this kind of mindset. I don’t think government or institutions outside can do much to change as this is a philosophical problem.
Any entrepreneur whose mindset is to grow will do anything. If you start off and you say that I am small and I want to remain small, no amount of cajoling or providing facilities from public institutions or anywhere is going to change your status.
So basically we need to have a broader thinking and this is a cultural change, which will also come about over a period of time.
At the chamber for instance, we run more than 500 seminars a year. It’s almost at the rate of two seminars a day on various kinds of things that the industry needs in order to grow, to improve, to get better, and people are taking part in such initiatives.
Even when we provide facilities, people don’t come for it. I think the SME sector has changed its mindset and things like Online Trust Solutions, Training Stage Programmes and Initiatives of D&B are things that can’t help in changing the mindset, in changing the cultural set-up of our people, of our small-scale entrepreneurs. It’s only few of them who want to cross that barricade and have the guts to truly turn big.
Mr T R Bajalia, Executive Director, IDBI Bank Limited
I just want to mention a couple of points on IPR. Rating agencies do value IPR. We do a rating if you own an IPR, it’s not a work in progress because otherwise everything can be work in progress and in India that’s a problem. If anyone applies for a patent in the patent office, it could take forever. If a valid IPR exists, your rating improves.
Secondly, the biggest challenge is that people in the patent office do not necessarily understand the technology that is being patented. For example, yesterday, I was in Lonavala having lunch with someone who runs and owns India’s largest gaming company, online gaming and contests, and then mobile tones, so on and so forth. He has created a concept called “Invisi Ads” because his games are online games. So he said, okay you’ve seen my games, that’s fine but I am putting ads, invisible ads into those games. So when you see them you don’t realise, but when you post them somewhere the ads will pop-up. This is a global patent that is there.
Audience III
Good evening, friends. I am also part of the chamber and good evening to Mr Malhotra and the Chairman for SMEs. The MSME Ministry and D&B are promoting a programme for lean manufacturing, which the Mahratta Chambers had announced and we went through the initial invites and we called people. We wanted them to register under the cluster scheme for lean management.
The government has sanctioned 100 lean clusters under the NMCP scheme, the National Manufacturing Competitive Excellent scheme. And they have 100 schemes, with an allotment of almost Rs 31 crore. There are only 40 clusters that have applied to this scheme. People do not take advantage of the benefits given by the government and in Pune, only the Mahratta Chambers went through. We have applied for three, we got all three. People don’t want to come up. Initial handholding is available, you have to carry forward. Thank you.
Moderator
All right, ladies and gentlemen. This is all the time we have right now. Thank you.