Indian Bank Comes with SME Friendly Schemes

Valsala Menon

In Share
The Indian Bank is one of the pioneers in financing the SME sector. Ms. A.
Revathi, industrial development officer of Indian Bank shares the details
about the bank’s policy of lending to small and medium enterprises and the
bank’s various schemes, with Small Enterprise India.com. Here are the
excerpts from the interview.
“The Indian Bank is one of the pioneers in financing SME sector. We have
even formulated structured loan products for financing industrial clusters with
finer rates of interest. Since market conditions are fast changing, there is a dire need to understand the
domestic and global markets for SME’S so that we can create value for customers and in the process,
enlarge our business too... To enhance flow of credit to MSME, a department as formed as Small and
Medium Enterprises Development Department from November 30, 2006.”
What is the focus of SMEDD?
A. To primarily review the existing policy framework to provide credit to SME’s.
b. To take measures to centralise the processing of SME proposals in major centres.
c. To take over SMEs from other financial agencies or banks.

What are the structured loan products provided under SMEDD?

A. IB Annapoorna and Arogya.
B. IB Ayushman.
C. IB BPO Finance.
D. IB Caterer.
E. IB Doctor plus.
F. IB My own shop.
G. IB Professional special.
H. IB Shanthi niketan.
I. IB Star rice mill.
J. IB Travel tour.
K. IB Vidya Mandir.
L. IND SME secure.
M. IND Vahana.

What is the SME policy of Indian Bank?

On receipt of loan application an acknowledgement is issued to the client immediately. The applicant
is called for discussion within ten days after receipt of loan application. The working capital limits
recommended must be need based and realistic, especially to new units. The fund based working
capital limits for Micro and small enterprises is up to Rs 5 crore should be assessed based on the turn
over method as suggested by Nayak committee Recommendations., wherein a minimum of 20 % of
the projected turn over should be financed by the bank or short term bank credit method whichever is
higher.
What is the interest rate structure?
For advances upto Rs 25 lakhs, there is no credit rating and for advances above Rs 25 lakhs, it is
linked to the credit rating under Risk Assessment Model. To have an independent assessment of the
risk on lending to a borrower under SME sector, borrowers are informed through branches to get rated
with Small and Medium Enterprises Rating agency (SMERA_ the rating agency floated by SIDBI) or
CRISIL.

Are there any incentives provided to borrowers for timely repayment of loans?
Yes. For prompt payment of term loan instalment, a rebate of 0.50%by way of reduction in interest
rate shall be sanctioned, subject to following conditions.
1. The instalments should have been paid on or before due date.
2. There should not be any interest arrears or over dues.
3. Rebate of 0.5% will be calculated only on the amount of instalment promptly paid for the
period from the date of advance to the due date, whichever is earlier.

The rebate so calculated shall be adjusted towards the subsequent interest charges, instalment dues
and there should not be any cash refund on account of this rebate.
Small entrepreneurs who have obtained ISO quality certification will be sanctioned one time incentive
of Rs 10,000 and a memento.
What is the centralised processing unit for SME?
In the process of expanding credit to SME sector, it is important that the entrepreneur‘s requirements
are catered properly and credit needs met on time. Timely delivery of credit is achieved by expediting
the sanctioning process either by carrying out joint appraisals or by centralising the processing of
proposals. With Indian Bank, both concepts are in vogue. In order to expedite credit to SME
sector, and to prevent branch managers from focusing on retail loan products, Indian Bank has
introduced the Centralised Processing Unit of SME proposals at Chennai, Ahmedabad, Bangalore,
Coimbatore, Kolkata, New Delhi, Pune, Mumbai and Kanchipuram.
To study the developments in industrial and government initiated projects in different areas of the
country including Tamil Nadu, Central Consultancy Cells have been set up to stimulate acceleration
in establishment of SMEs and to improve the financing of SME sector, by the Bank.
MSME sector undercapitalized, role of bank finance crucial
Updated: Jul 01, 2015, 10.49 AM IST
MSME sector undercapitalized, role of bank finance crucial
Updated: Jul 01, 2015, 10.49 AM IST
By Manavjeet Singh

Micro Small and Medium Enterprises (MSMEs) are engines of growth and employment generation in
the country. The sector has always discussed problems arising due to scarcity of capital. In this article,
we have tried to throw some light on finance extended to MSMEs and also reasons why MSMEs
aren't able to raise adequate finance.
Bank credit to MSMEs is Rs 7.9 trillion

Total bank credit to MSME s...

