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February 28, 2018

Towards ………. the Cash Flow Based Lending


Collateral based lending is still a common practice in the Myanmar Banking Industry despite the fact that experts and trainers have pointed out that this lending technique is antiquated when compared with current good international practice. Here, cash flow based lending has made its way. Now, with the assistance of the German government-owned Development Bank, KfW, it is learnt that, collateralized or even uncollateralized loans up to 100 Million MMK will be lent out to SMEs, which will be implemented by Cooperative Bank.
It has to be noted that uncollateralized lending does not mean a relaxation of the collateral requirement to receive a loan from a bank. It rather means the transformation of the lending methodology from collateral considerations to cash flow based lending. Here, currently the credit decision is made based on value of the collateral in collateralized lending, so it is interesting to see which will be based on for making credit decision in cash flow based lending.
For this purpose business plan is an objective indicator for the anticipated cash flow of the business. Hence, the lending process requires to present a business plan in line with the cash flow based lending technique.
Prerequisites of the bank
Before cash flow based lending can be implemented, a series of preparations on both sides, the credit department of the bank and the SME, have to be carried out reducing the information asymmetry. On the bank side, understanding of business plan and SME finance training need to be systematically conducted to the loan officers and the other staff of the credit department.
There the question might come up that the business plan is needed to be prepared by the SMEs not the bankers. From my point of view, it is necessary to understand how to prepare the business plan as a banker. This is because once you have experience in business plan preparation, you can make proper judgments of the weaknesses, strengths, viability, credit amount and particularly, the repayment capacity of the business from future cash flow which is the most important criterion for a bank. Thereby, a holistic approach has to be applied, meaning that extensive experience is needed. It has to be stressed that the credit staff should not provide any guidance how to prepare business plan to anyone, which does not comply with ethical standards.
In cash flow based lending, the credit decision is made after careful assessment of the various risks, the different profiles and industrial sectors of the businesses. This methodology is totally different from the traditional lending. Hence, comprehensive SMEs finance training is required in order to calculate the risks correctly and understand the differences of the enterprises. The careful assessment of the risks of the SMEs can only be achieved via a qualitative and quantitative analysis. The quality of the business is reflected by the return on the investment. So it is important to assess both aspects skillfully.
So, once the credit officer has finished a business plan and a SME finance training courses, he/she can make a proper assessment of repayment capacity and the risks involved and can make a balanced recommendation for the loan amount which is appropriate for the respective borrower.
SMEs and Business Plan
SMEs have inherited risks in general, such as many of them cannot provide collateral, cannot meet capital requirements, provide inaccurate business and financial documents, demonstrate weaknesses in technology application and management or need market information. Even in cash flow based lending, the vital need to submit business plan would become another challenge for the SMEs.
The presentation of a business plan plays a major role in making credit decisions as the expected cash flow is a result of the business plan. All businesses have some future plans and ideas in their mind to expand their business. However, it is important to be systematic, practical and rational when those flow into a physical business plan.
Some Myanmar banks such as KBZ, SMIDB and YOMA were selected by the Germany based GIZ for the first phase of the pilot project component under the SME finance project from April 2014 to Sept 2016. Long term international consultants were appointed to provide technical assistance to respective banks. Under this project as well, international experts were invited to conduct business plan training under the CEFE (Competency Based Economics through Formation of Entrepreneurs) methodology. Additionally, a training of trainer (TOT) program was conducted in order to continue the training after the finalization of the project and thus to safeguard the sustainability of the results of the project.
Then, customers from the respective banks were invited to attend a full 5-day training. The participants were needed to prepare a business plan during the training period. According to the training experiences, there is a big difference before and after the training, especially in the areas of the way of thinking, unfold experiences, weaknesses and strengths of the business in addition to increase their awareness for future prospects and risks of their businesses, ways of preparation and the forces in around the SMEs.
The trainings were very beneficial for SMEs and popular among them. In brief, the business plan training promotes technical aspects and raises awareness of the inherited weaknesses of the SMEs.
With the financial and technical assistance from the German government-owned development bank, KfW, CB has opened a new chapter for traditional lending procedures of Myanmar banks by introducing uncollateralized loan. However, both the credit department and the SMEs applicants face different challenges. The banks can conduct in-house training to improve the credit assessment skills. However, intensive technical support training for SMEs is required in order that they can prepare a realistic business plan.
In a nut shell, cash flow based lending creates improvements to existing conventional lending methods in line with the international practices and SMEs get the chance to acquire technical and financial assistance. This result is excellent and a breakthrough for the development of the lending process and the SMEs. If this can be implemented successfully, it is beneficial for both, banks and SMEs, in form of a win-win-solution. I would like to encourage to implement this technique in a correct manner.
On the other hand, some organizations which support to cash flow based lending should be in place. CB bank is currently lending up to 20 million MMK loans to SMEs, which have difficulties to provide collateral. Instead, CGI (Credit Guarantee Insurance) from Myanma Insurance is applied which covers the credit risk. So far, 60% of loan is covered under this CGI. The percentage of coverage should be increased so that the CGI can be widely applied. This scheme is one of the accesses to finance SMEs. If, in addition, a credit rating agency and a credit information bureau will be established, I hope that cash flow based lending will become more active and very beneficial to the Myanmar banking industry and the SMEs.


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