A good project viability report, coupled with a positive credit rating and collateral security can help SMEs raise loans faster. While banks closely look at the repayment capacity of the borrower, it is the relationship between the banks and the SMEs that has a direct bearing on raising a business loan
When Pranab Roy of Progressive Engineering in Jamshedpur took over the executive role in his family business around a year back, he focused on expansion. While the basics were already in place, he needed growth capital to get going. A sound customer base, a good reputation and clean books were all he thought would fetch him a bank loan of an undeclared amount. But that was not to happen. "My company posted a growth of 50% in sales last year and profits were up three times. Yet I have difficulty getting the bank loan," he says. Several meetings with bankers have come to naught and the capital for his business is still far away.
Pranab is not the only one trying hard to raise capital. Thousands of promoters of small and medium enterprises are trying everyday to explore the credit route to grow. And they have good reasons to do so. SMEs are the engines of economic growth and India is dependent heavily on them for employment generation and exports. Dubbed as the "nursery for entrepreneurship" by a report of the government’s task force, these units employ over 60 million people, share 8% of the GDP and 40% of exports. Most SMEs today are looking at 2020 with high hopes to grow and match the best in the world. Besides skilled manpower and technology, it is finance that would either make or break their dreams.
Number of MSME enterprises in India
But it would be unfair to say that everyone is denied a loan. If that were the case, there would be no banks around. Take the case of Mohd Haroon, founder and managing director of Noida-based auto parts company Aglow Engineers, who managed to get a loan of Rs 35 lakh from a local bank, to buy sophisticated machinery to grow his business. His good working relationship with the bank worked in his favor. He had been taking working capital loan from his local bank at attractive rates.
|Type Of Bank Loans|
|Working Capital Loan|
Business Loan Vs Equity
Regardless of the size of the business, short-term, medium-term and long-term capital requirements remain unchanged. Short-term requirements are used to run the business, the long-term needs are aimed at taking the business to the next level, purchasing machinery or raw materials, acquiring a business etc. For work capital loans, banks are the obvious choice but growth capital, firms also look for equity and / or a mix of debt and equity.
Their contribution to the GDP
While there are pros and cons of debt, it is the availability that matters. You as a business might be keen to get a business loan, the bank also has to be equally satisfied about your eligibility to get funded. Industry watchers believe that although there are claims to the contrary, a service business still finds it hard to raise a business loan as compared to a products business. "A lot of IT services companies face this problem, as they don’t have assets such as a plant or a machinery to pledge with the banks," said a financial expert who works in an outsourced CFO model. The case for big corporations is however different. That is primarily due to their hefty order books, reputation and a solid promoter background to back you. Some experts advice caution while raising debt. "Dont take more loan then you require, as that would amount to over-exposure to risk," says Sanjeev Goel, SR. VP, Essel Shyam Communications,
|Bank credit to msmes||(Amount in Rs. Crore)|
|Sectors||2005||2006||March 2007||March 2008||March 2009@|
|Pvt Sector Banks|
|Small Enterprise *||18,138|
|% of MSE Credit to ANBC for SCBs||11.6||9.9||7.2||11.6||11.4|
|ANBC- Adjusted Net Bank Credit
SCB -Scheduled Commercial Banks
In September 2009 the total outstanding credit stood at Rs. 323565 crore
February 2010 it further increased to Rs 369866 crore
Source: RBI Report on Trend and Progress of Banking in India/RBI Annual Report
Though there are positives which point to a business loan as a good option, it is undeniable that equity gives freedom to operate and tax free incentives too. If you take debt, it spares you the trouble of dealing with an outsider who would sit on your board and tell you how to run your business. Certain tax benefits also accrue to the companies that take business loans from banks. But this comes at a price. If you take a business loan, you got to ensure timely repayment as this can lead to trouble with the bank. Stricter norms are now in place to deal with defaulters. Interest rates, collaterals and guarantees are other things you got to deal with while raising a bank loan.
People employed by MSMEs. Next to agriculture
Issues While Raising Loans
Most SMEs that DARE spoke to talked of the difficulties in getting bank loans. Some of whom who had switched from public sector banks to private sector banks in the hope of availing easier credit talked of similar problems.
One of the problems is that of bureaucratic set up in banks with people getting transferred quite frequently. "You go to a bank branch today and talk to a loan officer, get an understanding of what documents to present while explaining your case, in the hope that the loan would move faster. Visit the same branch again after 15 days and you find there is a new person sitting across the table. You again have to explain your case. It takes up valuable time," says a promoter of an SME in Coimbatore. "Sometimes the time taken to issue a loan is too long. Our business can't wait. The other problem is that of too many rules and regulations and obsession with financials. Banks should take a holistic view of the borrower and not just stick to certain definitive parameters," says Pranab Roy, CEO, Progressive Engineering in Jamshedpur.
|If an SME has blue chip customers, then the bills can be discounted to the bank. SMEs can raise money after submitting those bills with the bank.
Mukesh Miglani, MD, Fabknit India has a similar story to tell. After dealing with public sector banks for a long time, he switched banks a few years back. Though the new bank had initially mentioned an interest rate of 12.5%, they increased charges after a few months, and Miglani had to pay an interest rate of 16% on repayment. Dejected, he switched back to the bank he was dealing with previously, and is quite happy now. On a loan of Ra 3.5 crore, he has a reasonably good overdraft limit. "Nationalized banks used to create problems earlier, but after the entry of other foreign banks and private banks, they have improved a lot", says Miglani. Accusations fly high when it comes to "hidden charges", which are primarily the terms and conditions under which the loan is being sanctioned. It is, therefore, necessary to read the fine prints too.
"We observe the 4 Cs while evaluating someone for loan - Capital (existing), Competence (of the team), Certainty (of projections) and Collateral (security)," says Joginder Singh, a Chartered Accountant. "A borrower should not agree to the terms of the bank, which he cannot comply with," he adds.
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