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7 things a banker looks for in your loan application

Sep 29 2012, 15:21 | By SME Mentor

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Being a successful entrepreneur is not about flying with great ideas. If you don't have the financial ballast
to anchor them, your dream venture will probably remain on the drawing board.
Here's the good news: Bank financing to small and medium enterprises is on the upswing. And, according
to the Reserve Bank of India, the credit flow to SMEs from scheduled commercial banks more than
doubled between March 2008 and March 2011, from Rs 2.14 lakh crore to Rs 4.79 lakh crore. Better still,
banks have been asked to add 20 per cent to this number every year.
But before you place your project file on the bank manager's table, you need to make sure everything's in
order. As Nischal Puri, chief executive officer at Brandis India says, "Once a bank has turned down your
project, you cannot approach it again."
Let's brush up on what bankers are looking for in your project application (Also see the standard checklist
of documents).
1) Minute details of the project
Assemble as many details as possible about your project, even if you have to use a market survey. B R
Bhatt, general manager at Corporation Bank, explains, "Many entrepreneurs try to sell what they have but
our focus is on whether they are trying to sell what people need." Other relevant questions include: is your
venture a sunshine project; what are the chances of a new product being accepted; can it withstand
2) The sector
Banks limit their exposure to risky sectors featuring in the RBI's Negative List. "Businesses relating to real
estate, trading in shares, hoarding commodities, etc are on this list and we cannot lend to these
businesses beyond a certain point. Exposure to these sectors is periodically reviewed and limits are
internally set in accordance with RBI guidelines," reveals Bhatt, adding, "We also restrict exposure to
sectors where our NPAs have been high."
3) Track record of founders
The loan behaviour of the business owners is a top concern, and repositories such as the Credit
Information Bureau of India (Cibil) provide the repayment history of individuals as well as companies. "We
need to know whether they have been loan defaulters in the past. If one venture fails, they wind up the
company and start a new venture. If their loan accounts have been NPAs (non-performing assets), they
may find it difficult to get a loan," says Bhatt.
Banks also want to know if you have the mettle to run a business efficiently. "We look at whether the
venture matches the person's qualifications and experience," reveals Ramesh Dharmaji, General
manager, SIDBI
4) Geographies
The region you operate in can have a huge impact on your product demand, supply and production. "If
there are too many rice mills in one place, and the entrepreneur wants to set up another one, we will have
to see whether it's worth backing the proposal," says Dharmaji. Proximity of your factory to the market is
also relevant.
5) The Numbers
It's all about the math. "We check whether the projections provided by the entrepreneur are realistic. If
they are too high, we revert and then settle on a mutually acceptable formula," reveals Bhatt. But many
new-generation ventures may find the going tough. "If your venture caters to modern needs, especially
the service industry, you may have a hard time discussing projections with the bank," admits Puri. But, he
points out, inflating numbers doesn't help. And even if the advisors recommend that you to stretch the
numbers, you shouldn't. "After the one-year review, if you have met only 80-90 per cent of the
presumptions, it doesn't go down well with the banks," Puri adds.
6) Collateral / Security
"Real estate or any other fixed assets, hypothecation of machines, and even pledging shares are
accepted. But the collateral has to be insured," Dharmaji points out. The good news is that according to
the Credit Guarantee Scheme, SIDBI along with the government has set up a fund to provide collateral-
free loans up to Rs 1 crore to MSMEs.
7) Sifting Truths from the fakes
Remember, banks have access to your track record and technology helps them spot a bogus application.
"There are a couple of cases where a bogus environment clearance certificate was submitted. They were
caught because the registrar of companies and government agencies have online verification facilities.
We can access these details by simply using the Permanent Account Number (PAN) of the company,"
says Bhatt.
The best way to negotiate the red-tape is to do your spadework carefully. If you need a helping hand,
SIDBI Credit Facilitation Centers will help you with the paperwork. Log in to to get started.
Document checklist for business loan applications
For new ventures
1. Loan application form
2. Project Details
3. Identity proofs of owners/ promoters
4. Resume of the owners/ promoter
5. Income Tax returns for the past 3 years
6. Approvals and Certifications (Registrar of Companies, Environment Clearance, Agricultural land
NOC, etc)
7. Office space address and details (rent/purchase agreement)
8. Collateral (that can be offered) details
9. Sales and profit projection estimates
10. Fund utilization break-up
Existing Businesses
1. Balance Sheet
2. Asset Liabilities statement
3. Property Tax receipts
4. History of loan payments
5. Past loan sanction letter
6. Past loan review statement