What is an MSME Loan and How to Get It?
Micro, Small and Medium enterprises might seem trivial, but their contribution to the GDP of our country proves otherwise. A study by SIDBI found that MSMEs contributed to 29% of India’s GDP in 2017 with a vision of increasing it 50% in the next 5 years. And the availability of funds and access to credit is central to making this dream a reality.
MSME loans are loans offered by banks and NBFCs if a candidate meets the eligibility criteria. They are loans customized to meet the specific needs of startups and MSME loans for new businesses looking to expand. The loan duration and interest rates differ from lender to lender, based on the principal amount borrowed and credibility of the borrower.
Every other day, we receive cold calls from banks asking if we’d like to take a loan and we politely decline. MSMEs on the other hand, don’t have it so easy. Even today, 40% of the funds lent to them are through informal sources, that often charge hefty interest rates, making payment a cumbersome burden resulting in default payments and consequently a lower credit score. Although the government and its initiatives have gone a long way, getting a loan continues to be quite the challenge. Some of the hurdles in their paths include:
- Inadequate Data– Lack of information results in lack of action. Formal credit ratings and lack of data used for risk assessment often forestall the loan process. Lenders, as a result, are unable to asses the MSMEs’ financial standing and ability to repay the debt.
- Security Collateral– More often than not, small organization lack the collateral and assets that can be leveraged while taking out a loan.
- Regulatory Restrictions- Compliance to regulations set by the government with regards to the eligibility also inhibits the flow of credit into the hands of MSMEs.Documentation- Most formal sources of credit involve long processes and the need for a number of documents of proof, forcing small enterprises to turn to informal sources.
- Documentation- Most formal sources of credit involve long processes and the need for a number of documents of proof, forcing small enterprises to turn to informal sources.
- Time- During the initial phases of starting up a business, most of the profits earned need to go back into the business to sustain or grow their business. While an SME might take a longer time to pay back a debt, this doesn’t necessarily make them defaulters.
Now that we understand the challenges faced by MSMEs, it comes as no surprise that they are an underserved market. They need a source of credit that is willing to give them a little leeway with regards to documentation, time, interest, etc. So, how do you get an MSME loan when it seems like everything just gets in the way?
See an opportunity, grab it. And, that’s just what NBFCs did to tap into the MSME loan market. Let’s take a look at how non-banking financial companies have simplified the lives of and loans for MSMEs:
There’s data in everything and where there’s data there’s insight. Insights that enable differentiated credit underwriting. NBFCs leverage both formal and informal sources of data to assess the credibility of the borrower and decide if the risk should be accepted. They take into account cash flows, debt history, industry risks, and other aspects that might factor into the repayment of the loan to gauge their MSME loan eligibility.
Regardless of which industry you’re talking about, a one-size-fits-all approach doesn’t work anymore. NBFCs grant MSMEs the flexibility and funds they need to meet their needs. This flexibility extends into the principal amount borrowed, cost of each instalment, total duration of the loan and the option to choose between a fixed or floating interest rate.
In the past, the turn around time from the application of the loan to the actual disbursement of the amount took a significant amount of time. Delays in meeting the immediate needs of an MSME could be the difference between its progress or closure. NBFCs have cut short the turn-around time and presently take between 7-15 days to process loans, once all the other requirements are fulfilled.
In the digital era where convenience is at the core, processes need to be streamlined to the click of a button. FinTech has come a long way in simplifying transactions, not just for banks but for NBFCs, as well. Whether the MSME is in search of information, wants to check their eligibility, apply for the loan or even make a payment, it’s all possible right at their fingertips.
MSMEs present an additional lending potential of $70 billion, and NBFCs are quickly becoming the go-to source for these loans. Capri Global is one such NBFC that’s identified the gap between the finances need by and granted to this segment and offers loans up to Rs. 50 lakhs as the first step to bridging it. To empower MSMEs to expand their businesses and reach their potential.