Prosperous India-13

Relationships facilitate easy mobilization of funds for businesses

Finance is the life-blood of any business, however small it may be. Hence mobilization of the required funds for investment is the foremost duty of an entrepreneur. Generally the entrepreneurs themselves would have a portion of the money needed for investment in the form of personal savings or family assets. But that may not be sufficient for the promotion of a business or industry. In most cases, the total amount required for the venture would be more. So there is a need for the entrepreneur to mobilize the additional funds from other sources.
Indians are very careful when it comes to funds for investments. Usually they try to invest as much money as possible from their own sources. Personal savings is their first priority as it belongs to them and hence they need not go to anybody to get it, except that they may have to inform their family members. Next to personal savings, the most immediate source is the family savings. In this respect the role of ladies in the family is very significant. One has to specially appreciate the role of mothers and wives in contributing their savings for the promotion of new initiatives. So in most of the cases, the personal and family savings forms a compulsory part of the investments.
After exhausting the savings, people plan for pledging of the assets of the family and even disposal of a part of it to mobilize funds. The main idea is to mobilize funds from family resources to the maximum extent possible, before looking outside for help. A study conducted among the businessmen belonging to the Sozhiya Chetty community in the Ghee and Butter industry of Kangayam in Tamil Nadu showed that all their enterprises were funded by the families without any support whatsoever from any other outside sources.
Invariably in most of the cases, financial support from relatives and friends form a sizable share of the investments. Studies reveal that brothers, sisters, in-laws, grandparents, relatives, community men and friends play their part to support people who promote ventures. A study conducted among the Reddiar community businessmen in Tamil Nadu showed that about one-fifth of them received support from their married sisters towards initial investments. It is interesting to see that the sisters had nudged their husbands to give funds to their brothers for promoting businesses.
In many cases, the relatives play an important role in mobilizing funds for investments. A study conducted among the diamond exporters belonging to the Patel community in Ahmedabad and Surat revealed that the relatives had played an important role in the setting up of businesses. The study showed that about 46 per cent of the respondents received more than 30 per cent of the initial capital from their relatives, while another 43 per cent received funds varying between 20 to 30 per cent of the amount required. The community men and friends also play a role by giving funds for business.
It is not that the people mobilize funds from own and family sources only for initial investments. Even for working capital and subsequent investments, they prefer approaching the personal sources before contacting outside agencies such as banks. Almost all the businessmen of Sankagiri in Tamil Nadu, the well known transport centre with the largest lorry traffic in the country, use funds from their own and close sources even for working capital. In the power loom textile export centre of Palladam in Tamil Nadu, all the businessmen ploughed back their profits into the business as additional investments. It is interesting to note that 80 per cent of them were investing all their surpluses back in to their businesses.
World Development Report 2001, published by the World Bank, reveals as to how funds are mobilized by the businessmen through their net work of relationships in Tirupur, the internationally known textile export centre. It says that the businessmen belonging to the Gounder community, who dominate the industry, mobilize funds through their community relationships without going to banks and paying interest at the market rates. For this purpose, they employ the “credit rotation” system and get funds. Ultimately this practice results in reducing their cost of capital which in turn reduces the cost of production, helping them to fix lower rates for their products.
In many of the industrial and business centres of Gujarat, the entrepreneurs revealed that they received financial support from their community men and villagers, when they expressed their desire to promote their own ventures. They noted that the contributions came spontaneously without hesitation as people wanted to see their own men in business and prosperity. Such kind of helping tendencies could be noticed in other parts of the country also.
When people find that the help from near and dear ones are not sufficient, they try to go for loans. Here also the informal mechanisms play an important role. People prefer to get loans from their acquaintances, as they are more personal and less cumbersome. There are many instances in which friends and relatives also provide loans for interest, either at market rates or even lesser. Then there are local financiers, who are almost everywhere to provide finance to the needy.
People prefer the local financiers over institutions for reasons such as personal acquaintance, convenience, approachability, quick response in times of urgency and lack of rigid formalities. These reasons outweigh difficulties such as higher rates of interest. As a result the local financiers play an important role in the promotion of businesses. Karur, the famous textile exporting centre in Tamil Nadu known for home made textiles, was also known for its finance entities operated by the local people as partnership firms. A study revealed that two third of the total funds required by the Karur industry was mobilized from the local finance entities. That was in spite of the presence of more than fifty branches of banks in the centre. Incidentally Karur was the birth place of two banks namely Karur Vysya Bank and Lakshmi Vilas Bank, both promoted by the local people decades earlier. The study showed that almost the entire financial transactions were taking place on the basis of faith and goodwill. Financiers were not worried about getting documents from the borrowers as they believed the people. The businessmen also reciprocated and as a result the bad debts were almost not there.
Thus relationships play a dominant part in mobilizing funds for businesses. This is one of the major reasons why the economy has been growing steadily, in spite of lesser penetration of banks and financial institutions among different sections of the society. Relationship is an important factor for much of the initiatives in the Indian economy, particularly those that belong to the family based non-corporate sector, as they facilitate easy mobilization of funds. Hence we have to realize that the relationship base of the society has been helping the economy to grow.
1. P.Kanagasabapathi and Senthil Reddy, “A Study on Entrepreneurship among Reddiars”, Unpublished Report, P.S.G College of Technology, Coimbatore, 2004
2. P.Kanagasabapathi and M.N.Arunkumar, “A Study on Sankagiri Transport Industry and Thiruchengode Rig Industry”, Unpublished Report, P.S.G. Institute of Management, Coimbatore, 2005
3. P.Kanagasabapathi and I.Menakha, “A Study on Powerloom Textile Export Industry of Palladam”, Unpublished Report, P.S.G.College of Technology, Coimbatore, 2005
4. Sharad Patel and P.Kanagasabapathi, “A Study on Gujarat Diamond Export Industry”, Unpublished Report, P.S.G Institute of Management, Coimbatore, 2005
5. P.Kanagasabapathi and A.R.Ramanathan, “A Study on Butter and Ghee Industry in Kangayam with Special Reference to Sozhiya Chetty Community”, Unpublished Report, P.S.G. Institute of Management, Coimbatore, 2006
6. P.Kanagasabapathi, Unorganised Finance Sector: The Engine for Economic Growth – A Study with Reference to Karur, Tamil Nadu, Swadeshi Academic Council, Coimbatore, 2002
7. World Development Report 2001, World Bank, Washington.
(Published in Yuva Bharati, Vol.38 No.11, Vivekanana Kendra, Chennai, June 2011)