The Micro and Small Enterprises, particularly the first generation of entrepreneurs, face difficulties in accessing bank credit because of their inability to provide adequate collateral security for loans.
The ministry of Micro small and medium enterprises and Small Industries Development Bank of India (SIDBI) have established a trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
According to CA Suresh Kumar Subrahmanyan, Chairman Banking and Finance Committee, AIMA MSME, there are many difficulties which are faced by the MSME credit borrowers. Some of them include :
- Credit limit of Rs 100 lakhs is insufficient considering inflation rate for the past few years.
- In the case of higher limits, banks are asking collateral security to create security. Borrower has to use profits for the creation of collateral security instead of plough back in the system to increase business.
- Branch Managers are not much enthusiastic to sanction loan under CGTMSE scheme
- For small loan, they insist on 100% security as they fear lack of accountability
- All banks do not show enthusiasm in providing loans under CGTMSME Scheme
- Private sector banks, as well as co-operative banks, do not provide loans under this scheme though they are supposed to do so
- We in the All India MSME Association have requested for an increase in the base limit for SME’s and MSME’s situated in metropolitan cities from 100 lakhs to at least Rs 500 lakhs. A similar increase in TierI and TierII cities has also been sought.
- A reduction in interest rates has also been requested. Normally the Interest Rate in this Scheme is higher than in another case of Advance making it slightly unpopular
- The processing fees are also higher for this scheme.
Suresh Kumar Subrahmanyan has further suggested some of the steps for smooth grant of funds under CGTMSE Scheme which are as follows:
- An IT company can get the desired loan if they have built sufficient profits.
- CGTMSE Scheme is predominantly for manufacturing or trading units. CGTMSE is collateral free scheme, not a security free scheme. It is still a secured loan
- Security should be in the form of business assets. Minimum requirement of Net Assets (assets-liabilities) is 1.33 times the loan amount
- This is why startups and service companies find it difficult to raise loans under CGTMSE Schemes
- Conduct of account should be impeccable. No bouncing cheques, no overdraft request to bankers etc. The company should be a growing company , in terms of profits and turnover.
- Stop Cheating on tax and make good compliance a habit. This helps in getting funds and growing business. I know several Companies that private equity ready, business maturity wise. They can not grow because of pathetic compliance level. Picture courtesy: Sebastian K (freeimages)