CASE STUDY: Issues faced in availing business Loans, and how to overcome them.

Based on our extensive market research, we have found that all Scheduled Commercial banks are mandated to provide financial assistance to eligible MSMEs and Start-ups, under Stand-up India, MUDRA, and CGTMSE Schemes. However, the interest in promoting these schemes is fairly low or non-existent amongst Banks, especially Private and Foreign Banks, which is contrary to the stipulated guidelines.

Recently, while assisting one of our clients in availing a Cash Credit Limit under CGTMSE Scheme, MSMEmitra.com experienced some of the problems faced by MSMEs.

'Company X' is an established market player in its field of work, providing the goods and services to big corporate clients. Company X had infused more capital into the Business in this Financial Year, to expand its operations and had a requirement for a Working Capital Cash Credit Limit of Rs. 60.00 Lacs. The company had surpassed the sales figures of the previous year within 5 months of the Current Fiscal, and were looking for Financial Assistance from Banks for their Working Capital requirement. However, as the promoter did not have any collateral securities, Company X wanted to process the loan under CGTMSE Scheme.

When we started approaching Banks on behalf of Company X, we found out that quite a few Banks rejected the proposal saying that they are not very comfortable processing loans under CGTMSE!!!

The hesitancy is due to the general perception that if the Borrower has nothing to lose, he is more likely to default, which is wrong, as the Borrower is given a loan against the primary security (Current Assets or Fixed Assets like Plant, Machinery and Equipment) and has a personal liability too, to repay the Bank's dues. 

MSME Loans (especially loans under Rs. 5.00 crores which generally classify as retail in the Bank's portfolio) account for less than 8% of the Total NPAs of Banks. Smaller Businesses suffer due to under-funding or lack of funding at the right time. They are victims of non-repayment of loans by the Bigger Businesses. NPAs are a risk inherent in lending, be it secured or unsecured loans, and proper Due Diligence and continuous monitoring on the part of Banks should not be compromised at any cost. If the Banks are diligent enough, the probability of 100 or even 50 out of 100 MSME Loans of Rs. 2.00 Crores becoming NPA is significantly lower than the probability of one Loan of Rs. 200.00 Crores turning bad. Also, under the schemes like CGTMSE, the risk of the Bank is shared by the Credit Guarantee Trust for Micro and Small Enterprises.

It is understandable if the Bank refuses to fund a Business because of poor credit repayment history of the applicant/s, or if the applicant fails miserably in the internal due diligence, even if the requirement is justified financially. But we were surprised to find out that Banks give unsatisfactory reasons for processing these loans, reasons which defy logic and are against the stipulated guidelines.

Working with the vision of making the process of getting Financial Assistance and availing the benefits of Schemes and Subsidies seamlessly and easily for our client, MSMEmitra.com decided to take on the system.

As per the stipulated guidelines, the Maximum Permissible Bank Finance for Company X was computed (based on justified estimations and projections made with some degree of confidence) as below:

CALCULATION OF MPBF for Working Capital Requirement (INR Lacs)
For the Year ended	31.03.2018 (Estimated)	31.03.2019 (Projected)	31.03.2020 (Projected)
MPBF, using Margin Method
Current Assets	99.80	108.40	117.60
Current Liabilities (Other than Bank borrowing for WC)	11.00	15.00	20.00
Working Capital Gap -> (i)	88.80	93.40	97.60
25% margin on Current Assets -> (ii)	24.95	27.10	29.40
Maximum Permissible Bank Finance (i) - (ii)	63.85	66.30	68.20

Two of the leading Private Sector Banks (who we believed are leading the way in the development of the country with regards to Financing deserving MSMEs) told us that our understanding of the computation is wrong. We were told that Banks have to arrive at the Limit based on achievement in the previous years, without any consideration for Achievements in the Current year and/or infusion of fresh funds for expansion. 

When pointed out that as per the recommendations of the Naik Committee, MPBF has to be computed as per the above method or as per Turnover method for Limits upto Rs. 6.00 Crores (wherein the Limit is calculated as Minimum 20% of estimated Sales of the Current Year), one of the Banks said that they can start with a Limit of Rs. 10.00 Lacs, without giving us a logical reason for computation of the same, while the other Bank refused to entertain any further questions. It is important to note here that under-funding is also one of the primary reasons why Small Businesses cease to grow, and eventually default in repayment of loans. We are following up on behalf of our clients, to get a satisfactory response from the said Banks for not following the guidelines.

However, majority of the Public Sector Banks and Private Banks like Catholic Syrian Bank, Suryoday Small Finance Bank and Equitas Small Finance Bank (in particular) have no set bias against proposals under any Schemes, and actually peruse the loan proposals before arriving at a decision, setting a new precedence for other Banks to follow.

If you are still wondering what happened to Company X, you will be happy to learn that due to our persistence and best efforts, the company has received an in-principal approval from 4 Banks, and are waiting to hear from 2 more Banks before making the final decision.

This case is not a one off issue for us, as we see it as a problem in the system, and are dedicated to doing our bit in making the entire process more transparent, acceptable, and based on merit. We will be making a formal presentation to the Ministry of MSME and PMO, highlighting the various reasons why MSMEs in India are not able to grow, in spite of the availability of various schemes and subsidies.

Here are a few points to remember for Business Owners. Before applying for a Business Loan, MSMEs and Start-ups must:

1. Visit MSMEemitra.com to make an informed decision about the most suitable Funding Option available, and learn how to avail the benefits of the applicable schemes and subsidies.

2. Make the projections with some degree of confidence and back it up with the quarterly / half-yearly achievements (as was the case with Company X).

3. Describe the background, achievements and Business plans in the Loan Proposal. If you are unable to prepare your loan proposal, contact us at support@msmemitra.com for our assistance.

4. Know all the rules, regulations, and guidelines for MSME Funding, before approaching the Banks.

5. Identify which Banks have a favourable policy for funding MSMEs, by visiting MSMEmitra.com

5. Persevere! Do not give up if a Bank refuses to process your loan without giving a genuine reason.

6. You can always reach us on support@msmemitra.com for our assistance.

Thank you for reading. We will love to hear from you about your experiences of going through this process on support@msmemitra.com

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MSMEmitra.com is dedicated to Start-ups and MSMEs, with an objective of helping Enterprises focus on growing their Business, without the constant worry of funding the growth.

The team at MSMEmitra.com, with a combined experience of over 60 years in Credit Reporting, Due Diligence, Banking (MSME Funding segment), and Financial Consultancy, provides Financial Consultancy to MSMEs and Start-ups which do not have a CFO or an internal Finance team. 

Disclaimer:

This write-up is based on actual events. The author wishes to highlight the plight of Small Businesses in India, without the intent of targeting any particular Bank or Organisation.