Banks redrawing strategies to fund small and medium enterprises
MUMBAI: Banks are redrawing their strategies on funding micro, small and medium enterprises (MSMEs), expecting the transition to the goods and services tax (GST) will improve their credit profiles and enhance their borrowing capacity.
The strategies mainly comprise launching new products and hand-holding existing MSME borrowers in improving cash flow prediction models and GST compliance, according to bankers. MSMEs are starved of capital because of limited access to bank credit. One of the key reasons for this has been lack of documentation and wherewithal to predict future cash flows, maintain accounting, and comply with taxation, bankers said.
Currently, bank finance to MSMEs is mainly based on pledged immovable properties such as land and building. Such credit is bundled as loan-againstproperty. Banks also assess the moveable assets of manufacturers such as stock of goods to ascertain cash flow to sanction credit to small companies.
According to Romesh Sobti, managing director and chief executive officer of IndusInd Bank, typically small and medium enterprises disclose only 60% of their turnover, balance sheet or stocks.
“Now (under GST), you are forced to disclose 100%, which means your balance sheet should become stronger and better. And therefore the ability to borrow from banking system should grow,” he said, while speaking at the second quarter earnings on October 12. Since the GST implementation, banks have seen a rise in demand for working capital from MSMEs.
Bankers said that the GST council’s decision to allow SMEs with an annual turnover of less than ₹1.5 crore to file GST returns on a quarterly basis, against the current practice of monthly returns, should help ease their compliance burden.
To help smaller firms tide over the GST transition, State Bank of India (SBI) has launched a product to provide working capital loans to MSMEs, based on their input credit claims.
The loan, to be given for nine months, will be given outside the sanctioned bank finance. The loan amount will be either 20% of the existing fund-based working capital limit or 80% of input tax claim due, whichever is lower.
Sobti said that IndusInd Bank is open to introducing a similar product. “To start with, we are looking at how to help existing MSME customers in terms of maintenance of relevant documents and compliance, which for them is the biggest challenge. We are not keen on new product but to tweak existing offerings based on the borrower profile and tax claimed,” said a senior official of a mid-sized private sector bank, requesting anonymity. According to India Ratings, industry participants’ ability to tide over working capital mismatches during the implementation phase and beyond would be relative to their balance sheet strengths and capital market access.