Micro, Small and Medium Enterprises (MSMEs) play a vital role in the Indian Economy. It is a catalyst for socio-economic transformation of the country, as it enables in meeting of national objectives like generating employment, reducing poverty and discouraging rural-urban migration. These enterprises help to build a thriving entrepreneurial eco-system, and promote the use of indigenous technologies. They provide comparatively large employment opportunities at lower capital cost than large industries and also help in industrialization of the rural areas. 

 Seeing that this sector has showcased consistent growth over the last few years, and still has inadequate access to financial resources, Government of India wanted to ensure that credit is made available to this sector at lower interest rate. Through the introduction of Non-Banking Financial Institutions like www.prestloans.com cheaper loans were disbursed through quickly and with much lesser paperwork. GOI launched numerous schemes like Prime Minister's Employment Generation Programme (PMEGP), Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises, Pradhan Mantri Mudra Yogna (read more about it at our blog https://bit.ly/2KfS3WL%20 )

Introduction :GOI noticed that a large percentage of MSME enterprises continue to operate with outdated technology and plant & machineries. This is because many of the MSME are not aware regarding quality standards and even if they are aware, lack of access to modern technologies and lack of funds hinder them from upgrading their enterprises to match global industrial standards. But in order to survive in this competitive world, they need to be modernized to ensure that cost of production goes down.

This prompted GOI to launch another scheme by the name of Credit Linked Capital Subsidy for Technology Upgradation (CLCS_TU).

Salient features

• This scheme was launched on 1st October 2010.

• This scheme aims at facilitating technology upgradation by providing 15% upfront capital subsidy to MSE units (including tiny, khadi, village and coir industrial units) on institutional finance availed of them on induction of well-established and improved technologies in specific sub-sectors/products approved under the scheme. (See https://bit.ly/2MWGFh2 for more details on list of approved technologies and specific sub-sectors/products)

• Technological upgradation means induction of state-of-the-art technology or near state-of-the-art technology. This would result in:

  • Improved productivity

  • And/ improvement in quality of products –through introduction of in-house testing techniques and on-line quality control

  • And/ improved environmental conditions, anti-pollution measures, energy conservation machinery

  • And/improved packaging techniques

• Earlier only 12% capital subsidy was provided, however, considering the need of the hour, GOI increased the limit to 15%.

• The ceiling of loans was increased from Rs. 40 lakhs to Rs. 1 crore.

• Admissible capital subsidy is now calculated with reference to purchase price of plant and machinery; instead of term loan disbursed to beneficiary unit.

• These changes were implemented retrospectively from 29^th September, 2005.  

• Eligible Beneficiaries

  • These include sole Proprietorships, Partnerships, Cooperative societies, Private and Public limited companies in the MSME sector.  Amongst these, women entrepreneurs shall be accorded priority

  • Industry graduating from small scale to medium scale on account of sanction of additional loans under CLCSS

  • MSMEs that have graduated from small scale industry in the last 3 years

  • Existing units registered with State directorate of Industries, which upgrade their existing plant and machinery with state-of-the-art technology, with or without expansion

  • New units which are registered with State directorate of Industries and have set up their facilities only with the appropriate eligible and proven technology duly approved by Governing and Technology Approval Board/ Technical Sub-Committee (GTAB/TSC)

  • Beneficiary unit shall continue commercial production for atleast 3 years after availing CLCSS subsidy

Procedure of disbursement

• MSMEs are required to approach Prime Lending Institution (PLI) (i.e. banks/financial institutions) and file an online application. (see https://bit.ly/2MWGFh2 for more details)

• This application is sent to Nodal Agency (Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD) who then sends it along with it recommendation to office of Development Commissioner, MSME.

• After processing and subject to availability of funds, due approval is accorded and concurrence is also obtained from Internal Finance Wing.

• Thereafter, funds are released to Nodal Agencies, and then from Nodal Agency to PLIs where the account of MSE is operated.

