Struggling To Get A Business Loan In India? Here Are Your Options

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The federal government in India was urging small and medium-sized businesses (MSMEs) to shed self-doubt and unleash their “animal spirits” until just six months ago. The sudden coronavirus pandemic not only knocked revenues off MSMEs’ balance sheets, but also affected their hopes of survival. 

In a bid to rescue MSMEs from defaults, the government offered relief in the form of collateral-free loans, subordinate debts and equity infusion through its Fund of Funds (FoF) scheme, which proposes to buy up to 15% growth capital in high-credit MSMEs. 

Earlier this week, India’s Finance Minister Nirmala Sitharam confirmed banks had sanctioned INR 1.27 lakh crore loans to MSMEs of the INR 3 lakh crore ($39 billion) announced in May. This figure is the collective loan that India’s 12 public sector banks, 22 private sector banks and 21 non-banking financial companies (NBFCs) have committed to grant.

That means more than half the capital the government has promised to lend is still available to businesses. Here are some basics you’ll need to know if you want to get a business loan in India. 

First, Adopt Digitization 

India has more than 63 million small and medium businesses. And the economy is heavily dependent on MSMEs to expand the country’s GDP growth. The pandemic has pushed small businesses to reinvent their models and adapt to a digital economy, which wasn’t the case pre-COVID-19. 

Global analytics company CRISIL notes previous downturns have shown that micro and small enterprises are unable to manage transient working capital challenges as easily as their large and medium peers. For India to tide over the tapered cash flow challenges, the government’s nudge to banks and financial institutions are bound to help. But for growth to improve substantially, demand has to be spurred. 

“Lenders have to go beyond traditional credit processes because they have to play a seminal role in recovery. That will mean closer interactions with MSMEs to understand underlying drivers of business, and using innovations such as operational scorecards, digital platforms and alternative data for monitoring and underwriting,” CRISIL’s Chief Operating Officer Amish Mehta said in a June press release. 

Early steps are being initiated by industry stakeholders who are a part of the lending cycle.

Digital fintech companies in India such as InstaMojo have introduced services like sachet loans, in which the loan is disbursed over a series of messages on WhatsApp. Instacash enables merchants to gain instant access to working capital of INR 1 lakh for a period of seven to 14 days, specifically to address MSMEs’ working capital needs during the coronavirus crisis. 

Supply chain financing platform CredAble witnessed a sharp increase in enquiries for short-term working capital loans to the tune of INR 1 crore ticket size just as the pandemic hit the country.

Nirav Choksi, the co-founder & CEO of CredAble, notes a shift away from traditional lead & credit scoring models to alternate data models that augment NBFCs’ credit assessment strategy, thereby creating new organic markets for them. 

Charlie Lee, the co-founder and CEO of Softbank-backed True Balance, an Indo-Korean fintech company, believes when a company helps India grow, India helps it grow too. 

Many of True Balance’s loan beneficiaries during the coronavirus pandemic were small business owners who took loans to ensure solvency of their businesses. Small business owners referred other small business owners and that helped them make a return because of the company’s refer-and-earn offering. 

Some of the notable beneficiaries of True Balance’s cash loans, level up loans, revolving loans and COVID-19 insurance included small entrepreneurs, such as a doctor in the Kollam district of Kerala who bought more than 500 policies to distribute to the poor. The doctor then referred a railways employee in Tamil Nadu who bought another 600+ policies to distribute among contract workers. 

J Sathiayan, the Chief Business Officer of U GRO Capital, which offers secured as well as unsecured loans,,thinks for MSMEs to address their working capital needs, unexpected work orders or expansion requirements due to the disruption caused by the pandemic, business loans are their only resort. The company expects their digital loan product to help revitalize the health of the Indian MSME sector.

How You Can Get a Loan to Fund Your MSME 

Loans can be procured via government schemes, banks and non-banking financial companies. Some financial technology companies have also ventured into granting small loans to take a piece of the lending pie. 

Government Schemes

There are five main government schemes that can be used by a small and medium business to continue a business, digitize it or to buy machinery or equipment to run it. 

Pradhan Mantri MUDRA Yojana (PMMY)

Credit Amount: This scheme provides loans of up to INR 10 lakh.

Who Can Avail: Non-corporate, non-farm small or micro enterprises.

Lenders: These loans are given by commercial banks, regional rural banks, small finance banks, cooperative banks, mutual fund institutions and NBFCs.

Online Process: The borrower can also apply online at www.udyamimitra.in.

Details: MUDRA has created lending products including Shishu, Kishore and Tarun to signify the stages of the business’ development respectively and funds it may require. 

Shishu covers loans up to INR 50,000.

Kishore covers loans above INR 50,000, up to INR 5 lakh.

