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SMEs who raise loans have to deal with some strict financial discipline. This includes maintenance of accounts and timely repayments of loans. Although there is nothing wrong with this but some promoters complain of too much interference from banks. SMEs who take loans for a certain reason can’t divert funds for other purposes of the business. This prevents SMEs from constructively using the capital in hand. The borrowers have to undertake periodical monitoring of their usage with regard to loan amount. This usually comes in the form of financial statements and cash flow information that needs to be submitted to banks on a regular basis. The banks claim that they do it with the purpose of keeping a closer watch on borrowers.
| Reach is the mantra
T.R. Bajalia, Executive Director, IDBI
A large number of SMEs don’t have banking relationship. We are working with NGOs and government agencies towards RBI’s Rural Inclusion program. Today, a rural SME is faced with a number of roadblocks. Typically, the SME is a single person managed unit. These units go to unorganized sector for their loans. There is a need to bring in awareness that finance is easily available. We have to counter the myth that "going to the bank is difficult." Many do not know that most proposals we (IDBI) get are covered under credit guarantee (CGTMSE). We registered one lakh accounts last year. Interest rate in nationalized banks are the most competitive. If NBFCs offer at close to 20 per cent, ours will not exceed 14 per cent. IDBI increased portfolio by 100 per cent last year. We introduced 13 new products covering all requirements of SMEs such as road transport, shops and establishments, expansion, diversification and so on. Different segments within SME sector have different reasons for raising finances. Micro enterprises require working capital and capital for expansion. They will require collateral free loans. Small scale industries and medium require timely money at cost effective interest rates. This is where the lending market is most active. |
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95% Villages are not covered by banks |
High collateral is also blamed by many SMEs as the reason for not being able to get loans. Some claim that if to raise Rs 1 crore as loan, they have to provide a collateral of Rs 3 crore, then why would they take the loan at all if they had so much funds in hand. Although banks have tried to allay fears that collateral is not the only thing they stress upon, the wish-list is quite long. "Borrowers will have to realize that we are a commercial entity and we have to ensure that the money comes back to us with interest. There is a difference between giving a loan and doing charity," says a senior banker with a private sector bank.
"While collateral is the prime security asked by banks, sometimes, even the property has to be given as collateral, which is a big hindrance. Often, the banks ask for both personal and corporate guarantees", says Sudhir Khurana, AVP, Finance & Accounts, Essel Shyam Communications, a company that has grown through the stages as an SME. "Banks could ask for collateral that would be 20-25% of sales, and then 100% additional security", says Miglani.
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60% Banks are required to extend at least this portion of their advances to SMEs |
Another issue is that of pre-payments. Some SMEs have crossed swords with the banks over this issue. "While we tried to pay our installments in advance, the bank charged us prepayment penalty," says a promoter of an SME. "While in several cases of default, the businessmen get waiver on principle and interest terms. This is the irony of our banking system," he adds,
Banks too have their good enough reasons for not lending sometimes. Lack of transparency on the part of the borrower is one among those. They insist that the promoter of an SME seeking a business loan should come out clean with their books and balance sheets. "SMEs who do not have reliable accounts and transparent financial data do find it tough to raise growth capital. On the other hand, those who come out clean have higher chances of getting a loan," says an official with a credit rating agency.
"Unlike in nationalized bank, sales and collections are decoupled in private banks. We are very watchful of our NPAs and there is strong performance evaluation tradition that drives all aspects of our operations," says a top official with HSBC Bank "We are not bound by the government directives to lend a portion of our total lending to SMEs. While we do follow the principles set out by the government, we do it only if we have secured our lendings," he adds.
| Nationalized banks used to create problems earlier, but after the entry of other foreign banks and private banks, they have improved a lot.
Mukesh Miglani, MD, Fabknit |
The whole process is divided into four parts: marketing, scrutinizing, sanctioning and disbursement. The centralized credit processing centre help in reducing the delays and hassels for these entrepreneurs who are starting their business.
S.Pattabiraman, GM - SME, Corporation Bank |
How To Get A Business Loan?
Despite all the talk about the issues and challenges in raising a bank loan, it is also a reality that banks are lending in a big way and SMEs are lining up to raise money at lucrative interest rates. Here are a few points that banks look for and if a small business meets all or most of these, it stands a better chance of getting a loan.
Project Viability
No one puts a bet on a weak horse, so do banks. Being a commercial entity themselves, they would want to rest assured that the project for which they are giving money has enough potential to generate returns. For this one has to present a viable business plan to convince the banker that his money would be in safe hands. Many banks have a team that evaluates the project thoroughly before recommending a line a credit.
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5% MSMEs are covered by institutional funding |
While for a startup, it is a business plan that makes or breaks a deal, in case of SMEs it is a detailed report that would spell out the roadmap for either the expansion of the existing unit or the setting up of a new one. According to a banker, normally the business model, demand-supply, competitors’ status, tie-ups, orders, team background, sustainability, breakeven horizon, product profile, quality controls, financial position and projections, technical-managerial expertise, execution risk, etc are taken into consideration.
Transparency
This is the big bone of contention between the lender and the borrower. While banks insist a lot on transparency with respect to balance sheet, etc, the SMEs claim that it is the bank that needs to be transparent. "We find that SMEs are prone to cooking their project reports and balance sheets in order to get term loans. They do not even show discipline in handling overdraft facility," says a top manager with a private-sector bank. Banks insist on coming out clean on past track record, sales projections, etc.
Credit Rating
The banking industry is now relying heavily on credit ratings. A good credit rating can definitely increase the chances of getting a bank loan faster. Banks are now digging into CIBIL data to extract the past track record of the borrowers. Their ratings reflect the credit-worthiness of the borrower. Besides helping banks get a better sense of the borrowers financial strength, the ratings helps the ratee company gain insight into its own strengths and weaknesses. Credit rating agencies such as ICRA, CRISIL and CARE are now focusing quite a lot on the SMEs which can make the most of this facility.
Promoter’s Competence
It might look like it would be difficult for banks to judge this but it is not. "We have a number of ways of finding out as to how the promoter is viewed within his own community," says a banker. Banks insist on checking the promoter’s understanding of his business and if his track record is clean. Needless to say, that the promoter’s reputation does affect the chances of getting a bank loan.
| Loan Gyaan
Manas Kumar Nag, CGM, SBI
What does SBI look for while considering a business loan application from an SME? How does the credit rating affect the chances of an SME in getting a Business loan? Does SBI help SMEs in case of Currency Volatility? What happens in case of defaults on business loans? And when all efforts fail we initiate recovery measures by issuing letters and legal notices recalling our advances. Bank starts recovery measures by issuing SARFAESI notices, filing cases at DRTs, other court for chronic defaulters. What are the initiatives taken by the Bank for assisting the units affected by the recent slow down? |
Repayment Capacity
Banks would want to be sure that they would get their money back on time. So the personal repayment capacity of the promoter is also taken into consideration. As for the business, it is the cash flow projections that help the banks in deciding whether the business would generate enough cash that would cover repayment as well.
Collateral
This is the security to cover risk. While collateral is an important element of the lending process, it is not the only element. In case of a manufacturing unit, it is the value of plants and machinery that is pledged by the borrower to raise loan. This is referred to as secured lending or asset-based lending. SMEs talk of high collateral. Often, collateral asked is much more than 100% of the loan, which may even include, personal property and corporate guarantee.
Vimarsh Bajpai & Nimesh Sharma
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written by ravi kumar p, March 17, 2011
written by Ralph Lauren, February 10, 2011
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