Read more at:

http://economictimes.indiatimes.com/articleshow/47890997.cms?utm_source=contentofinterest&utm
_medium=text&utm_campaign=cppst

SME Business Loan Guide

1. What is a Business Loan?
Ans: A business loan is a loan given to businesses to meet various requirements that they encounter
during their business operations. It gives business owners access to credit that can be paid back over
an agreed time along with the interest. It can be used for a range of business related objectives like the
expansion of an existing business or investing in a new one. At NeoGrowth, we are committed to
helping your growing businesses with Business Loans. Our loan repayment is based on your business
cycles and hence is a lot more cash flow friendly as compared to bank loans.
2. What is SME loan / SME finance?
Ans: SME loans are specially created loans for the small businesses. These are designed to be in tune
with unique requirements which small businesses encounter during various phases of their business.
3. What are the typical business requirements for which business loans are given out?
Ans: Typical business requirements include new product launch, warehousing needs, expansion to
new locations, entering new product categories, hiring new employees, marketing and many more
such business related needs.
4. How to get financing / business loans for a small business?
Ans: Small businesses have various options to avail loans like banks which have small business unit,
NBFC, crowd funding or peer to peer lending etc. As compared to the traditional banking system,
non-banking financial companies (NBFC) are quicker and more flexible while serving the finance
requirements of SME. NeoGrowth is a NBFC registered with RBI and helps SME's with business
loans which are business friendly.
5. How to apply for an SME Loan?
Ans: Every bank or NBFC have their own processes around the application procedure. But broadly,
you need to apply online or by going to the branch, submit the required documents and post
verification you get a loan.
6. What are the documents required to avail a business loan?
Ans: The documentation requirement for availing a business loan are different for every bank and
financial institution. It also varies with the type of business entity and type of loan applied for.
7. How to find the best financing companies in India for your business?
Ans: You need to explore finance options according to your business needs. So for example,
NeoGrowth is well suited to serve businesses that use POS/EDC machine or are online sellers. Our
flexible repayment model allows business owners to repay based on their business cycles and not on
fixed EMI basis.
8. How should you prepare to get a small business loan quickly?
Ans: These are generally accepted guidelines when it comes to getting a business loan from a bank.
Update your financial records
Know the value of your assets
Keep your bank statements handy
9. What is the difference between NeoGrowth business loan and SME bank loans?
Ans: Traditional bank loans come with fixed EMIs. Also, banks have very strict documentation and
eligibility criteria. We at NeoGrowth have minimal documentation requirement, simple eligibility
criteria and flexible repayment model with no EMI.
10. How are business loans for online sellers different from traditional bank loans?
Ans: Online business comes with its own challenges and unique business requirements. Traditional
bank loans require a lot of paper work, business experience and company financials which online
businesses do not generally have. NeoGrowth online business loans have an eligibility criteria and
documentation requirement understanding the online business space.
Business Loans

For retailers using credit/debit swipe machine (POS)

For online sellers
About Us

About NeoGrowth
Senior Management
Board Of Directors
Contact Us

For sales enquiries

For complaint
For Careers
Quick Links

Blog
News
Client Stories
SME business loan guide

Bank loans may increase for SMEs

“Banks and NBFCs will not levy high interest on these loans, as
Government of India is bearing the cost of underwriting them,” Modi said.
Written by Sunny Verma | New Delhi | Published:January 2, 2017 12:40 am
As on May 31, 2016, a total of 24.31 lakh proposals from micro and small
enterprises have been approved for guarantee cover for aggregate credit of Rs
1.13 lakh crore.
TOP NEWS
Doubling the credit guarantee on loans taken by small and medium enterprises
(SMEs) and enhancing their cash credit limits is expected to increase the
banking sector fund flow to the SME sector. These steps announced by Prime
Minister Narendra Modi on Saturday would also lower borrowing costs of the
SMEs. “These decisions will ensure that additional deposits mobilised by the
banks during demonetisation period are not directed only at lending towards
large industries. SMEs will get better access to credit with doubling of the
guarantee,” said Bhuwan Goyal, director at A.P. Refinery, a Punjab-based
edible oils refiner operating in the SME sector.
PM Modi Offers Rebate Of 4% On Rs 9 Lakh, 3% On Rs 12 Lakh Under
New Housing Scheme

The Credit Guarantee Fund Trust for Micro and Small Enterprises, run by the
government and SIDBI, provides guarantee on up to 85 per cent of the
sanctioned loan facility availed by such enterprises for a fee. This guarantee
enables both existing and new SMEs to get collateral-free loans at lower rates.
As on May 31, 2016, a total of 24.31 lakh proposals from micro and small
enterprises have been approved for guarantee cover for aggregate credit of Rs
1.13 lakh crore. Apart from bank loans already covered by the Trust, credit from
non banking finance companies will also be covered under the scheme. A senior
banker at a Delhi-based PSU bank said government’s intent is clear that
additional deposits mobilised through withdrawal of old notes of Rs 500 and Rs
1,000 should be used to enhance credit to SME sector. “Basically now we can
finance loans to projects worth double the earlier costs as the guarantee will be
there,” the banker said.
“Enhancing the limit from Rs 1 crore to Rs 2 crore for credit guarantee and
increasing the cash credit limit from 20 per cent to 25 per cent will help them in
their working capital requirements and keep the trade moving at a time when
remonetisation process is still ongoing,” industry chamber FICCI said.
“Government of India underwrites loans given by banks to small businesses
through a trust. So far, loans were covered up to Rs 1 crore. This limit is now
being enhanced to Rs 2 crore. Earlier the scheme only covered bank loans.
Hereafter it will cover loans given by NBFCs as well,” Modi said in his address
to the nation on Saturday. “Banks and NBFCs will not levy high interest on
these loans, as Government of India is bearing the cost of underwriting them,”
Modi said.

