High Cost of Finance is Killing the Small Entrepreneurs

Indian Entrepreneurs have a huge unanimous complain from Private NPAs of the Corporate sector. This complain is for keeping high rate of interest which ultimately makes a huge impact on the running cost of the small sectors. As the large Indian banks, who are under the pressure of increasing non-performing assets, are charging the interest rate of as high as 16.7 per cent from the helpless SMEs.

Small entrepreneurs in the country still continue to groan under the harsh rate of interests offered by the banks to them even as the sector wields enormous power in economy’s empowerment.

Recently, an expert on MSME finance shared his experience at the Butibori Industrial Area in Nagpur where he came across cases of MSME units being charged interest at exorbitant rate of 16.70 per cent per annum with monthly rests on internal rating slipping to SB 14.

“The officers concerned expressed that of course they are at pains charging such an interest but cannot help it as the bank’s risk is increasing with overall NPA increase evident from records,” he said.

“I am amazed and am thinking if Large Units are having similar pricing?” he questioned.

He was of the view that with such high interest rates these units would soon face sickness.

“There is little room to step in looking to increasing NPA of banks as we cannot tell Banks to become sick and not to improve their balance sheets,” he said.

According to an MSME entrepreneur, the higher rate of interest puts the MSME firm at higher risk of turning sick. This means, the small firm which is already under financial stress have more chance of turning into an NPA and thus be an add on to the increasing country’s increasing NPAaccount.

The total number of sick MSME units in the country increased by 10.25 per cent to 5,16,619 sick units during 2014-15, with a loan outstanding of Rs 33,378.17 crore. This was against 4,68,397 sick units with a loan outstanding of Rs 32,869.92 crore during the previous financial year. In 2012-13, the country had 2,22,204 sick units with a loan outstanding of Rs 16,639.89 crore.

Citing the non-performing assets problem that has ruled the roost last quarter with most banks reporting poor results on account of bad loans, Finance Minister Arun Jaitley on Sunday said that large corporates were to blame for the NPA problem.

"Large corporates are responsible for NPA problem," he said.
Recently, urging the banks to boost lending to small businesses, the RBI Deputy Governor said the MSME segment was a safer bet than large corporations.

"Everyone should be equally conscious of the fact that there will always be limitations in lending to the individual... So look any which way, the most potential segment for the credit growth to come, in our condition, is MSME sector," Reserve Bank of India Deputy Governor S S Mundra said.

Mundra said the gross NPA number for loans to MSME segment might be bigger as compared to loans to large corporates, but cases of restructuring are far too smaller, which results in a lower overall stress.

"If you look at the total percentage of stress, I think the MSME sector is much better than the large corporates," Mundra said.

There is a "very strong business case for the banks to grow their MSME book" if we look at it from the perspective of developing a strong lending book with decent margin, which will help the profitability and viability of a bank.

Even the top bankers like SBI Chairperson acknowledged that the larger of the SMEs (small and medium enterprises) are beginning to show less stress.

But what is the best answer for the financial problems that SMEs face – Is it to lower the rate of interests for the MSMEs in line with the big corporates who undoubtedly have bigger loan accounts with the banks or open specialized branches for the MSMEs where cannot draw a line of discrimination between the big clients and small clients.

Some of the experts opined that increasing pressure on banks to finance under CGTSME Scheme, unfortunately has not yet trickled down to the Branch Level. Further, increased Angel / VC Funding Activity will also ease the situation.