Looking at the issues faced by MSMEs in borrowing money from banks, one really wonders why this happens when there is a code of banks commitment to micro and small enterprises

Micro, Small and Medium Enterprises (MSMEs) are often hailed as the pillars of Indian economy. Their contribution both in terms of production of goods and services and employment generation is immense. Surprisingly, success achieved by most of the MSMEs is because of their own endeavours, and there is very limited support from the system in which they operate. MSMEs face problems at all stages right from the setting up of a business entity to the selling of goods in the market.
 

However, the toughest task for MSMEs today is to get a loan approved from a bank to fund their project. In absence of collateral, raising loans is impossible for a small enterprise. This happens in spite of the fact that a popular government scheme called as, ‘Credit Guarantee Fund Trust for Micro and Small Enterprises’ is in place to help borrowers, who do not have the collateral to offer. This is not the only issue. Getting a loan application acknowledged is also a gigantic task. Looking at the issues faced by MSMEs in borrowing money from banks, one really wonders as to why this happens, when there is a code of banks’ commitment to micro and small enterprises. These codes are set by Banking Codes and Standards Board of India (BCSBI).
 

Let us look at some of these codes to see how seriously these codes are followed by the banks:
 

Code on Lending
 

We will inform you about salient features including benefits available and charges payable and terms of Credit Guarantee Scheme of CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES which is extended by eligible banks and is popularly known as CGTMSE guarantee scheme for MSEs and which is available at present to new as well as existing Micro and Small Enterprises including Service Enterprises with a maximum credit cap of  Rs100 lakh (Rupees One hundred lakh) per borrower, excluding retail trade, educational institutions, training institutes and Self Help Groups (SHGs) as per the said Scheme.
 

Reality: Most of the MSMEs crib that bank officials very rarely talk about the scheme. Even dedicated SME branches of banks discourage lending under the scheme. This happens even in cases, when the scheme is advertised by a bank. The RBI data below shows it all. Considering that India has more than three crore MSMEs, the number of loans sanctioned is miniscule.

Code for loan application:
 

Acknowledge, in writing, the receipt of your loan application, whether submitted manually or online, indicating therein the time frame within which the application will be disposed of.
 

Reality: Banks rarely acknowledge a loan application. Acknowledgement for loan application is given only in such cases where banks found some scope for granting of loans. If a small or medium enterprise comes up for a loan proposal which has some new ideas, banks tend to reject the loan application on the grounds of viability without acknowledging the loan application.
 

Code for credit assessment:

We will

1. Not insist on collateral for credit limits up to Rs 10 lakh or up to limits specified by Reserve Bank of India, from time to time.
    
2. Consider providing collateral free credit limits up to Rs 25 lakh if we are satisfied about your track record and financial position being good and sound.

Reality: As mentioned above collateral free loan remains a dream for MSME borrowers. While there are risk perceptions of lending to MSMEs, the fact remains that banks have agreed to promote MSME business by adopting this code. Hence non-adherence to the code raises questions about the bank’s seriousness about the code.
 

There is a need to empower MSMEs with respect to their rights and duties when they deal with banks. It is true that loans cannot be disbursed in a callous way by the banks without following due diligence. But the fact remains that MSMEs need financial help which can be provided only through institutional framework of financing. While approval of disbursement of loans come only at a very advanced stage, banks do need to share the details of banking codes so that MSMEs understand their rights and also ensure that they follow duties that this code expects them to do.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)