MAKING SMES BANKABLE AND BANKING ON SMES

MR. R. NARAYAN, FOUNDER & CEO, POWER2SME

Aug 10, 2016 10:56

India is considered a "bright spot" in the gloomy, global economic scenario today. The country
with a GDP growth of 7.6% (in 2015-16) has topped the World Bank's growth outlook for the
financial year 2015-16 for the first time. A closer look at the performance of the Indian economy in
past few years certainly showcases some glimpses of structural reforms with a shift of focus
towards high potential sectors – manufacturing MSMEs, and start-ups. It is clear that as an
economy, we are banking upon the MSME sector and the start-up community to push the frontier
of nation's growth. (world bank)
Over the years, manufacturing MSMEs have shown steady growth and the sector has come a long
way. Today, the sector has created a position for itself and is now known for the manufacturing
of a variety of sophisticated and niche products like electronic control systems, electro medical
equipment, microwave components, etc. The manufacturing MSME sector contributes 8% to
India’s GDP, 45% to India’s total output and 40% towards total exports (Govt. of India data). These
numbers may seem magnificent but if compared with other countries, like China where SMEs
contribute 60% to nation’s GDP, it reveals that India that has largest SME base (38 million) after
China (52 million) has untapped potential that needs to be explored. But, what is stopping our
manufacturing SMEs in utilizing their full potential, becoming bankable?
Challenge in procurement of good quality raw materials: On an average, raw material
procurement amounts to about 70% of the recurring costs of a manufacturing SME. Add to that
the highly biased and unstructured nature of the market. An SME has to compete with large and
established enterprises, which get easy access to high quality raw materials owing to the
volume/quantity of purchasing power.
Owing to their small size and lower demand for raw material, SMEs have to spend huge amount
for sourcing good quality raw materials from trusted suppliers. This raises two prime concerns for
the SMEs:
 Limited access to high-quality raw materials
 High procurement cost
Lack of access to working capital: Although they contribute significantly to the economic growth,
SMEs still struggle to get sound financial backing. In fact, majority of the banks fail to analyse the
credit worthiness of the SMEs – that is, whether the SMEs have the capacity to payback the debt
in loan on time. Unless the SMEs have strong financial backing with easy access to long term
working capital, the sector cannot be termed as a bankable one. Thus in order to have a SME
sector that can be banked upon, India need to make it bankable and financially stable.
There are various reasons why SMEs do not get enough financial support:
 Ticket size of loan & high transaction cost– The SME sector suffers from challenges of
small ticket size of loan, low revenue per client, and incur high transaction cost due to
which the traditional banking institutions refrain from financing these small ventures.
 Higher risk perception – Banks consider SMEs as a high risk sector owing to low or nil
credit rating, higher rate of diversion of the funds, and low turnover, among others.
 Lack of collaterals - SMEs often fail to raise enough funds due to lack of collateral. Banks
and other financing institutions prefer to give loans to entities with best collaterals and
security such as residential property, thus crushing the efficiency and scope of growth of
the small firms.
Government initiatives to help SMEs
While the challenges are deep-rooted, the government is resolving to address the key issues. For
instance, the establishment of MUDRA bank, under the Pradhan Mantri Mudra Yojana (PMMY),
to disburse loans of smaller amounts is a great move. As of May 2016, the Mudra bank has
managed to disburse Rs 1.32 lakh crore to about 3.48 crore beneficiaries and has set a target of
Rs 1.8 lakh crore has been set for the current financial year, 2016-17. The PMMY has managed to
reinstall an air of optimism in the SME sector with its effort towards refinancing micro units - small
individual and enterprise borrowers – who seldom get loans from banks.
However, the demand of such loans is humungous in the market to be absorbed by a single entity.
The International Finance Corporation (IFC) has reported that the MSME sector has a severe
capital shortage of Rs. 32.5 trillion along with a debt shortfall of Rs. 26 trillion.
Financial Institutions as custodians
Given the situation, various NBFCs (Non-banking financial companies) and private banks have
come forward with specialized loan services for SME players. This is seen as a welcome move by
the SME sector and many players are opting to secure working capital loans from NBFCs or private
banks as against the private lending concept that comparatively has the highest rate of interest
in the market. Presently for many SMEs, lending from private banks and NBFCs is proving to be
a viable and convenient option. Over the past few years, NBFCs have become a major source of
working capital for small and mid-sized companies.
New-age Lenders – Fin-tech/ Digital Finance Firms
Avant-garde NBFCs like Vistaar Finance and others, with their online presence also made it easier
for the asset light SMEs and entrepreneurs to receive loans. These NBFCs analyse the credit
worthiness of the sellers using analytics and other scanning metrics like their sales and fulfilment
records and can disburse loans in less than 48 hours.
The new age NBFCs, with help of technology are creating disruption in the industry, and for good.
The trend is picking up at a faster pace as the SMEs find this option very convenient to access
funds easily and quickly. In fact some of the banks like Bank of Baroda is also partnering with new
age lending players in order to expand their reach especially in the SME sector.
How can SMEs and banks work together?
Major efforts are under way in making the India SMEs bankable as the sector is being exposed to
innovative credit facilities, online lending platforms which offer alternative modes of financing for
small businesses.
 Focus on bright ideas and not size of assets - There is a need for banks and financial
institutions to evaluate the credit worthiness of SMES on the basis of the merits of the
project and ideas rather than focusing on size of collaterals – this would be a game
changing scheme in the MSME sector, that is known to drive innovation and competition
into key economic sectors.
 Performance driven incentives by government: Again, we need to focus on improving the
performance of our SMEs and ensure that a good idea or product should not face
mortality due to lack of funds. The government, along with public banks must introduce
performance incentives basis business activities of SMEs. Incentives can be given in form
of lower rate of interest on loans, or sponsoring SME’s participation in global trade fairs
or rebate on certain taxes, or in any other way that promotes ease of doing business.
 Resolving the information asymmetry – One of the major reasons why banks refrain from
lending to SMEs is lack of reliable financial information. Efforts need to be made in
supporting SMEs in generating reliable financial information. India can take cue from the
Intergovernmental Working Group of Experts on International Standards of Accounting
and Reporting (ISAR), under United Nations Conference on Trade and Development
recommendation for implementation of a standard accounting system for SMES. Such a
standard system promises flexibility to accommodate growth, reduces information
asymmetry and also evaluates an SMEs accountability and ability to furnish information
based on their business skills.
  Working with third party players other than rating agencies: The main purpose of
collecting information is to analyse the credit worthiness of a player. The same can also
be analysed by tying up with companies that are directly working with SME players. This
can help banks get an insight into payment history, behaviour and performance of an SME
player which can play crucial role in deciding the credit worthiness of SMEs.
The MSME sector has still a long way to go before it is identified as a bankable and dynamic sector.
Although the government has come up with substantial policies and reforms to boost the SME
sector, there is a need to address the challenges that affect the SMEs at the grassroots level.
Unless SMEs are made truly stable and profitable, banking on them remains a question. To
augment the government initiatives further, prominent industry bodies and other stakeholders
should join hands to promote more activity in the sector and help create more demand for its
goods and services.

