Why do banks ask so many questions and want so many documents? A primer.
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Why are banks so rigid in accepting loan applications?
Well, they are cautious. They accept deposits for the purpose of lending. If they see the information provided is incomplete and the individual seeking for bank loan is not credit worthy, they are likely to perceive the person and/or the project as unreliable. The result: a rejected loan application.
The solution: you, the entrepreneur, must furnish all information accurately. Take time to understand exactly what the bank is asking you to give, and then give it in an organized, systematic manner, leaving no scope for doubts and questions.
Why do banks need collaterals?
The reason here is quite simple. Collaterals offer protection against default. After all, when you lend someone something, you are taking a risk. To minimise theirs, banks make sure they have a guarantee of some sort. Lalit Agarwal, MD, V- Mart Retail Ltd says, “A collateral reduces the fund risk to maintain the lower capital adequacy ratio. In case the account goes into the Non Performing Assets (NPA) category, banks can recover their money from that additional security by auctioning/selling.”
Agarwal shares his experience, “To grow further with new stores, we needed an additional fund and it was hard to find with all the existing financial arrangement. We started discussions with banks, but even there the challenge was to provide some security as collateral to get the loan sanctioned. We submitted our inventory and fixed assets as part of the collateral. That is how we met the challenge and received financial support.”
Why do banks impose a pre-payment fee?
Banks lend money for a certain period of time. They make money from interests, and thus the more you borrow and the longer you take to repay the amount, the better it is for the banks. If you want to make an advance payment or say want to pay double your EMIs, it affects the banks liquidity flow, forcing them to liquefy their assets. Banks don’t like this sudden surprise. To compensate the loss, they ask for a penalty fee to discourage such activity.
Why do banks require a Project Report?
Banks need to understand if your project is truly viable. They need all the information to meet their internal audit requirement as well.
A well thought through and clearly presented project report can, therefore, make the
difference between a rejection and a sanction.
So, it makes sense to invest time and energy into preparing a report that will chart your course of action for the bank, leaving no scope for doubt. Entrepreneur Sagar Bedmutha's experience in this issue offers a first-hand view for you!
| Guru's Gyan | |||
| From the perspective of the SME sector, what are the top three factors that a bank would look for before disbursing loans? And why? The first factor that we would look at is client credibility: its financial track record and the positive feedback from the industry. The other factor we evaluate is the business model: sustainability of cash flows, profitability and deployment of cash back in related business. The third factor is business survival instinct: the agility to move with speed in difficult times and to assess the winners and strong survivors in their business segment. |
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| When it comes to the SME sector, what policy does your bank follow on collateral? The SME business in our view is about strength of cash flows; collateral is secondary comfort. If the business model is strong and cash flows are healthy, an insufficient collateral will not jeopardize a good customer’s liquidity solutions. |
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| Do you charge a pre-payment penalty to SMEs which decide to pay back early? Or, do you reward those companies for their enhanced credit-worthiness? We follow the industry practice. For existing customers with a good track record, if payments are from business cash flows then pre-payments can be considered as a good sign and may be waived. |
Manish Jaiswal Head, Small and Medium Enterprises (SME) Group, Dhanlaxmi Bank |
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| Could you describe the importance of a detailed project report in SME lending? Would you ignore the detailing, if you are convinced about the credit-worthiness of the small-time entrepreneur? There is no specific focus on long term green field project funding; however, we believe in providing growth capital to SMEs for related expansions, be it forward or backward. Additional business lines which supplant core SME business with a robust model where cash flows can be locked are preferred. |
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