(RESEARCH REPORT ATTACHED)
The micro, small and medium enterprises (MSMEs) are facing additional challenges in accessing credit due to the recent liquidity crunch in the economy impacting their working capital and term loan needs. MSMEs at present have been facing issues arising out of delayed decisions from banks on granting access to credit, additional collateral requirements, demand for personal guarantees, additional charges and conditionalities on bank guarantees. Further, delayed payments and higher interest rates have also contributed to the financial stress faced by this sector.
CII commends, the government’s response in addressing these issues faced by the MSME sector through its twelve key initiatives announced by the Prime Minister to provide a fillip to the sector. The launch of the 59-minute loan portal to enable easy access to credit for MSMEs is particularly noteworthy and would go a long way to ensure easy availability of credit to the sector.
In addition to these Government initiatives, CII suggests short term measures to be taken by RBI and the Government to enhance credit access to the MSME sector. The short term recommendations for RBI include:
One, Turn Around Time (TAT) for sanction and enhancement of limits for working capital or term loans be fixed at15 days from the date of application and for disbursement, 15 days from the date of sanction
Two, limit the collaterals sought by banks to 133% of the exposure and elimination of the need for personal guarantees where sufficient collateral exists.
Three, personal guarantees should be sought only in case of collateral shortfall
Four, in the case of Collateral Shortfall, Personal Guarantees should be taken from whole time/executive directors only and not from the external directors who provide their expert guidance and have no role in day to day operations.
Five, the requirement of returning Bank Guarantees to close claim period needs to be removed and the claim period as mentioned in the Bank Guarantee should be honored.
Six, charges for Bank Guarantees for over 2 years may be debited on an annual basis and not charged upfront to ease cash flow pressures on the MSMEs.
Seven, the standard rate of margin money for loans and bank guarantees could be capped at 15%.
Eight, Letters of Undertaking (LoUs) be permitted for Buyers’ Credit for such cases where the MSMEs are incurring capital expenditure.
Nine, MSMEs having no defaults should progressively receive discounts on the normal margin requirements and commensurate with their lower risk profile, similar to no claim bonus discounts for Insurance.
Ten, RBI may allow banks to sanction Buyers Credit facility to MSMEs, wherever import of raw materials is being done under Letter of Credit.
Eleven, In the case of bounced cheques where beneficiary MSMEs suffers lack of liquidity due to lengthy process of obtaining relief from the Courts. A convenience fee of 10% of the cheque value is paid to the beneficiary bank whereby 1% of the fee is retained by the Bank and 9% would be paid to the beneficiary MSMEs.
Twelve, Government should continue to address the problem of delayed payments for the SME sector by instructing the PSUs/PSEs to clear all the pending payments of MSMEs within a stipulated time.
With the Government and the RBI working together to ensure availability of funds to MSMEs, it is possible to see a brighter future for the MSME sector which accounts for more than 7% of India’s GDP, 45% of total manufacturing, 40% of India’s exports and employing over 117 million persons.
14 November 2018