MSME loans: The latest survey by the industry body FICCI on small and medium enterprises (SMEs) involving 610 respondents on Thursday said that collateral-free credit is only on papers and not implemented as banks provide loans only when collateral is offered by SMEs. The feedback on collateral required by banks was gathered from SME participants during Focus Group Discussions (FGDs) as part of the survey process. To boost MSME financing, the survey suggested cash-flow-based lending which replaces lending based on physical assets as collateral with information-based system lending.
In addition, the survey also suggested a change in the classification norms of MSMEs as non-performing assets (NPAs) from the current 90-day limit to 180 days. This is because the working cycle of MSMEs in many cases extends much beyond the 90-day period, as from the date of purchase of raw materials to the date of making sales and often takes another 30 to 90 days to realize the bills and receivables.
“Due to such delays, which have become a general business practice now, MSMEs find it extremely difficult to service their debt instalments or interest obligations in time, as a result of which, many of them default and their dues become irregular and overdue, leading to their classification into NPAs,” the survey said.
The change to 180 days “will save a large number of MSMEs from turning sick or getting closed resulting in loss of economic activity and employment. This will also prevent avoidable classification of bad debts and unwarranted litigation by banks thereby saving the banks from losses.”
Moreover, while the government had introduced various schemes and initiatives to support the MSME sector post-Covid, there have been challenges in their implementation and reach, the survey added.
For instance, the Credit Guarantee Fund Trust for Micro and Small Enterprises Scheme (CGTMSE scheme), which offers collateral-free loans up to Rs 5 crores with government assurance has not been effectively accessed by SMEs. The survey said that banks have been showing hesitancy in providing financing to SMEs.
“Access to credit for MSMEs continues to be a challenge; while the regulatory aspirations are in the right direction, there’s no doubt that implementation gaps exist. Often, when such gaps exist, there are solutions that the market throws up that plug those holes. When it comes to credit, the solution is straightforward: setting loan prices (rates) according to demand and risk. Interestingly, most NBFCs cater to the underserved MSMEs by charging higher interest rates on their loans. Paradoxically, this higher pricing increases the likelihood of loan defaults, thereby perpetuating the cycle that MSMEs are grappling with. The sad answer may be that we accept that some borrowers will remain unserved by the formal banking system,” said Utkarsh Sinha, Managing Director, Bexley Advisors told FE Aspire.
Moreover, SMEs also highlighted the need for improved government policies and support mechanisms to address the challenges faced by businesses. For instance, the need for greater transparency, improving the efficiency of existing mechanisms and platforms for resolving payment issues and providing financial relief measures that adequately address the needs of businesses impacted by delays and defaults.
Additionally, SMEs said that there is a need for consideration of the long-term consequences of financial difficulties on creditworthiness including negative impact on CIBIL score, long-term repercussions and difficulties in accessing future loans.
Among other key concerns highlighted in the survey were:
Slow payment processing, complicated registration process, and issues related to operating system such as time taken to upload bills, etc., were among the top three concerns related to the GeM portal.
With respect to the invoice discounting portal TReDS, respondents noted that many buyers are registered on the platform while the registration fee is high and the registration process is complicated.
Lack of awareness of digital transformation impact, lack of skilled resources/ technological expertise and lack of knowledge of business-specific solutions were top challenges faced by SMEs in technology integration in business.
Among major regulations or compliances requiring relaxations, according to SMEs, were tax compliances, labour and employment laws and regulations, accounting standards, import-export regulations, environmental regulations and more.