MSMEs lack awareness about easy and collateral-free loans available with banks

MSMEs avail loans by mortgaging their immovable properties at exorbitant rates of interest for their trading activities, unaware of the easy loans formulated specially for them

By Richa Chakravarty

Tuesday, April 08, 2014: The Small Industries Development Bank of India (SIDBI) has observed that micro, small and medium enterprises (MSMEs) avail loans by mortgaging their immovable properties at exorbitant rates of interest for their trading activities. MSMEs have low awareness about the various easy loan schemes for trading activities formulated by the Ministry of Micro, Small and Medium Enterprises (MMSMEs). Hence, SIDBI has advised MSMEs to avail the easier loans offered by the various banks, which are available at competitive rates of interest.

Loans aplenty

Today, all nationalised banks offer both collateral as well as collateral-free loans at competitive rates to MSMEs. These loans are available either against a working capital or the machinery of the new or existing facilities. Since the rates of interest (RoI) at all nationalised banks differ, MSMEs have been advised to compare and evaluate loan terms and facilities while availing the benefits. State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Central Bank of India, UCO Bank, Delhi Financial Corporation, SIDBI, Union Bank of India, ICICI, IDBI, and Axis Bank are just a few of the banks that offer special loan schemes for MSMEs.

Keeping in mind the problems faced by MSMEs in getting finances for their businesses, Government of India had also launched the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) in 2000, which offers collateral-free credit. Both existing and new enterprises are eligible to avail loans under this scheme. The Ministry of MSMEs along with SIDBI established this trust—the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)—to implement the scheme. About 131 banks across India offer loans under this fund and the trust. More than 1.1 million proposals have been approved under the scheme till April 2013, providing guarantee cover for a total sanctioned loan amount of Rs 543.22 billion. “SBI offers up to Rs 10 million under CGTMSE, which is collateral free and without any third party guarantee,” informs an SBI official. PNB also offers Rs 10 million under CGTMSE. It offers Rs 1 million without collateral, and up to Rs 2.5 million to MSMEs with a good track record and financial position.

Besides this, an India Opportunities Venture Fund (as announced in the Union Budget 2012-13) has been implemented by SIDBI with effect from August 1, 2012. The fund envisages enhancing the availability of equity/risk capital to the MSME sector, as well as indirect assistance by way of funding operations. SIDBI has also been operating an MSME risk capital fund for providing risk capital facilities to the MSME sector.

Strict assessment process

Banks carry out strict assessments before extending loans. “RoIs are calculated only after the assessment; hence, it varies from case to case,” says a PNB official. An applicant has to disclose the company registration number, balance sheets of one to three years (varies from bank to bank), business constitution/type, location of its manufacturing facility, business projection for the next two years, etc.

While the assessment and the whole procedure takes 20 days, the loan is sanctioned within a month. In case of defaulting on loan repayments, the bank has all the rights to confiscate the property of the borrower.

MSMEs unhappy with poor loan execution

During a survey by Electronics Bazaar, it was found that MSMEs lack awareness about the various financial schemes and loans available to them. They are also unaware that there are monitoring cells where they can complain if a public bank fails to give them proper information about all the schemes available with them.

Informs Nandini Dhake, director, marketing, Omega Electronics, an MSME, “Banks never disclose the details about the various schemes introduced by the MMSME and National Small Industries Corporation (NSIC). Despite being a woman entrepreneur and running an SSI unit, I could never avail any benefit from these schemes.” Dhake has mortgaged her property for a Rs 10 million loan from a nationalised bank. Even on submitting all proofs and certificates of being an SSI unit, she could not avail a loan under any MSME scheme. “I suggest that all banks should have a separate division to look into SSI applicants,” she adds.

A senior official in the MMSME agrees, as he explains, “Banks sometimes do not disclose the schemes available with them just to avoid the hassles involved in getting funds released from the third party (agency that stands as guarantor on behalf of the borrower) and also to avoid the paper work involved. However, this is not the case always. MSMEs can lodge an official complaint against the bank in such cases.” A monitoring cell at the MMSME headquarters at Nirman Bhawan ensures that banks sanction loans under the schemes available for MSMEs.

Vinod Kapur, general manager, marketing, Saru Smelting Pvt Ltd, another MSME, is also dissatisfied with SIDBI as his loan from SIDBI was never sanctioned. “I feel the financial institutions favour big enterprises despite the fact that it is the MSMEs that face problems in arranging finances for running their businesses,” he adds.

Arvind Kaul, proprietor, East West Automation Technologies Pvt Ltd, is also dissatisfied. “The loans I applied for under the MSME schemes were never sanctioned. Since the process of sanctioning loans is lengthy and cumbersome in government institutions like SIDBI, we prefer to manage finances through other channels rather than availing benefits from such schemes,” he says.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

Aaparana Chauhan