Loans for long have been a well-known and well-used method of raising capital. The drawback for taking out a loan for your company is repayment of the loan, both in principal and interest. However, the positive aspect of loan or debt funding is that the lenders are only entitled for repayment, not an ownership which is why debt funding is considered advantageous for growing companies. When you are just starting your business, it is cheaper than raising equity and it makes sense to preserve your equity for as long as possible.
Funding amount may vary according to different loan providers and may sometime pose a challenge like requesting for mortgage(s) or gurantee(s) of repayments. To understand how the debt funding scenario works further, CIIE connected with Jaisingh Dhumal, Chief Manager at ICICI Bank who also leads operations at Technology Finance Group of ICICI. More about TFG can be found at the bottom of the article. Excerpts from the interview:
Debt over equity
In my view, debt is to be serviced for a limited period (besides the fact it is concessional in our case) compared to equity. Debt that was provided under our schemes was significantly cheaper, once debt is returned the company is debt free and can expand/innovate into the next phase with internal cash accruals or own funds which can be brought in as promoter’s own equity in the second phase.
For example, if a company is a research oriented company with cash flows dependent on results of research then we use a different financial mechanism like a conditional loan where no interest is payable until commercialisation of the technology so in such a scenario debt is not advisable.
We don’t source projects or companies. This department has been in operations for about three decades, so, everybody and anybody interested usually has decent awareness about us. Generally technology companies, companies working with incubators or IITs or college or tech parks usually know about such schemes. Although we have to advertise about active lines in national newspaper as part of the policy, we have never felt the need to advertise. For example, agriculture commercialization enterprise program is the only active line right now – so we advertise about it in national newspaper once in a year, as part of the policy.
After a line has been open, we receive applications regarding that. Different lines have different format to apply. Once we have received the application, we send in an excel sheet to the participants that asks for a detailed project report (dpr). Once we receive the dpr, we start with the appraisal process. While the appraisal process is going on, we keep in touch with the company to seek any more information required. Once the appraisal note is ready, it comes to me for overlooking and editing. Post the editing process, it is then sent to the committee/ forum responsible for the approval. It might look simple but it’s a long process of about a month or two.
The complete track record of the company is checked for these risk schemes. Right from civil checks to relationship with your current banker, everything is checked. One critical point in due diligence is to check for personal defaults. Defaults in home loans, auto loans, credit cards and all are red flags. Before the appraisal note is prepared, a team is put in place which looks at ticking all the checkboxes on the list of eligibility and program guidelines.
Although innovation is the key to the projects we fund, the financials and track record of the company is equally important for us. Before you run right out and start approaching us, make sure your financials are in order. Messy accounting and record-keeping can ruin your chances of getting financed by raising questions in our minds as to how well you know your business, your competence in financial management, and your diligence with documentation. You need to know your numbers, your balance sheet should be balanced, good standing with your existing banks, business plan with proper financial projections. All these factors play a vital role for us before going forward with the appraisal note.
We offer concessional interest rates. All of our schemes will have different requirements but they will never be commercial interest rates. If the on-going market rate is 14% then we will be way below 10% and the likes. For instance, in agribusiness line it will be linked to the wholesale food inflation rates and the NABARD rates. Every month, we keep a track of what is the current NABARD rate and food wholesale price index and accordingly we will link our interest rates. We cannot be lower than NABARD rates for agriculture sector – so if today NABARD is offering 7.3% then we are at 7.5%. For institutions it is interest free – we only charge them a service charge of 1%.
The engagement model with the benefactors is one of the most detailed and important aspect for us. When the legal documentation is done, the relationship manager will take charge. It is a continuous process which helps your determine if your recovery will be done or not. It’s after the sanction letter has been passed that the real work begins. Legal department ensures that all the documentation is in place and security is perfected. The relationship manager ensures that the disbursement happens on time, the balance checks after the project is under implementation, where is the money being utilized, what is the quarterly progress report – all these information needs to be checked and verified. Our rigorous follow up process is one of the key elements of our success in getting successful recoveries. We don’t disburse money on the basis of certificates only. I have to ensure that the relationship manager visits the site, he/she sees to it that the assets are created as per what we have written in the appraisal which is then tallied with the CA certificate.
