Vague policies of lenders- A source of the annoyance of SMEs in India
Vagueness in policies adopted by lenders is depriving many potential SMEs to access credit especially Govt schemes in India.
Recently I met an entrepreneur who has been running between the banks and financial institutions for raising a debt of Rs 1 crore. He has been struggling for six months to secure a loan to meet the requirement of the new project which is under implementation.
The project comprises setting up of the unit in a leased property having unexpired lease period of 15 years( Term loan is only for 7 years) and the collateral security extended are two residential sites having a value exceeding the loan amount by 40%. These two housing sites are approved by the competent authorities and its commercial value is quite high. However, the property is located in a village very close to the municipal limit.
He met with branch head of the largest public sector bank(PSB) in India way back in November 2017. After seeing the nature of the project and its commercial viability, the branch head had readily agreed to finance the project and asked the promoters to submit the proposal. A considerable amount of time was consumed in taking legal opinion on the property. Finally, the proposal was moved to their superiors. However, to the surprise of all, the controlling office declined the proposal on the ground that the unit is set up in a leased property and it is not acceptable to them. It was a very heartbreaking moment for entrepreneurs as they have been after this bank for more than six months and that proposal is declined on the ground not related to commercial viability rather a reason which could have informed upfront if it were to be the case.
As the process was getting delayed, the promoters approached a leading state-level financial institution for financing the project. This institution has a very unique product which gives loan at a considerably lower rate of interest under a Govt scheme. Promoters have complied with all their conditions including rigorous scrutiny. However, the institution declined the proposal on the ground that the proposed collateral scrutiny is in the village limit and thus not acceptable as per their policy of lending.
The reasons are contrasting:
The bank rejected the proposal on the ground that the proposed project in the leased land is not acceptable. However, the collaterals security in the village limit is okay for it. Whereas the institution is okay with leased property to set up the unit but is not conformable with the collateral which is in the village limit though close to the metro city.
The closer look at their individual position reflects that there is no bar from a legal angle for either to reject the proposal. It is their policy which forbids them to accept the proposal.
At the hindsight, the agonising struggle of entrepreneur makes anybody to ponder over the whole gamut of the issue. Both the bank as well as the institution have the mandate to promote entrepreneurship and that is one of the key yardsticks for Govt budgetary support. Secondly, there is no illegality that blocks the decision.
If you look at the institution’s policy, they do not take property in village irrespective of its value or saleability of the property. Thus they are depriving that section of society who cannot afford such luxuries which many budding entrepreneurs are. On the other hand bank’s approach towards not considering leased property wherein the pieces of machinery are housed (the loan is for machinery only) is equally atrocious.
The sad part is that despite best efforts and incentives from the govt to promote entrepreneurship and enable the proliferation of SME segment which is a major job creator, the objectives are not translated to the expected level of result due to policy inconsistencies prevalent among the lenders.
Monitoring and Policy Advocacy is missing:
Though govt and regulators have a well-established monitoring mechanism to ensure the flow of credit to SME space, there is a serious gap at the grass-root level which is not addressed to make the programme successful. The monitoring mechanism focuses only on the quantitative progress in relation to historical numbers or incremental growth. But whether there is sufficient access to such facilities for the entrepreneurs which should be a key concern is not monitored.
Credit-oriented assistance schemes of the Govt requires the active participation of Banks and state level institutions. These institutions enjoy sufficient autonomy to frame policies keeping in view the risk perception and they undertake risk mitigation. However, there is none to analyse these policies and identify the ambiguities between the institutions. Having a body or the institutions like SIDBI if undertake such studies and create a platform for influencing lenders to modify the policy inefficiencies and assist beneficiaries to access such facilities, it will boost the growth of SMEs. Such a mechanism can act as policy advocacy group which does not direct or regulate the activities of those organisations rather engage in constructive discussions aiming at better policy environment.
A body meant to promote better policy advocacy can help bridge the gap and there will be a better understanding of risks and meaningful mitigation can be built into it in financing entrepreneurs in India under entrepreneurship development schemes.
Banks and institutions need to rehaul their lending policies to facilitate increased flow of credit to entrepreneurs. And there is a need for a body to identify the gaps and advocating better policies to reducing the vagueness and in turn its effectiveness to imrpove the lending to SMEs in India.