• Subsidy amount is released with each loan instalment in a manner proportionate to the amount of term loan disbursed (on pro-rata basis)

Performance of CLCSS

 Performance of Credit Linked Capital Subsidy Scheme (CLCSS) from the inception (2001-02) upto 2016-17 is given below:

 Conclusion :MSMEs contribute 32% of Gross Value added (GVA) and pave way for industrialization in rural and backward areas. According to National Sample Survey (2015-16), 633.8 lakh unincorporated non-agricultural MSMEs provide employment to 11.10 crore workers in the country, but the percentage or credit they receive is not commensurate. The Economic Survey 2017-18 clearly showed that MSMEs are handicapped by dearth of credit to expand their business.

Traditionally, banks hesitated to grant loans to MSMEs due to myriad of reasons like their high risk factor owing to their unorganized nature; their lack of eagerness to get themselves rates; their inconsistent cashflow; their lack of formal accounts etc. In order to bridge this gap and to ensure MSME’s smooth transition from informal to formal sector, NBFCs (Non-Banking Financial Institutions) like www.prestloans.com; were set up by government of India. This was also done to remove financial roadblocks faced by MSMEs. Compared to banks, NBFCs have gained a better understanding of their customer base and are now better equipped in profiling their customers. This is probably the reason as to why majority of the Public Sector Banks are grappling with high NPAs, whereas NBFCs magnitude of this problem is miniscule.

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I am Ramesh, a 30-year-old man who lives in Karol Bagh and owns a small grocery store. This business was started by my grandfather and was wound up when I was a teenager, due to unfortunate and untimely death of my father. It was my grandfather’s dream to open the biggest grocery store of the entire locality. And even though, he is no more, I wanted to make this dream come true for him. So, I re-started it at the age of 25. I invested my own personal savings to re-start the store. But as time went by, I realized I could make much more profit than it was possible. I realized there were too many middle-men who were eating away a big share of profits. I approached the wholesaler, but he refused to supply to me directly as his cost of delivery would be more than my demand. The gift shop next door wasn’t doing well, and I wanted to make him an offer, that he would find very hard to refuse.

As none of my relatives and friends could extend such a high valued loan, I approached a well reputed bank, but the bank also refused as I had a negative CIBIL Score! (Read more about CIBIL score at Prest Loans blog https://bit.ly/2tVSfQE) I was really puzzled; how can I have a negative score? I had never taken a loan from a bank. I had only borrowed a small amount from my friend 3 years ago. This was when a couple of my customers were running behind on their payments and I had to pay my suppliers who were threatening to withdraw their supplies. And I had even repaid him back on time and with interest! I told the bank about my grandfather’s dream and showed him the lacuna of services provided by me by showing the strategic location of the shop and the profits that the shop can make due to the office complexes nearby and the residential areas in the vicinity. However, the bank paid no heed and my loan application was declined.

I talked to my relatives, my friends and also searched the internet. And I was amazed that there were so many options available for MSMEs (Micro, small and medium enterprises). Credit Guarantee Scheme, Pradhan Mantri Mudra Yojna (read more about it at Prest Loans blogs https://bit.ly/2KfS3WL), Capital Linked Subsidy Scheme, Capital Linked Subsidy Scheme for technological upgradation (read more about it at www.prestloans.com) etc. are some of the collateral free loans that MSMEs can take.

I even read that since MSMEs like mine do not maintain proper books of accounts, and sometimes properties are not accepted as securities, government of India empowered NBFCs (Non-Banking Financial Institutions) to disburse loans quickly and with minimum paperwork. These NBFCs are equipped with latest financial technologies that can study my social behaviour, other informal data and extrapolate my financial and risk-taking abilities.

With so many options available, I was getting confused as to which loan would be the cheapest and which one would suit my business needs the most. Then I remembered that, as per one government of India initiative, I could hire an agency to analyse credit worthiness of my business. This would help me evaluate my business performance and credit reputation. These services can be availed at discounted rates to MSMEs. The rating is done by reputed agencies like CRISIL, CARE or SME Rating agency of India etc. This rating would help me get loan at competitive interest rates. It was also interesting to note that, GOI provides once in a lifetime subsidy of Rs. 40,000 to MSMEs to get themselves rated. But this option was too costly for me. I would certainly get this assessment done after I have expanded and automated my entire procurement process. I would need a third party’s competent opinion before automating deliveries to my customers.

