5 Mind Numbing Facts About MSME Loans

With about 30% contribution of the country’s gross domestic product, MSMEs (micro, small and medium enterprises) play an important role in the country's economic well-being. The development of the MSME sector has also provided employment opportunities to more than 11 crore Indians right now, reassuring that the future for this sector is very promising in India.

As the MSMEs in India are growing rapidly with governmental schemes and subsidised MSME loans, issuing a loan towards a growing business has become more convenient and simpler than ever.

However, with so much potential, the MSME sector still cannot garner enough attention and confidence among moneylenders and bankers, especially when it comes to providing loans. Even though the national scenario for MSMEs is very promising, there are some hurdles in getting the final approval for MSME loans and other credit requirements.

Here are five mind-numbing facts about MSME Loans.

The payback re-assurance is not enough.

Despite how profitable MSMEs are, there isn’t enough assurance if there won’t be any loan defaults, payment delays, and other problems. This is only because most MSMEs just starting up don’t know exactly when they would be making enough profits. And banks/moneylenders are not taking any chances with their money.

Even though bigger businesses are not exactly fail-proof, lenders usually fear facing the hassles of claiming the availed loan more in any case of loan defaults by an MSME.

In fact, in 2021, even the government started taking steps and measures to manage the increasing non-profit assets (NPAs) in MSMEs. Lenders don’t prefer providing loans to potential NPAs. This is why huge organizations and established businesses are preferred over small businesses that have just started up.

The loan preference is given to established large businesses.

With schemes such as Prime Minister Mudra Yojana, Employment Generator Program, stand-up, and start-up India, the government is focusing on subsidized MSME loans. This helps potential business owners draw loans on easy terms.

But that doesn’t necessarily mean that this plan exactly works. Most lenders don’t prefer providing loans to small businesses. In such scenarios, factors such as,

• The financial situation of the borrower
• The credit score
• The previous repayment performance (if any)

These factors play an important role in the sanctioning of the loan. If any of these factors seem to be slightly skeptical for a lender, issuing a loan will not be easy at all.

On the contrary, it’s a no-brainer that established businesses have a direct relationship with a bank/lender where their numbers and past records tell it all. These large enterprises are an assurance about the security of the loans and timely repayments.

This is why a large enterprise loan is always preferred compared to an MSME loan.

Demand and supply for MSME loans and the gap in between

The visible gap between the supply and demand of the loans and general financial support for MSMEs is a problem. Even though government organizations are trying to popularize MSME loans and make it convenient for business owners to draw up loans, there are still people who can’t take full advantage of the situation.

MSMEs usually cover smaller parts of the country and are usually unaware of the different benefits, subsidies, and schemes. This prevents them from benefiting from the schemes govt introduces for them. 

The financial situation of these business owners doesn’t help as well, as lenders focus on this solely, which takes their enthusiasm away from providing a loan.

MSMEs have a back repayment track record.

When it comes to issuing an MSME loan, the issue is from both the sides. Having a good credit score is extremely crucial for sanctioning loans. MSMEs, in this case, either usually has a bad credit score or no credit score at all. 

This is not the only problem, though. There are always several incidents when MSMEs don’t or cannot repay the loans because of NPAs, which ultimately impacts the credibility of even the new players in MSMEs.

Govt’s organizations are, however, taking steps to bridge the mismatch due to improper credit records. Once a system with a proper financial history is used, the MSME sector could easily benefit from the types of loans they want. 

Not enough security for MSME loans

Under almost all kinds of government schemes, deriving an MSME loan is usually collateral-free. However, the downside of this for lenders is that it increases the risks of defaults and irregular repayments. 

Usually, lenders prefer giving out loans against properties as the same could be redeemed in cases of defaults or the borrower failing to pay up due to NPAs. Loans worth ₹30-150 million are sanctioned against properties almost every year. This happens for the sake of reducing the risks towards sanctioning loans.

Most MSME loans are sanctioned against properties, jewelry, deposits, and more. To keep things fair for the borrower and the lender, the govt should provide better security options to promote collateral-free business loan sanctions.

Conclusion

When it comes to providing MSME loans, there are usually more denials than approvals for various reasons. To make it easier for MSMEs to draw loans, the govt needs to take steps to minimize the NPAs and improve the loan-seeking process for businesses. This can ensure that a properly conducive atmosphere is created for a thriving MSME sector in India.

Also, the business owners who seek these loans need to ensure that they don’t default on their payments to make their repayments in time. This will pave the way for a very convenient process for future MSME business owners to draw up loans and collect the capital for their businesses.