Sectors and criteria
In agribusiness line, we are involved in post harvest processing where there is value addition for farmers. We try and make sure that the project is in backward area, adds value to the producer, minimize the wastage of the farm produce and in turn increase the farmers net return. At the same time we make sure that our connect with them is not just limited to giving them loan but also transfer of knowledge. Some other criteria of selection includes employment generated in the backward area or rural area and addition of new infrastructure to the rural area.
Likewise, for energy, we operate in emission reduction process. For instance, for very large Cogen projects, banks would normally fund but its nothing new, there’s no innovation in it. However, for a small or medium size edible oil company or refinery who wants to put up half a mega watt turbine would struggle to get a loan from the bank because it has no collateral to give. In such a situation, if the company uses biomass boiler to cut down on the cost, then we come into picture. Using grid power is expensive but a company like this who uses an alternative form of energy to improvise on margins can monetize the difference which will then help them repay the loan. In this way, the company doesn’t has to provide any security.
How we operate is that we do first four or five projects in a country, where disruption happens and then move on to another sector. We don’t repeat funds in the same sector.
One example can be in agriculture and energy sector. A certain company with us converted from low tension to high tension and to insulated cables whilst saving 25% energy and significant amount of emissions. They repaid the loan not by creating security but through the energy savings they made through the agriculture and residence sector by just selling at a higher cost. The difference was used to pay the loans back. Another example can be about a wind side management company where utilities. This kind of project has a lot of transmission distribution losses. This company worked on reducing the losses by insulating cables and providing farmers with energy efficiency pump sets where the energy requirement went down for water pumping and the water discharging remained the same. In the similar way every sector has its own uniqueness to save on the difference by using alternate form of energy or products to repay their loans.
We come out with different means for various schemes on how the company can pay us back without creating additional stress for the customers. The companies that come us have no collateral, no security, and is not being funded, which otherwise would not be supported by the usual banks including mine. But for TFG, if we can help such a company by giving them with a suitable solution then the entrepreneur/ sponsor is happy.
Usually, a company repays us much earlier than the time provided. In clean energy, we have a period of 1-2 year for repayment depending on the cash flow of the project. Agriculture sector has a period of 2-5 years and in general it is usually between 3 and 5 years. We have a 100% recovery in Cogen, in wasted recovery, in demand side management with produced tnf losses, even in energy services companies where we have done street lighting projects with municipal body. We pursue different ways to ensure no defaults occur at the same time promoting the projects that will reduce emissions.
The agribusiness line at TFG is open, so if you are a startup/ entrepreneur who meets the criterias mentioned by Jaisingh, then you can apply.
About TECHNOLOGY FINANCE GROUP
The Technology Finance Group (TFG) of ICICI Bank implements various programmes for international agencies such as World Bank and USAID. The programmes currently running are designed to help the industry and institutions undertake collaborative R&D and technology development projects. These programmes focus on the following sectors:
- Biotechnology/ Healthcare
- Electronics & communication
- Manufacturing/ Control technologies
- Financial/ Security services
The core group handling these programmes assists projects, which introduce new concepts, products, and processes that will have a positive impact on the industry and help in improving competitiveness and operational efficiencies.
The programmes being implemented are:
AGRICULTURAL COMMERCIALIZATION & ENTERPRISE (ACE) TITLE III PROGRAMME ICICI Bank Ltd is India’s largest private sector bank and the second largest bank in the country with consolidated total assets of about US$ 120 billion as of March 31, 2011.
Technology Institutions (TI) Programme funded by World Bank helps technology institutions to build capacity to enable them to meet the challenges and requirements of the industry.