The CEO and cofounder of CreditEnable, a fintech company based in London and Mumbai, had been invited to address the conference on the problems small and medium-sized businesses (SMEs) have in gaining access to affordable debt.
It’s an issue worth tackling. SMEs in high-income countries provide 62% of jobs and 64% of GDP compared to 45% and 33% for developing economies, according to a report by the International Finance Corporation (IFC), a division of the World Bank.
If that gap was to be closed only a few percentage points by providing SMEs with the means to modernise and expand, the impact on jobs and wealth would be enormous.
At the conference, Sood was introduced to the leaders of the Confederation of All India Traders (CAIT), the trade association that represents owners of SMEs across India.
From one generation to another
CAIT’s members certainly have the ambition to take on the challenge. But they also illustrate the dilemmas.
Or Kajal Anand, owner of Debon Herbal, also in Mumbai, who operates the cosmetic manufacturer with her husband Shyam and son Rishi.
As both business owners reach out to lenders to obtain credit to turn their plans into reality, they admit to having little experience as to how to prepare and to present themselves to formal lenders.
“We were unaware of the documentation required since we were just a start-up and barely had any transactional history,” says Anand who eventually got all the documents in place and could access credit from a formal lender.
Lenders have very few criteria with which to give credit to small and medium-sized businesses. The process is inevitably long-winded, costly and often unsuccessful forcing many businesses to turn to expensive, informal lenders.
“What strikes me about the credit market for SMEs is that it is dysfunctional. There is an ample supply of capital and of demand but they are not meeting efficiently,” says Sood of the lenders and SMEs.
“If you are an SME owner who can actually afford to pay 30% interest on its debts to informal lenders, you’re very highly creditworthy. You are also very unlikely to default on your loan because there is so much at stake in terms of personal reputation.”
Getting the message on the road
When Sood first met Balkrishna Bhartia, CAIT’s President, and Praveen Khandelwal, CAIT’s National Secretary, at that conference in Nairobi, CreditEnable had already been operating for one and half years as a marketplace where borrowers and lenders can meet efficiently.
Cofounded with Varun Sahni and funded by investors including the Shell Foundation, its technology – a credit algorithm and predictive analytics package backed by artificial intelligence and machine learning – allowing lenders to more easily assess the financial performance of small and medium-sized businesses – had already been tested with lenders.
“Upgradation and modernisation of the existing format of trade will need drastic changes to make traders aware of the developments and to enable them to accept and adopt the changes,” says Khandelwal.
He, along with Bhartia, was already in the advanced planning stage to launch a campaign – or rath, as they called it – to get its message in front of as many of its members as possible later in the year.
“We are trying to educate our traders to meet future challenges of retail trade by adopting technology, availing credit and improving business practices,” says Bhartia. “Through this rath we are educating on digital payments, statutory compliances and raising of funds.”
The rath, in Hindu tradition, is a chariot used for religious festivals. In the 21st century India it is a brightly painted bus leaving New Delhi in September 2018 eventually returning to the Indian capital four months later having travelled a staggering 40,000 kilometres across country.
From the beginning
The sheer size of the global SME sector, so vividly illustrated by CAIT’s membership, would have put off most people. But Sood has history when it comes to issues with scale and complexity.
She was born in Chicoutimi, a small town in Canada’s northern Quebec, to a half Scottish/half French- Canadian mother and a father born in India, one a teacher, the other an engineer but both social activists.
“The question at the dinner table was always ‘if there is a problem then someone should be able to fix. If so, what can we do about it?’,” says Sood.
At first, she decided to become a diplomat, because “you can change the course of nations. You can have an impact on people”, applying to study foreign service at Georgetown University in Washington DC.
She then joined the U.N., working as a speechwriter for the secretary-general, the late Kofi Annan.
The U.N. did not quite match her energy.
“It works very fast in certain situations and very slowly in others. I wanted to see more impact happening faster.”
She left the U.N. to work for a New York-based consultancy that brokers conflict between governments and large international organisations or companies, where she took on the global, chocolate supply chain.