Issues in SME Financing

Financing Technology Entrepreneurs and SMEs in Developing Countries:
Challenges and Opportunities
Excerpted from infoDev's study of Financing Technology Entrepreneurs and SMEs in
Developing Countries: Challenges and Opportunities.

Although the situation can differ among countries and individual businesses, the financing gap
for SMEs in the developing country has a few well-accepted causes. These include:

1. Information asymmetries between investors and entrepreneurs

2. Higher risks associated with small-scale activities
3. Sizeable transaction costs associated with SME financing
4. A lack of collateral held by SMEs for loans

These factors can be exacerbated by institutional factors within a country and are often more
severe for SMEs operating in the ICT/ICTE industry due to lack of understanding about their
economics and business models.

Finally, there are a number of "demand side" considerations that deserve more attention. The
following three factors play a considerable role in perpetuating the SME financing gap:

1. The poor quality of projects seeking funding

2. The inability of SMEs to make the best possible use of available resources of funding
3. The negative attitude displayed by SMEs towards equity financing

7 Challenges an SME faces in Banking

MAY 30, 2016BY LOANXPRESSSME,

#### _An overview of the kind of problems being faced in India_ Right from the stage
where a budding entrepreneur decides to start his business to the time when the
business becomes completely functional working on an auto-mode, an entrepreneur has
to face a lot many hurdles. His journey begins from having courage to face his family
and friends with regards to questions about stability, market and his plans, to raising the
required amount of funds and being able to find and hire the right talent. It then
continues to his conquests over his budgets, finding and satisfying his customers,
advertising and marketing effectively, cost-cutting, ensuring financial security, facing
failure and standing up once again in its face and learning from his mistakes and that of
others.