While I was coming back from a supplier meeting, I recollected reading Mr. Ashok Mittal’s opinion regarding struggles of MSMEs and how they plan to bridge the gap by disbursing quick, easy and cheap loans. I also realized that loan taken from NBFC would be the cheapest, fastest and I could also enjoy longer repayment terms. I immediately grabbed my phone, logged onto www.prestloans.com, filled a simple form within a matter of minutes. Their officials approached me, asked me a couple of simple questions, did minimal compulsory paperwork and my loan was disbursed in just 3 days!!!

Now, I will be able to acquire the gift shop next door, expand my business and would be one step closer towards my grandfather’s dream. All thanks to Prest Loans!!!

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Just like an online marketplace brings buyers and sellers on a single platform to transact, P2P lending marketplace brings borrowers & lenders together.  P2P lending is a crowd-funding model where people, looking to invest their money & people who want to borrow can do so. Their website lists multiple borrowers under different risk categories, with varying interest rates. Borrowers are either individuals or small businessmen whose loan applications have been rejected by banks.

Global cumulative lending through P2P platforms at the end of Q4 2015, had reached Rs. 38,200 cr from Rs. 19 cr in 2012. And up until April 2016, there were around 30 start-up P2P lending companies in India. RBI feels that although P2P lending platforms are still at a nascent stage in India and are not of significant value yet. But the potential benefits they offer to their stakeholders and their associated risks are too important to be ignored.

At present, it is partially or fully regulated in many western countries like US, Australia etc. China has the largest P2P market in the world, with hundreds of platforms offering diverse services, but the sector is not regulated currently.

Government of India understands the imperative need for affordable credit specially for MSMEs and is giving impetus to NBFCs like www.prestloans.com to ensure that the gap is bridged. This means that faster and easier loans are available at cheaper rates through NBFCs.

Peer-to-Peer Marketplace

P2P Lending firms typically charge their lenders one-time registration fee, or they charge based on the amount lent. Lenders are allowed to choose from among a set of borrowers on the platform and can diversify their risk by lending to multiple borrowers.

These firms often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer. This way borrower's confidence gets a lot of boost, when he sees that multiple parties want to extend a loan or invest in his enterprise/ new business model. But as a borrower, due diligence must be exercised to determine whether the cost of borrowing is reasonable.

A low risk borrower is likely to get an interest rate of 12-13%, while a high-risk borrower can get a loan at 25-30% interest rate. Multiple lending opportunities offered over these platforms are likely to give greater return on investment than a saving bank and fixed deposit account would give. However, these investments are very risky as they are unsecured loans.

These firms assess their borrowers on basis of credit scores, banking details and income tax returns. They assign a greater weightage to social behavior than to credit scores. This social behavior is then extrapolated to financial behavior. Furthermore, these firms also help in following up for repayments and assist in recovery process as well.

P2P firms facilitate documentation for lending and borrowing. Loan is transferred from lender's bank account to borrower's bank account. These firms facilitate collection of post-dated cheques drawn up by the borrower in the name of the lender. These cheques are proxy security for loan repayment.

RBI Regulations for NBFC-P2P Lending activities

Seeing the pivotal role P2P lending were likely to be playing in the near future, RBI came out with a set of regulations that will govern this sector. Only entities that are registered under the Companies Act can get a P2P registration from RBI

• Companies registered as NBFC-P2P shall have a net owned fund of at least Rs. 2 cr unless a higher amount is specified by RBI

• NBFC shall only act as an intermediary/facilitator between borrower and lender and cannot mobilize deposits or give loans on its own

• They cannot provide credit enhancement or credit guarantee schemes

• They cannot facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted

RBI Regulations: NBFC-P2P Prudential Norms

• Leverage Ratio of not more than 2 shall be maintained

• Aggregate exposure of a lender to all its borrowers, at any point in time, across P2Ps, shall not exceed more than Rs. 10,00,000