The U.S. Congress introduced the Harkin-Engell Protocol in 2001, an international agreement to reduce the worst forms of child labour in the production of chocolate. Manufacturers, processors and traders were expected to work towards the elimination of the practice themselves.
The question was how to consolidate 1.5 million small farmers, often on less than a hectare of land, across five countries in West Africa. The answer was to organise them into cooperative structures to secure a better price.
“That was the first large-scale experiment in blended capital – taking development finance and corporate funding and putting it together with different sorts of expertise to get a positive outcome at scale.”
The aha moment
After a stint with Nestlé, Sood joined a private equity fund specialising in renewable energy and one of Norway’s largest state-owned companies.
The fund also invested in small communities wanting to build their own hydropower projects. She noticed how many of the companies were generating good commercial returns but when they wanted to expand the bank would not lend to them.
In 2011, Sood, with cofounder Varun Sahni, set up an asset management company focusing on social impact. As they built up a portfolio, the issue of how SMEs were failing to access debt kept on surfacing.
It was at this stage in the company’s development that Sood arrived in Nairobi and met CAIT leaders Bhartia and Khandelwal.
A year later, the peer-to-peer Changemakers Programme kicks off with ten senior leaders of CAIT sharing their experiences of raising debt and what changes they need to make to compete on a global level with members.
“If we can systematically move a big chunk of these people out of the informal debt sector, the overall cost for all of them will go down,” says Sood.
And, of course, she’s doing something about it.
1. Manohar Wagle, owner, Wagle Sports: incorporated in 1865 by Manohar’s great grandfather.
Family: Vaibhav, my son, has just joined the business. He used to manage our store in Khar but now that we’ve shut that down, he’s back at our flagship store in Dadar. My elder son used to also work with us but has now ventured out into another field.
Future business plans: People have become conscious of their health ne hence the field we trade in, sports and fitness, has gained tremendous popularity. We have already set up a pop-up store in a high profile country club in Mumbai. We are thinking of opening more across Mumbai as you have many sporting people going there.
Finance: My company was originally a self-funded venture started by my ancestors. The few times we’ve required urgent financing, we have had to borrow from friends and family. I have a robust balance sheet. I feel lenders’ should look at the overall picture.
Location: South Mumbai
2. Kajal Anand, owner, Debon Herbal: cosmetic manufacturing unit incorporated in 1995.
Future business plans: Though we currently do export, we want to focus on exploring new markets and increase the exporting capacity and volume. We want to enter a chain of bigger retail shops and do a revenue share with the owners of the same. My son is going to lead the marketing function.
Finance: Initially it was very difficult to access finance. We were unaware of the documentation required since we were just a start-up and barely had any transactional history. We slowly learnt the importance of having a good personal credit history and how helpful that can be to get loans at the inception of your business. As the business grew, we earned a lot of goodwill in the market because of the high quality of our products and managed to get all our documents in place eventually.
Location: Bhayander, Mumbai
3. Rabi Shankar Roy, owner, Sunshine and Indira Enterprise: distribution and construction, both founded in 1994.
Finance: It was very hard. The banks don’t negotiate good interest rates, their managers don’t give personal attention to a borrower’s application and the turnaround time for the loan to get sanctioned on average is four to six months. Even if the correct documentation was compiled, providing collateral and mortgages was very difficult. After a few years of my business being active, my reputation, profile and solid transactional history enabled me to eventually secure debt.
Role in CAIT: West Bengal Secretary-General – also overlooks CAIT activity in Assam, Sikkim and part of Orrisa.
Location: Kharagpur, West Bengal.
Finance: We started the business with our own capital and managed to grow the company at a fast pace. When we needed a working capital loan it wasn’t very difficult due to years of experience, correct documentation, a strong relationship with banks and the fact that I pledged my personal property as collateral. However, the main pain point for me was the turnaround time it took for the loan to get sanctioned. There was a lot of back and forth with the bank managers and they kept pushing timelines.
Location: Chennai, Tamil Nadu.