Apart from these, there are a few banking challenges that only increase with time. As a
business grows, so does it finances and the challenges related to them.

Following is a list of 7 challenges than an SME faces in Banking:

**1. Self-Funding:** For entrepreneurs who have questions about how to get a business
loan to start a business, well you can’t. I have even been asked questions like what do I
need to get a business loan and how to qualify for a business loan. Any entrepreneur
wanting to start a business has to essentially come up with his own contribution of funds.
He could borrow these funds from friends, family or the traditional money-lenders that
form the unrecognized sector. Most entrepreneurs end up pledging their homes or family
jewelry to start and sustain. However, financial institutions do not lend to start a
business. Once the enterprise has built a financial history of at least one year, a lender
begins to consider his borrowing requests.

**2. Collateral:** To get a business loan in India, most bank lending happens through
secured lending. Though there are collateral free loan what is an unsecured loan from
financial institutions, there is a limit on the amount of unsecured debt that can be availed
by a business. The money that is available however for normal business is available in
most cases against collateral. The collateral that needs to be given can only be in the
form of fixed assets. A certain percentage of the value of the proprety is sanctioned as
the loan amount. Financing is not available against any cash flows from lenders unless
an SME is well-rated and established.

**3. Cost of lending to Banks:** At a macro level, a lender has to lend to a larger number
of small enterprises to fulfil his lending targets. A large number of files becomes an
administrative hassle in terms of managing costs and risks individually. Lenders
generally prefer to stick to the larger ticket lending since it is easier and lowers their risk.
This ends up hurting the smaller enterprises who are in search of where to get a
business loan. In an ideal world, it would have been better to lend to small enterprises
thus helping themselves to spread their risks and the SME finance would give the sector
the required support.

**4. Perception Issues:** Most lenders view SMEs with a negative perception because of
the efforts involved in processing their cases. Apart from the documentation hassle that
the Banker has to deal with, a lot of guidance and handholding is needed to be given to
the SMEs which consumes a lot of the time of the lenders. SMEs are ignorant not only
about how to get a business loan or how to get a mortgage loan, but also about the
documentation required for availing these facilities. Ultimately even genuine cases are
left unattended and ignored by the Bankers.

**5. Funding Costs:** Being an SME, one generally doesn’t feel the need to get their
enterprise rated from a rating agency. On the other hand, a lender prefers lending to a
rated entity as they need to set aside more risk weightage and hence more capital for
any unrated lending that is being done from their balance sheet. Ultimately, the
borrowers bear the brunt as lenders charge higher rate of interest to lend SME finance
or MSME loan.

**6. Access to banks:** Generally an entrepreneur tries to avoid going to banks as they
are not the best at finance and understanding their own balance sheets. They are the
masters of their businesses, however not of the finance world. The other reason for them
being unable to access bank lending is the general inertia on the part of the banks, by
failing to be able to handhold them and guide them on how to qualify for a business loan
or even tell them how much I can borrow for a mortgage or against their balance sheet.

**7. Accounting practices:** SMEs generally have a practice of posting stunted profits in
order to pay minimal taxes as guided by their accountants. This practice in the beginning
helps them to save taxes but when they go to get a business loan, they are turned away
from the banks in view of low profitability in their balance sheets. The accounting
practices followed by many of the SMEs are followed in view of short term gains but
come back to haunt them when they reach the banks to borrow for growth. SMEs learn
their blunder when they get answers to how to qualify for a business loan.

Solve funding issues to finance SMEs growth plans

The major hindrance in the expansion of SMEs, which contribute significantly to the growing
Indian economy, is the unavailability of sufficient and timely funds
R Narayan | Mumbai July 2, 2014 Last Updated at 16:17 IST
The micro, small and medium enterprises are the backbone of economic development in
India. They are the incubators for talent, innovation and entrepreneurial spirit, which is
essential for the country's development. Indian SME sector contributes 45% of the
industrial output, 40% of the country's total exports, employs over 60 million people,
creates 1.3 million jobs every year and produces more than 8,000 quality products for
the domestic and international markets. With approximately 30 million SMEs in India,
around 12 million people are expected to join the workforce in the next three years with
the sector growing at a rate of 8% a year.

SMEs are present in a variety of sectors including

chemicals, plastics & polymers and pharma sectors. The burgeoning importance
of SMEs in the manufacturing sector is due to their significant contribution to the key
factors of the growing Indian economy. The importance of SMEs in manufacturing sector
is mainly due to the quantum of units that fall in this category, forming 90% of the total
industrial units in this country. Government is taking several steps to
boost manufacturing sector growth as it would lead to job creation and boost the
country's economy. National Manufacturing Competitiveness Council has been set up by
the government to suggest ways to enhance competitiveness in
the manufacturing sector. The government has already announced
a National Manufacturing Policy (NMP) that aims at raising the share of manufacturing to
25% of GDP by 2022. The NMP envisages setting up of national investment
and manufacturing zones, which are industrial townships, benchmarked to the
best manufacturing hubs in the world.

