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Tata Capital > Blog > Loan for Business > 5 Mind Numbing Facts About MSME Loans

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5 Mind Numbing Facts About MSME Loans

5 Mind Numbing Facts About MSME Loans

Micro, Small, and Medium Enterprises, generally referred to as MSME are considered to be the backbone and an integral part of the economic growth. The MSME sector is seen to contribute approximately 8% of the nation’s GDP by contributing nearly 40% of the gross manufacturing output and 45% of the total exports. This sector is the second largest provider of employment after agriculture. The growth of MSME sector is a potential driver towards economic independence and self-reliance. The development of MSME sector also has the potential to improve the social and cultural structure of a particular geographic location along with the economic development of that area resulting in decreased migration to cities and combat constant inflow of migrants. Despite so many pros, the MSME sector has not yet been able to garner enough confidence among bankers and lenders when it comes to availing loans, more so, due to the approaches adopted by banker and lenders.

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Let’s have a look at some of the main hurdles MSMEs face while availing a business loan.

1. Preference for large businesses –

In general, banks and non-banking finance companies tend to prefer large businesses when the question is about offering business loans. This trend branches from the notions that large businesses are secured with better assets and the probability rate of failure of such businesses are less compared to micro, small and medium enterprises (MSMEs). This trend of thought continues despite the provisions made by government and RBI to ease out processing and sanctioning of MSME loans and SME loans.

2. The gap in demand and supply of MSME loans –

It has been observed that most of the MSMEs run their businesses on self-finance as they have no source of institutional financing. Despite being considered as the backbone of the economy and various schemes and initiatives to support MSME financing, there is a considerable gap between the demand of MSME funding and supply of loans by banks and non-banking financial institutions.

3. Lenders opt to play safe –

Though the success rate of MSMEs is quite noteworthy, yet lenders want to play safe by not adding non-performing assets. It is not that big businesses do not fail, yet lenders are consumed by the fear of facing hassles at the time of claiming the availed loan in the form of repayment in the untoward event of default by an MSME.

4. Lenders prefer to give loan against collateral –

Almost all banks prefer to give a loan to MSMEs only against collateral i.e. either property, gold or bank fixed deposits. Nearly Rs. 30-million to Rs. 150-million MSME loans are sanctioned against loan against property. This trend is followed mainly because of the risk mitigation framework that is being adopted by the banks in order to build a secure business loan book.

5. Lack of good record management by MSMEs –

One of the weaknesses that inhibit financing for this sector is a lack of good record management facility by the MSMEs. This factor results in poor credit ratings and reflects MSMEs as risky businesses. And, alike in any other loan, a good credit score goes a long way in getting your business loan approved too. Referring to this point Dr. K.C. Chakrabarty, Deputy Governor, Reserve Bank of India (RBI) said that “credit scoring model will go a long way in promoting credit facility to MSMEs” while addressing at a Training Workshop on Credit Scoring Model with support from IFC for MSE Lending in Mumbai. (Source: http://www.moneylife.in/article/lending-to-msmes-by-banks-some-bitter-truths/35540.html)
Aside from, the above-mentioned hassles, you also have to meet the basic eligibility criterions to apply for MSME loan or SME loan. Below is a table incorporating the criterions for micro, small and medium-sized enterprises:

Well, there are many initiatives have been taken by government and RBI to bridge the gap of financing for MSMEs. Measures like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Pradhan Mantri Jan Dhan Yojana PMJDY are being potential interventions in supporting MSME and SME loan disbursement. And, if implemented well, such programs can bridge the demand and supply gap resulting in the further progress of the MSME sector.

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