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MSME LOANS - BOON OR BANE FOR INDIA?


The economy across the globe has witnessed a severe destruction due to the unexpected pandemic. Even if currently we all are living in unprecedented times, still there are certain pillars of hope to support the wavering state of the Indian economy. MSME sector turns out to be a boon to the declining of Indian economy by contributing approximately 37% to GDP(7% to GDP from Manufacturing & 30% to the GDP from Services).


It has turned out to be the first choice of the common man of India in terms of ease in compliance & funding with a never heard of lowering interest rates without any collateral security! It has boosted confidence of many entrepreneurs to take business loans from banks and in turn will further boost employment with a hope to start reviving with the upward side of the economy.


Further to ensure support to the budding enterprises’ government has also introduced several schemes. No scheme or loan is 100% risk free and it is obvious that there are certain advantages associated with it. But as per the popular knowledge, every coin has two sides and this is not an exception in that regard. So the pertaining question is whether MSME loans are a blessing or another pitfall? Let us analyze deeper into the matter for a clearer vision.


MSME Loan Advantages


1. Hassle-free Proceedings:


All The MSME’s/Start ups seem to be eligible to avail the loan criteria and with less paperwork, it should be hassle-free experience with the nodal agencies which are governed by RBI.


2. Lower Interest Rates from selected banks


The one factor which drives these loans is the lower interest rate in the range of 10 to 15 percent,(with SIDBI It’s @5%P.A*for a limited period) which makes it quite affordable and easy to repay.


3. Flexible Payment Option & Moratorium Period


Repayment is never a burden with such loans as one can repay at their convenience without any penalty or prepayment charges. This repayment can be done either in full or in parts as well.


Some banks are also offering moratorium period before the start of Actual EMI’s, Means you are being offered to relax/revive your business/Finances for sometime without having to be burdened with immediate payment of interest/EMI’’s


4. Relaxation in Eligibility Criteria


Bank’s/NBFCs offer a variety of loan options to meet different business requirements like starting a new business or business expansion as per their eligibility & risk appetite. However such loans may be offered to low credit ratings under special schemes & .Such loans are designed in a fashion which may give a freedom to choose a loan with or without any collateral security/Guarantor.


5. Sense of Security


Loans to MSME/Start ups not only provide the necessary funding/capital for the enterprise to sustain in the market, but also provides a sense of security to the entrepreneur.


If the industrialists and businessmen's wishes to acquire an industrial property for sale in Mumbai, then they can utilize this golden opportunity by applying for the same loan.


MSME Loan Disadvantages


1. Interest on loan


Having a low rate of interest doesn’t mean that there is no interest to be paid. Interest costs are a significant amount of money and it is always a liability till the loan amount is completely repaid.


2. Documentation Hassles


Completing compliance documents of the loan is quite time consuming & depends on external parties to respond as per their guidelines, which have been a hassle for many consumers.


3. Risk of increase in NPA’s


Zero collateral requirement gives a privilege to the lenders, but may have an impact on the banks in the long run which can increase non-performing assets due to unsecured loans


4. Processing Fee


The entrepreneur has to pay an extra amount while applying for the loan towards loan processing fees, which is generally 0.5 to 1% of the LTV.


5. Managing Initial Capital in the business(Skin in the business)


50 to 70% loan is sanctioned as per standard banking norms and hence infusing initial own capital of 30 to 40% from own sources sometimes becomes a hurdle to run the business.


6. Eligibility With Credit Score


Its standard banking practice for individuals/companies/directors with a high credit score will be eligible to opt for a loan, However there may be few deviations/escalations which depend on a strong project report, Payment history & provisions to secure the loan repayments.


CONCLUSION


No business or enterprise is completely free from risk. So it is unavoidable to manage your finances without having to infuse continuous capital in the business by opting for loans to make profits out of it. With the overview of the Special Scheme to boost employment and generate more liquidity in the market ,MSME’s seems to have more advantages in the current market scenario to revive their businesses at a least financing cost ever seen & which means more surplus income/ capital available.With a proper planning and financial discipline, all the businesses can put more capital from business incomes & make more profits too by having their own or leased industrial unit in Mumbai. Because of low financing cost,more surplus income available & hence it would be easy to reduce the loan liabilities & can aim for debt free business.


“BUSINESSES” are like growing “TREES” & it needs continuous “WATER” means “CAPITAL” to enjoy the “FRUITS” called as “PROFITS”