The major hindrance in the expansion of SMEs is the unavailability of sufficient and
timely funds to finance their growth plans. Banks have been making steady strides to
bridge this gap. But the approach followed by banks to funding is restrictive as they
create value by controlling and managing risk. In any loan application for a business, a
bank has to necessarily evaluate the risks involved, gauge collateral support and the
methods to mitigate those risks. There is a huge amount of paperwork involved and the
process is cumbersome. Therefore, it is not always possible for an entrepreneur to
satisfy all requirements and conditions the bank might pose. The above listed methods
of financing are primarily debt financing, as sources of equity funding remain elusive in
India.

In case of the SMEs, the access to capital markets is very limited, and they largely
depend on borrowed funds from banks and financial institutions. While investment credit
is provided by financial institutions, commercial banks extend working capital. In the
recent past, with growing demand for universal banking services, term loans and
working capital are becoming available from the same source. Besides the traditional
needs of finance for asset creation and working capital, the changing global environment
has generated demand for introduction of new financial and support services.

It is imperative for the RBI to issue necessary guidelines to banks on credit flow to the
SME sector. Additionally, the Government should strive to create a favourable
environment for SMEs that curbs the need for debt and capital. This could be achieved
by setting up SME-focussed banks and NBFCs that accord priority to SME sector
lending. Additionally, there could be financing schemes for SMEs that might be high on
risk, but promise robust returns. Also, there is need for reduction in the interest
rates. SMEs continue to pay interest rates of 19-20% for bank loans. There is an urgent
need to restructure the loans for SMEs to ensure that the interest rates are lower.

R Narayan, Founder and CEO, Power2SME

Additionally, delayed payments have always been an area of concern for SMEs that
contribute to reduced working capital for SMEs. Delay in settlement of dues adversely
affects the recycling of funds and business operations of SME units. Most defaulting
customers are large enterprises and SMEs are unable to report the same for fear of
losing business. To address payment issues, the Government could establish an
automated portal wherein SMEs provide details of customers they supply. In case of
payment defaults, the Government can send automated reminders to defaulting
establishments.

As known to all, Budget is an occasion for the government to set new financial and
economic goals, give policy directions and allocate financial resources for the same.
While presenting the Budget, the Finance Minister announces fresh policies, new
schemes, and projects and allocates money for the development of different sectors of
the economy, in order to meet the overall objectives of socio-economic growth.
Considering the importance of MSMEs to the economy, it is important to address various
issues affecting MSME performance in the current recessionary economic climate.

Challenge of financing SMEs

ARUN KUMAR
(2) · PRINT · T+

inShare
Share2
Business LineAlocal intermediary can ascertain financial information needed to arrive at a credit decision on an
enterprise - Photo: K Murali Kumar

Small enterprises are hit by poor access to funds. This can be overcome if financial
institutions are able to assess firm-specific and general risks, and offer innovative
products.

India is home to about 26 million small enterprises (with investments less than 50 million) that
account for about 20 per cent of the country's GDP . While small enterprises drive economic
growth with their ability to innovate and employ in large numbers, the biggest challenge faced by
them is access to finance.

Small enterprises, such as brick-kilns, grocery stores and small restaurants, need finance to
purchase raw materials, procure stock, pay wages, meet other working capital requirements and
support expansion plans.

Despite the efforts of Ministry of Small and Medium Enterprises, SIDBI and support from the
RBI by inclusion under priority sector, there continues to be a huge demand-supply mismatch in
small enterprise financing.

One of the major reasons for banks/financial institutions (FIs) being unable to bridge this gap is
the perceived credit risk involved in financing small enterprises. This is primarily on account of
non-availability of valid bills, proper accounting systems and lack of known buyers.

To mitigate such credit risk, banks typically look for enhanced collateral or traditional equity,
both of which cannot be brought in by most entrepreneurs. Further, due to their small size and
local presence, the transaction costs involved in financing them are very high.

ASSESSING LENDING RISKS

In the face of banks'/FIs' reluctance to lend, these enterprises are compelled to resort to high
cost, non-continuous financing from money lenders and other informal sources, or continue to
operate at sub-scale. Banks charge an interest rate of 10-20 per cent, compared with 36-70 per
cent from informal sources like money lenders. Risks faced by any business can be broadly
classified as idiosyncratic or systemic. Idiosyncratic risks are specific to an enterprise, like
location of business or skill of the entrepreneur.

