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Making Small And Medium Enterprises Loans Easier

Monday, March 09, 2015
By Brijesh Parnami

Brijesh Parnami CEO, Destimoney Advisors

India needs to create a better ecosystem to nurture business growth

India is a country that is buzzing with ideas of young entrepreneurs. A successful business story, an idea that changed a life and courageous struggle to succeed against all odds are stories that seem to be told everywhere. However, for every person who succeeds in a small scale business venture and translates it into a successfully business model, there are several others who fail to make a headway due to lack of funds financial resources. A start-up finds it difficult show collateral or prove their creditworthiness against a loan and often find it difficult to procure finances. While we are yet to go a long way to make loans easily available for small scale ventures, fortunately the rigid system has started to change with more financial institutions forthcoming to encourage and help Small and Medium Enterprises.

It is no doubt that the SME sector is going to be the focus sector going forward. In India, we have over 3 crore SMEs. While estimates may vary, it is accepted across all stakeholders that SME sector collectively contributes to over 45% of the industrial output in the country.  Not just that, the sector also contributes to 40% of exports and employs more than 6 crore people.  Going further, it is estimated that SMEs create more than 13 lakh jobs every year. The number of quality products they produce have crossed 8000. In the next 3 years, nearly 1.2 crore people are expected to join the SME workforce in India.

With such immense potential, it is incumbent on the SME ecosystem to fully support its growth.  However as mentioned above, one of the major hurdles that SMEs face is related to inflow of credit. A large number of SMEs are still in their initial stages of growth and therefore are not able to show strong financials in their books.  As a result, banks, NBFCs and other lenders are hesitant to take exposures on the SMEs. They tread this bastion with enormous amount of caution. As a result only 1 out of 4 SMEs who apply for credit, actually manage to get it.  For a sector that is showing such enormous potential for its own growth and growth for the economy, the stifling challenges of credit must be overcome sooner than later.

Many lenders have become proactive to the financial needs of the SME. They have evolved and come out with innovative ways of assessing the credit worthiness of the SMEs.  Instead of going by the traditional route of assessment of declared financials, they resort to studying the cash flow generation patterns of the SMEs and to establish through different workarounds, whether the SMEs would be able to generate enough cash to be able to run their business, while also repaying their loans. These financiers understand the cashflows by an in depth study of the business model of the SMEs, interacting with their customers, interacting with their suppliers and other key constituents of their ecosystem.  These methods have to some extent eased the pressure of credit squeeze on the SMEs.

However, we still have a long way to go.  There are two key things that must happen.

One: More and more lenders should start looking at SMEs as a profitable opportunity for growing their lending business. The past experience has proved that the repayments from SMEs are reasonably satisfactory, in that as long as the cash flows are kept intact, the loan repayments do come in.  Two:  Look at other innovative ways of taking credit exposure on SMEs such as structuring secured loans against gold, property etc., with loan to value ratios a shade higher than normal. A carefully assessed loan application that is backed by strong cash flows and security is a bankable risk.  There is adequate scope for lenders to start reviewing SME loans with a more open credit-framework.  Not to mention, they could price it to match the risk that they perceive they are taking.  SMEs would be willing to pay an interest rate of between 16% to 18% for a loan.

There is no gainsaying the fact that out of all the segmental options available to lenders today, loans to SMEs stands prominently in the front.  It is a win-win for the SMEs, for the lenders and also promises economic growth. It is upto the lenders now on whether they want to encash this.

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