Walking the Loan Route can be a breeze

BANGALORE, INDIA:In every ground event Dare organizes, the finance mentor, usually a banker, is flooded with questions. He is the most popular guy on the panel, and with a reason. Banking is the most crucial of operations our SME super-CEO will handle in his daily juggle.

Know the lay of the land

“In any service industry, the customer jointly produces the experience,” says S. Gnanavel, DGM, SME Credit of Bank of Baroda (BOB). In India, an SME entrepreneur typically borrows money from private lenders. An estimated 5-10 per cent is institutional lending. The rest 90 per cent is from internal accruals or private lending.

Private lenders seldom follow the institutional rigour and paper work. As a result, the expectations of the borrowing entrepreneur are skewed.

The biggest point the banks make is that they normally fund 75 per cent of a project cost. The business is familiar to the businessman but not the banks, so they need enough information to understand its dynamics. SME entrepreneurs find this a major hurdle, and interpret the bank's rigorous information-seeking as not being business friendly and not understanding their view point.

Every banker we spoke to had one to thing to say: “Entrepreneurs should know their rights and their responsibilities.” The emphasis was on the latter, of course. The typical visualization of an entrepreneur in the mental map of a banker is: An entrepreneur is not organized; He is not tech-savvy; He is not bothered about productivity, but only concerned about the product.

Bankers say that the entrepreneur thinks of going to banks only when the business is going global and requires serious scaling up. Private lenders cannot fund large projects and they are more interested in getting their money back. Institutional lending follows the guidelines laid by Reserve Bank of India and the SME Ministry. In most cases, SIDBI and other nodal agencies oversee the process. There is much at stake when it comes to information gathering, so banks leave no stone unturned to get it.

Have a Fiscal Plan

Banks are paranoid. And justly so. It’s the experience of the banking industry that most SME sector units live from contingency to contingency. “If I don’t know what I need, I can’t ask for it. In order to know, the organizations need to plan ahead,” says Sangram Singh Dash, DGM SME Credit, State bank of India (SBI). Well, that summarises the situation well.

{#PageBreak#}The question then is: Who can enable an SME unit to plan their financial requirements?

Take a situation where a 10 per cent contingency fund is raised by a unit, and the entrepreneur spends it on his regular expenditure. Here the entrepreneur may not be essentially diverting money but squeezing himself to do more with available funds, while the bank is not informed.

However, since the entrepreneur took the famous “Jugaad” route to get his work done for less money, he has starved his business. There is the bank at the end of the day which is very suspicious, because it does not understand the rationale behind the entrepreneur’s act.

Banks often find that when an entrepreneur applies for a loan, the particulars he has provided do not relate to his needs.

Know how banks really operate

It is critical to understand how banks work at a higher philosophical level. Banks work on three non-negotiable principles:

- Trusteeship of funds

- Return funds with interest

- Return funds on-demand.

Moreover, banks operate on thin margins but higher volumes.

Since banks process loan applications in huge volumes, they have evolved certain pre-requisite patterns for applicants to qualify for the loan. The moment the pattern is met by the applicant, bankers easily pass the application. This is the most important lesson to learn.

The entrepreneur has to understand the pattern of lending and the pattern of borrowing. He has to understand how banks match in order to efficiently raise funds.

Banks themselves are working harder to make this process easier. They work with third party Knowledge-enablers. They strive hard to establish a connection between themselves and the entrepreneur. Take for instance, SBI’s wide variety of schemes or BoB’s vast network of loan factories. Banks are increasing interactivity and working with credit

disposing agencies.

You can get Collateral-Free loans

Collateral is not a hindrance anymore. The central government’s Credit Guarantee Trust for Micro and Small Enterprises agency has finally taken root in the SME economic activity. SME entrepreneurs are actively seeking collateral free loans. Banks have developed enough trust in the scheme to extend this scheme through their regular SME banking channels. So ask for the scheme next time you visit your bank.

CGTMSE now has a Rs 3200 crore corpus. It has cleared 6000 cases, so there is actual ground level proof that the guarantee fund is working for banks.

“We are now at Rs 26,000 crore credit guarantee cover. Having completed 10 years, we are now actively seeking innovations in our approach, “says U.R. Tata, CEO of CGTMSE. “Our next experiment will be in differential pricing for collateral free loans based on credit risk.”

CGTMSE strives to keep rejection levels low as far as possible (under 3 percent).