Systemic risks, on the other hand, are beyond the control of any enterprise. Such risks make up
the environment in which a business operates. Risks due to change in preference of customers, a
catastrophic event, and changes in economy are all examples of systemic risks.

The key to financing any enterprise lies in the ability of the financier to evaluate and manage such
business risks. High quality origination can help evaluate idiosyncratic risks well. Traditional
equity acts as a cushion for such risks. A high quality local originator with geography and
business specific information about such enterprises in the operational area will be able to
evaluate and manage this risk well and will demand lesser traditional equity to be brought in by
entrepreneurs.

Systemic risks, however, are a different ball game. No amount of traditional equity is sufficient
when the financier is uncertain about an enterprise selling anything at all in an environment
where demand patterns and economic situations can change very quickly.

A financier searches for cues to establish that the business has a current and future ability to
service loans, even in an uncertain business environment. For small enterprises that have large
number of cash transactions, poor record of sales, produce undifferentiated goods and lack
known clients, assessment of systemic risk becomes very difficult.

Such challenges can be addressed through structures that allow financiers to trap cash flows, or
by resorting to a stronger and well established sales pattern in a supply chain.

FINANCING METHODS

Some ways of financing small enterprises are as follows: Supply-chain financing, where a
supplier and a buyer with known balance sheets can be financed.

For example, small enterprises that manufacture and supply jam to large players can be financed
if their cash flows are trapped through bills, or by obtaining a collateral/guarantee/comfort letter
from the company to which it supplies.

This can be adopted by many financial intermediaries, even large banks. The method has its
limits because it requires careful mapping of supply chains. Lending through a local financial
intermediary who can verify cash flows and income of the enterprise and finance them through
relationship-based approach is another option.

A local financial intermediary who understands the working capital cycle, seasonality,
procurement place and mode, point of sales, and demand for the product or service, can finance
small enterprises based on an understanding of the geography in general and various aspects of
the business in particular.

A local intermediary can ascertain turnover, income and other key financial information required
to arrive at a credit decision about the enterprise.

Business-specific templates can be developed for each small enterprise and a master limit can be
fixed taking into consideration the scale of business, projected sales turnover and surplus they
would generate.
Depending on business requirements, FIs can provide working capital loans, term loans or both.
Also, long-term, relationship-based lending helps mitigate credit risk by creating dynamic
incentives for the enterprise to maintain a relationship with FIs.

PRODUCT INNOVATIONS

Innovation in product structuring is as important in addressing gaps in small enterprise

financing as the channel itself. Innovative products such as equipment lease finance can help
address the need for term debt, and products such as receivable financing, bills discounting and
factoring could substitute requirements of working capital finance, addressing the unique needs
of small enterprises.

Local originators are best placed to do this given their monitoring capability and knowledge of
small enterprises, allowing structuring of products like working capital finance, channel finance
and cash credits that meet needs of the enterprise, enabling scale.

(The author is with IFMR Rural Finance. blfeedback@thehindu.co.in)

MSME/SME Business Loan: Features & Benefits

With low interest rates and generously flexible repayment options, Business Loan by Bajaj Finserv can
give the much needed boost to your business/ SME/ MSME, enhancing your competitiveness and
profitability. Loan for business by Bajaj Finserv gives a credit line facility, enabling you to expand your
business to new heights, upgrade your existing business to latest machineries and equipment, scale up the
growth and much more, at minimal repaying options.

Top features of business loan:

Line of Credit
Line of Credit is a unique credit facility given to our loan applicants, wherein you are approved for certain
limit of credit/ loan, for a said duration. The monthly instalment for Line of Credit will consist only of the
interest amount and will not have a principal component on a monthly basis. The principal amount of loan
is to be repaid at the end of the tenure of the facility. Read about this feature in detail here

You can deposit the funds when in access and withdraw fund when required in business, and you will be
charged interest only on the amount utilized by you. The limit may drop along the tenor (Dropline) or
remain constant throughout the tenor, giving you maximum availability of funds throughout the tenor.

Loans up to Rs.45 lakh

Whether your business has needs for short-term loans, intermediate-term loans or long-term loans, Bajaj
Finserv offers business loans up to Rs.45 lakh. You can use the loan amount to invest in infrastructure,
expand operations, buy equipment or inventory, or even to increase working capital.

No collaterals needed
Bajaj Finserv’s business loans don’t require collateral, which means you won’t have to put your personal
or business assets on the line to qualify for financing. And since you don’t need to pledge collateral, there
is no requirement for appraisal of the value of your assets. As a result, funding will be much faster, require
less paperwork and will minimize documentation.
Preapproved offers
As an existing customer of Bajaj Finserv, you will be eligible to get exclusive pre-approved offers from us.
These offers may include a top-up loan or even reduction of rates from time to time. This will require less
paperwork and will minimize documentation.