Tarun covers loans above INR 5 lakh, up to INR 10 lakh.

Credit Guarantee Fund Scheme for Micro and Small Enterprises 

Credit Amount: This scheme provides fund- and non-fund-based (letters of credit and bank guarantees) credit facilities of up to INR 200 lakh per eligible borrower. 

Who Can Avail: New and existing micro and small enterprises engaged in manufacturing or service activity excluding educational institutions, agriculture, self-help groups and training institutions.

Lenders: These loans are given by scheduled commercial banks (public sector banks, private sector banks and foreign banks) and select regional rural ranks which have been classified under the “sustainable viable” category by the National Bank for Agriculture and Rural Development (NABARD). 

Online Process: The borrower can learn more about the online application via www.cgtmse.in.

Details: The credit facilities, which are eligible to be covered under the scheme, are term loans or working capital facilities up to INR 100 lakh per borrowing unit extended without any collateral security or third-party guarantee. The guarantee cover available under the scheme is maximum 85% of the sanctioned amount of the credit facility. 

National Small Industries Corporation Subsidy

Credit Amount: The National Small Industries Corporation (NSIC) facilitates MSMEs in accessing credit support (fund-based or non-fund-based limits) of up to INR 5 lakh from the banks.

Who Can Avail: All medium and small enterprises (MSEs) with a Udyog Aadhaar Memorandum (UAM) are eligible to apply under the Single Point Registration Scheme offered by the NSIC.

Lenders: These loans are given by various nationalized and private sector banks. 

Online Process: The borrower can also apply online through www.nsicspronline.com.

Details: Download a loan application form from the banks under the bank credit facilitation scheme. MSEs who have already commenced their commercial production but not completed one year of business are issued a certificate with monetary limit of INR 5 lakh, which shall be valid for the period of one year.

Credit Linked Capital Subsidy Scheme for Technology Upgradation

Credit Amount: Upfront capital subsidy of 15%on institutional finance of up to INR 15 lakh. For example, the maximum investment in approved machinery is INR 1 crore to MSE units for induction of well-established and improved technology in the specified 51 sub-sectors and products approved. 

Who Can Avail: MSEs with a valid UAM number are eligible. 

Lenders: Scheme is being implemented by 12 nodal banks or agencies including the government’s SIDBI and NABARD. Besides SIDBI and NABARD, all the nodal banks or agencies would consider proposals only for credit approved by their respective branches.

Online Process: SME units need to upload their subsidy claim application only though their primary lending institutions, such as their banks. 

Details: The objective of the scheme is to help in the technological upgrade of MSEs’ plant and machinery with or without expansion and also for new MSEs that have set up their facilities with appropriate eligible and proven technology duly approved under the scheme’s guidelines. This scheme is linked with term loans availed by the MSEs from banks or financial institutions.

SIDBI Make In India Soft Loan Fund For Micro, Small and Medium Enterprises (SMILE)

Credit Amount: Minimum loan size is INR 25 lakh.

Who Can Avail: MSEs with a valid UAM number.

Lenders: SIDBI, which is a development financial institution in India backed by the government, grants this loan.

Online Process: MSMEs can apply via www.sidbi.in.

Details: SIDBI provides a soft loan in the nature of quasi-equity and a term loan on relatively flexible terms to MSMEs for the establishment of a new unit or for growth of existing units. The focus is on identifying 25 sectors under the government’s flagship programme Make in India. In addition, deserving proposals from any other sector can also be assisted on merits. Loans extended under the scheme cannot be used for repayment of earlier loans.

Banks

An easy way of getting a MSME loan from a bank is by applying for a loan via the website. This is the only government portal for MSME registration. 

Since the government announced a change in the definition of MSMEs in May, all MSMEs have to register on this website to create an Udyam Registration Number. This number is linked to the MSME owner’s Aadhaar and PAN Cards, both of which help banks validate a person’s bank account details, residential address and their financial stability along with technical details such as telephone numbers which will receive unique codes to validate loan requests and subsequent disbursal. 

Banks will be able to retrieve all the information required to grant a quick loan to the MSME whose Udyam Registration Number is available. 

Non-Banking Financial Companies

NBFCs offer two kinds of loans to MSMEs in India. 

Pre-approved Loan

These are loans that have a pre-approved limit to the funds that are disbursed to the MSME. The business only pays interest on the amount of funds used and not on the whole loan approved. 

This feature is unique to NBFCs, who are approving loans as small as INR 10,000 to INR 10 lakh. 

Flexi-Business Loan

These loans enable MSMEs to pay interest in monthly installments and to pay principal at the end of the loan’s tenure. This reduces the burden of principal and interest payments month-on-month and businesses have more working capital to roll into their business activities. 

NBFCs use Aadhaar for background verification and businesses can get loans even with a low credit score.

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