• Aggregate loans taken by a borrower, across P2Ps, at any point in time, shall not exceeded more than Rs. 10,00,000

• Exposure of a single lender to a specific borrower, across P2Ps, shall not exceed more than Rs. 50,000

• Maturity of the loans shall be less than 36 months

• They must undertake due diligence on their participants including credit assessment and risk profiling of borrowers. This information must be disclosed to their prospective lenders

• NBFC-P2Ps shall adopt the loan recovery practices from other NBFCs. There should be proper redressal mechanisms for complaints. Funds should be directly transferred from lender's bank account to that of the borrower's.

The growth of digital transactions, recent fintech innovations and the increase in demand for affordable credit has been the driving factor for growth in NBFCs like www.prestloans.com and P2P lending platforms in India. Its recent inclusion under RBI regulatory lens has put the sector on exponential growth trajectory. Considering that these firms are likely to be grow to $4-5 billion by 2023, this lending segment has completely disrupted the lending and asset class categories in India.

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On every other day NEWS Channels are blasting headlines with businessmen and big firms fleeing huge and huge debts from national banks all over India. This has lead to a more rigorous process for application and approvals of a loan for any person. With the rise in MSME sector in India, over 51 million enterprises in this sector which contribute to about a third if GDP, this lending process by banks is ultimately bringing upon a misfortune to the fresh entrepreneurs; whose dreams are built on banking lending and credit facilities.

To solve this pickle and stop black money lending, government has given a nod and appreciating approval to NBFC credit lending facilities. Enquiries with many small businesses showed one common and recurring theme — the absence of sufficient and timely funds from the banking sector for their working capital or investment needs. Non-banking finance companies (NBFCs) like Pres Loans have thus become a gift for micro, small and medium enterprises in need of funds. Lending to MSMEs had earlier been the job of banks and NBFCs have had little to no role in this segment.

One might ask why banks are not taking more interest and measures in lending to MSMEs. With the size of each loan in the MSME sector being relatively small as compared to the huge loans that are decked up on the bank desks; more often than not the problem turns out to be the same- that is lack of proper accounting systems, non-updated financials and proper documentations. The overall experience of application for a loan in a bank turns out not so good in case of MSMEs. Thus, banks are also not keen on lending to this sector which consumes their resources without much in return. This leaves a huge gap in credit availability that needs to be fulfilled.

NBFCs dive in here as Superman saving Lois Lane. NBFC sector has stepped up to meet the credit deficit by working around the obstacles or lack of financial knowledge of the MSME sector. NBFCs like Prest Loans are solely for the purpose of lending to small businesses and provide a happy and satisfying customer experience. They are equipped with the technologies to keep a track of the loans issued, with a thorough screening process of the customer without causing much havoc. They have not only simplified the lending process but also reduce the borrowing costs.

 NBFCs are looked upon as changed agents for pushing micro, small and medium business to up their potential and fulfill their dreams. With simplified and seamless procedures, flexibility as a strategy and unconventional risk mapping processes, NBFCs are bringing about a paradigm shift in lending process enabling borrowers borrow at economical terms. They have brought innovations and diversity to their line of credit products and services to match with the ever changing and challenging MSME sector.

 NBFCs have become a lifeline for the undocumented strata as well; people can apply for unsecured loans, even though it might result in a higher interest rate. Prest Loans being one of the leaders in the pack of NBFCs suffice a range of loans with agreeable policies, easy applications, fast approvals, customer durable loans, mortgages and line of credit. They go above and beyond their business obligations and assist in uplifting customers they serve through advisory services on bookkeeping, supply chain management, sharing best business practices etc. By extending the credit facility to various segments of the society otherwise snubbed by traditional banks, such as, non-salaried people, rural enterprises, low-income households etc, NBFCs have carved a big trusting mark among the MSME sector and turned it to niche for itself. To learn more about Prest Loans’ offerings visit www.prestloans.com.