Online account access

You have the convenience of accessing your business loan details anytime, from anywhere online. You
have free access to your loan account statement and other relevant documents online at your disposal.

Whether you are expanding into a new vertical or growing your existing business, you can avail of a small
business loan for finance. In today’s fluxing economic climate, nearly any enterprise can see immediate
growth as long as they use the business loan wisely

How to apply for a business loan / SME loan

A: The online way

Step 1: Click here to apply

Step 2: Fill in the mandatory details, & click Submit

Step 3: Our representative will get in touch with you along with your pre-approved offer.

B: Simply SMS
Step 1: SMS ‘BL’ to 9773633633

Step 2: Our representative will get in touch with you along with your pre-approved offer.

It should be clear by now that at least two electrodes are necessary to make a potential
measurement. As Kissinger and Bott have so perfectly expressed, “electrochemistry with a
single electrode is like the sound of one hand clapping”
(http://currentseparations.com/issues/20-2/20-2d.pdf). In potentiometry, those two electrodes
are generally called the indicator electrode and the reference electrode. The indicator
electrode possesses some characteristic that allows it to selectively respond to changes in the
activity of the analyte being measured. For the measured potential to have meaning in this
context, the reference electrode must be constructed so that its composition is fixed and its
response is stable over time, with observed changes in measured potential due solely to changes
in analyte concentration.

You are probably familiar with tables of standard reduction potentials from a general chemistry
course. The standard reduction potential, or E0, allows you to predict the ease with which a
half-cell reaction occurs relative to other half-reactions. (For a review of standard potentials
and electrochemical cells, you can access the companion “Concepts” module). Values of E0 are
most often reported as the potential measured in an electrochemical cell for which the standard
hydrogen electrode is used as a reference.

The standard hydrogen electrode, or SHE, is composed of an inert solid like platinum on which
hydrogen gas is adsorbed, immersed in a solution containing hydrogen ions at unit activity.
The half-cell reaction for the SHE is given by

2H+(aq)+2e−⇌H2(g)2H+(aq)+2e−⇌H2(g)

and the half-cell potential arbitrarily assigned a value of zero (E0 = 0.000 V).

Practical application of the SHE is limited by the difficulty in preparing and maintaining the
electrode, primarily due to the requirement for H2 (g) in the half-cell. Most potentiometric
methods employ one of two other common reference half-cells – the saturated calomel
electrode (SCE) or the silver-silver chloride electrode (Ag/AgCl).

1. Saturated Calomel Electrode (SCE)

The SCE is a half cell composed of mercurous chloride (Hg2Cl2, calomel) in contact with a
mercury pool. These components are either layered under a saturated solution of potassium
chloride (KCl) or within a fritted compartment surrounded by the saturated KCl solution (called
a double-junction arrangement). A platinum wire is generally used to allow contact to the
external circuit. The half reaction is described by

Hg2Cl2(s)+2e−⇌2Hg(l)+2Cl−(sat’d)Hg2Cl2(s)+2e−⇌2Hg(l)+2Cl−(sat’d)

with an E0 value of +0.244 V. A common arrangement for the SCE is shown below, left side.
In this arrangement, a paste is prepared of the calomel and solution that is saturated with KCl.
The solution over the paste is also saturated with KCl, with some solid KCl crystals present.
Contact to the measurement cell is made through a porous glass frit or fiber which allows the
movement of ions, but not the bulk solution. In many electrodes designed for potentiometry,
the reference half cell is contained within the body of the sensing electrode. This arrangement
is referred to as a “combination” electrode.

2. Silver/Silver Chloride (Ag/AgCl)

The silver/silver chloride reference electrode is composed of a silver wire, sometimes coated
with a layer of solid silver chloride, immersed in a solution that is saturated with potassium
chloride and silver chloride. The pertinent half reaction is

AgCl(s)+e−⇔Ag(s)+Cl−(sat’d)AgCl(s)+e−⇔Ag(s)+Cl−(sat’d)

with a value for E0 of +0.222 V. The actual potential of the half-cell prepared in this way is
+0.197 V vs SHE, which arises because in addition to KCl, AgCl also contributes to the
chloride activity, which is not exactly unity. A schematic of the Ag/AgCl reference electrode
is shown at right in the previous figure.

Both the SCE and the Ag/AgCl reference electrodes offer stable half-cell potentials that do not
change over time or with temperature. In addition, the loss of electrolyte to evaporation does
not change the saturated nature of the solution, nor the potential. One must be aware that the
contact junctions of the half cells by nature slowly leak fill solution into the external solution
in which they are found. As such, there are instances where measurements of certain ions, like
chloride, might be affected by the ions introduced to the measurement solution by leakage. The
doublejunction design prevents this problem by placing a second solution between the
reference half cell and the measurement solution. This of course adds a second junction
potential, a topic covered elsewhere in this mod