Useful Notes on Cluster Development: Domestic and International Best Practices

As per the sanction received to their loan application in 2002, the consortium received a cash credit (hypothecation) facility with a limit of Rs. 60 lakh. The purpose of the advance was to procure natural rubber, synthetic rubber, chemicals, titanium- di-oxide, etc., and sale of the same. The interest charged was 2.5 per cent.

Primary security was stock, and collateral security was in terms of land (valued at over Rs. 40 lakh) offered by two of the directors of the consortium. Eight directors also offered personal guarantees. Stock statements are submitted every month and withdrawals are monitored based on stock statements. The authorized official of the bank is permitted to carry out periodical inspection at monthly intervals.

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Not so evident ‘uniqueness’!

With regard to Darjeeling tea (and perhaps Virudhunagar chillies), agro-climatic conditions lend outright distinctiveness to’ the product. In some clusters, however, uniqueness is not so easily evident. In the case of Kottayam rubber, for instance, Kottayam rubber has a reputation recognition) that may be evident from the Govt. Gazetteer as also from various historical records, reports in the print media, and other such secondary material available with the Rubber Board.

The fact that prices of rubber sheets from Kottayam are always on the higher side also indicates some premium in the Indian context. A scan of commodity market prices in the newspaper validates the premise. A paper recently cited that costs involved in the manufacturing process is considerably lower in Kottayam.

This in turn, lends its products premium quality and prices. But, does this make Kottayam not a significant player in most rubber products, or in terms of share in global rubber and rubber product trade? An option in this context may be to narrow down claim to geographical indications (Gl) on to particular product trade……. rubber mats and matting’s, for instance, wherein market share leadership may also be established.

Creation of a guarantee fund:

In Alleppey, member enterprises of the first network supported under the Member Enterprises Credit Guarantee Fund (MCGF) were making semi-finished coir mats and had an average annual turnover of about Rs. 5 lakh each.

Enterprises in the group, on an average, spend Rs. 2 lakh a year on purchase of raw materials. Of this, about Rs. 1 lakh is for credit purchase. The operating cycle of business is about a 2 months period (average lot size). Hence, each unit requires approximately Rs. 40,000 as working capital for the cycle of 2 months.

Of this Rs. 20,000 is credit purchase. Input suppliers offer credit @ 4% per month to enterprise. If credit purchase is avoided, the profit margin of enterprises can be increased by about 20%. Therefore returns will be about Rs. 5,600 per month per enterprise.

Financial Support:

Financial assistance in the form of working capital loan may be extended by any commercial bank. In Coimbatore, a multiplier of 2 over the corpus fund was offered by Vijaya bank and SBI Alleppey sanctioned support to a similar extent.

Evaluation and recommendation committee:

An evaluation committee that represented 2 members of the group President, COWMA, and Manager, Bank, were to scrutinize proposals of the members and make recommendations. In effect, the account could be operated only upon the joint signatures of the President COWMA and the entrepreneur. Although the bank will be primarily responsible for appraisal of loan proposals and recovery of debt, the implementing agency would co-ordinate with the bank to ensure recovery of loans.

Amount of loan, margin money, security, and invocation of guarantee:

Amount of loan to each member of the group shall be need-based and depend on the recommendations by the committee. Loan may also be taken on a group basis, if necessary. In the Coimbatore case, the account could be operated jointly by two leaders/partners and a nominee of the COWMA, who offered a personal guarantee. In the case of Alleppey, all members opened individual accounts at the local SBI. The bank may require margin money deposit for Joan proposals in excess of Rs. 50,000.

Security:

Hypothecation of assets created out of the loan constitutes primary security to banks for the assistance they provide to the borrower. The corpus fund will be used as collateral security by way of interest-bearing fixed deposit. This is in lieu of collateral security to be offered by individual borrower to cover part of the outstanding facility offered.

Funds placed with the leading banks in the form of guarantee for extending credit to member beneficiaries shall not be invoked till the borrower account is classified as doubtful, and all recovery efforts by bank in the normal course of business have been exhausted.

Invocation of guarantee:

The invocation of guarantee shall be limited to the extent of 75% of the principal loan amount outstanding in the defaulted case. This option is largely in cases (such as in Jaipur) where members were to utilize funds independently. Bank shall have first charge on the deposit of corpus fund so made, and cede second charge in favour of SIDBI.

Interest rate and payment:

The rate of interest charged was bank PLR plus 2.5% in Coimbatore while it was only 8% in Alleppey. The working capital facility was extended in the form of a cash credit.

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