Banks are keen to get equity into this sector

Yes, you read it right. Banks want to see higher equity participation in the sector which operates mostly on short and long term borrowings. “A lot of equity has gone as growth capital (given for a period of 10-15 years). Companies who avail of this should return back,” says SKV Srinivasan, Executive Director of IDBI Bank.

SME sector is actually coming of age in this sense. More and more companies are seeking equity participation rather than go for traditional route of project funding. Banks will love this situation. Even banks are keen to participate in equity. A decade back such things were unthinkable. If you had a bad experience trying to raise an equity from a bank in the past, try again. You may be surprised by the response.

{#PageBreak#}A SIBIL type of agency for MSMEs can help this industry immensely.

Take advantage of technology

We were surprised to find a senior official of a public sector bank holding a mini-lecture on how cloud computing can help in reduction of transaction cost for banks. IT is engaging in a big way. Bankers have also encouraged a lot of KPOs which have come up to help bridge the gap between the lenders, the supporting agencies and the borrowers.

Banks are not averse to working with outside agencies anymore. “We would need to engage agencies to bring in credit rating and pass on the interest rate advantages to the customer. Decrease information gaps. Increase reach,” says Srinivasan.

Your bank can be your mentor

Finally, have you ever looked upon your banker as a possible mentor? Perhaps not. One public sector banking official opened our eyes to this possibility and how some of his successful entrepreneurs engage the bank into an informal advisory firm.

Banks too have a vast experience is dealing with industries in various domains. As a result, banks would have accumulated knowledge on what risks are worth taking, what investments are absolutely necessary.

A banker can try to help the entrepreneur to come to a good project mix. They will have access to vast data on failed and successful enterprises.

A good promoter listens to the banker and benefits from it.

5 SMART TIPS FOR SMES SEEKING LOANS

Have a single point of contact

What does this phrase signify? Just like a bank has to ensure that a single point of contact is provided who is stable (without transfers) for a considerable time period, you too have to ensure a single person is dealing with the bank.

Be finance literate

Charges become hidden when you take your eyes off the fine print. It’s important to read and understand what you are signing. Do not rely on your accountant or CA. Do it yourself.

Give it time

Do not expect a loan sanction with weeks of applying, unless you already have a relationship with the bank and all your project papers are in place. It pays to understand the process behind the loan sanction and estimate the time. This will right size your expectation level.

Take the green route

Banks have moved away from an essential paper-based processing to digital processing. See if you can avail of this facility. Many times, this shortens the processing time and cost.

Insist on the CGTMSE Scheme

CGTMSE provides collateral free loans upto Rs 10 crore. It takes time to process. For banks giving you a loan under CGTMSE means higher paper work. They are also sceptical if they get their money from the agency if you default. So they often try to put roadblocks at you just to reduce their risk. Stay your ground and insist on CGTMSE scheme. Threaten to go to some other bank which provides it more readily.

{#PageBreak#}Bank of Baroda’s Innovative Delivery Model

S. Gnanavel

DGM, SME Credit of Bank of Baroda

Bank of Baroda has a unique concept called SME Loan Factory. The Bank has 40 such loan factories in different places across the country. This takes business loans to the doorstep of entrepreneurs. More factories are planned to be added.

Each loan factory, headed by a Factory Head, is assisted by a Process Head and a Marketing Head with Processing Officers and Marketing Officers reporting to them, respectively. Marketing Officers go to the office / home of entrepreneurs to complete paper work and once the file is ready, the processing team takes over. The entire process flow is timed to ensure that the Turn Around Time (TAT) is kept preferably less than 14 days.

Bank of Baroda has introduced various other initiatives such as area specific schemes to suit special requirements, Baroda Swarojgar Vikas Sansthan (BSVS) for providing vocational training to aspiring entrepreneurs, imparting knowledge on accounting, finance, marketing to entrepreneurs in association with AIMA etc, to name a few.

Proposal tracking System

Realising that faster TAT would be the cutting edge, Bank of Baroda’s Chairman and Managing Director Mr MD Mallya desired to introduce an online proposal tracking system.

“Today, we have in place a real-time application tracking system called Protrack” says S. Gnanavel, DGM, SME Credit of Bank of Baroda (BOB). The basic objective of this web based application is to allow the officials in the hierarchy — from a branch to CMD’s office — to track the movement of proposal. This brings total transparency to the whole process chain. There is provision to monitor and generate MIS reports at factory level, regional level, zonal level and corporate level. This system has been developed fully in-house by the IT team of the Bank. Gnanavel recalls that this customer centric initiative is the brain child of CMD Mr MD Mallya and it is getting further strengthened and enriched under his guidance.

Source: www.dare.co.in