Unsecured loans: what MSMEs need to do to get credit from banks, NBFCs without collateral

Credit and financing for MSMEs: Although obtaining credit through the cash flow-based model is relatively easier than raising an asset-backed loan, the former involves a higher interest rate.

Credit and financing for MSMEs: In recent years, banks and non-bank financial companies (NBFCs) have started to recognize the approach of cash-flow based lending to solve the credit problems faced by MSMEs instead of secured lending based on assets. Experts have pointed out that traditional lenders, mainly banks, who have relied on collateral so far, are now taking a pragmatic view of the scenario. “With the proliferation of new businesses in the country on the one hand and the division of family assets on the other hand, collateral is also running out. Therefore, banks are moving towards cash flow based valuation” , Dhrubashish Bhattacharya, Head of MSME Business, Bank of Baroda told Financial Express Online.The credit gap in the MSME sector was around Rs 20-25 lakh crore, according to a June 2019 report by UK Sinha Committee constituted by the Reserve Bank of India (RBI).

So what do MSMEs need to obtain cash flow based bank or NBFC loans without mortgaging their assets? Primarily, it forces promoters to share adequate business data that could help lenders assess the financial health of the current and future business. Arun Nayyar, CEO of digital lending platform NeoGrowth, told Financial Express Online that alternative data sources such as digital transaction data related to UPI, RTGS, NEFT and IMPS, apart from GST, and credit history with on-time repayment is considered a sign. to be a responsible borrower from financial institutions. Data on tax returns, bank statements, point of sale data, etc. could also be useful.

However, getting MSME developers to share this data is the biggest problem in extending credit, according to the managing director of small business lending platform U GRO, Shachindra Nath. This, Nath said, is a mentality issue among MSMEs that the less information they share with the lender, the better it is for their credit score. Even today, 90% of U GRO customers refuse to share their GST information and 67% do not share their bank details. “Just like you can’t hide your symptoms from a doctor, a business can’t hide information from a lender,” Nath said during the panel discussion on alternative SME financing for the FE Boardroom 2022 event hosted by Financial. Express last week.

While data sharing is the main requirement in the cash flow-based lending model, MSMEs need to ensure that capital is deployed for the purpose for which it was used, although the promoter also needs to be aware. take full ownership of their MSME unit, regardless of the amount. stake they hold in the business, B Sankar, Chief Managing Director – SME & SCF, State Bank of India said during the webinar.

“It is their unit and they are responsible for the people who work with them, their livelihoods and their families. So, the hands-off attitude towards the business does not sit well with lenders,” Sankar added. The final demand from lenders is that MSMEs repay loans on time. A bank default can exclude not only the promoter itself, but also future generations from the formal lending system. “So repay loans on time and work to build a strong credit history, so that we lenders are with you in your growth story,” he said.

Even though obtaining credit through the cash flow-based model is relatively easier than raising an asset-backed loan, the former involves a higher interest rate. Compared to traditional bank credit with an interest rate of between 8 and 17%, cash flow based loans charge up to 30% or more and a minimum of around 12 to 13% depending on the financial information, including the CIBIL score. In other words, the interest rate is decided based on the risk profile of the borrower.

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“When an MSME applies for a loan from us, we check their credit rating, track record, certainty regarding business growth and repayment. These factors are taken into account when deciding the interest rate” , Alok Mittal, co-founder and CEO of MSME lending platform sIndifi told Financial Express Online.

For example, a higher interest rate would include borrowers who might have defaulted on their previous loans, or their ‘degree of formality’ might be low, meaning that while they could claim a turnover of Rs 2 lakh per month, only Rs 35,000 of that could be visible in bank statements, Mittal explained. On the other hand, those with around 12-20% lower rate would be businesses that have been in business for the past five years with steady cash flow, strong banking history and zero defaults. Launched in 2015, Indifi has so far disbursed over 40,000 loans in over 400 cities.

Particularly during Covid, digital lenders had come to the rescue of MSMEs with their cash flow based financial model. For example, Ahmedabad-based logistics company HGR Logistics has been hit due to late payment from customers in the automotive, garment and other sectors as Covid forced several businesses to close. their operations temporarily in 2020. The company even moved into pharmaceutical logistics but had little capital to fund ongoing operations.

“We were facing a financial crisis at that time. I knew that banks would not give me a loan during Covid and especially to businesses like logistics which were facing the greatest impact of the pandemic. While searching for unsecured loans online, I stumbled across Indifi. My CIBIL score of over 780, GST details, turnover of my business for the last five years and other details were good enough for me to get a loan of Rs 25 lakh at a rate interest rate of approximately 16%. It helped me recover from that period as I had no assets to mortgage if I had taken a traditional bank loan,” Moral Agrawal, Managing Director of HGR Logistics told Financial Express Online.

However, in the case of new businesses applying for credit in the absence of cash flow data and any assets as loan collateral, developers can take advantage of the Credit Guarantee Fund loan program without collateral for micro and small enterprises (CGTMSE) set up by the government and SIDBI. It is important to note that Finance Minister Nirmala Sitharaman, in her budget speech in February this year, announced the overhaul of the scheme to facilitate additional credit of Rs 2 lakh crore for micro and small businesses during the upcoming exercise.

The current limit under CGTMSE, however, is up to Rs 2 crore. If the promoter of a new venture without any business data or collateral wants to raise beyond Rs 2 crore, lenders are less likely to back him. “How is anyone going to give you more than Rs 2 crore in such a situation,” Bhattacharya said. “We advise new entrepreneurs to start with an amount authorized by the CGTMSE backed by the government guarantee and develop the business for about a year or two before applying for a larger loan,” he added.

Other important non-guaranteed programs for MSMEs by the government is the Emergency Line of Credit Guarantee (ECLGS) scheme. However, it is only applicable for existing borrowers on the banks’ books as of February 29, 2020.

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