Spurned by banks, MSMEs make a beeline for NBFCs

Vijay C Roy

Tribune News Service

Chandigarh, November 20

Hit hard by the double whammy of demonetisation and GST, the cash-strapped MSME sector of Punjab has shifted its preference from commercial banks to non-banking financial companies (NBFCs), as the banks are reluctant to lend them, fearing defaults.

The micro, small and medium enterprises (MSMEs) are facing tough scrutiny and lengthy procedures at both private and public sector banks and often their loan applications are rejected on flimsy grounds. They find it easy to secure loans from the NBFCs, Punjab-based industrialists said.

With easy documentation and improved turnaround time, the NBFCs are denting the share of commercial banks in lending, but they must be aware of risks involved in laxed lending, experts said.

After the unearthing of about Rs 10 lakh crore of NPAs across the country, the banks are overcautious in lending. Advances to the MSMEs by banks during April-September 2018 declined by 24% in Punjab.  

In April-September 2017, the banks had registered an increase of Rs 15,816 crore, up 33% compared to the corresponding period previous year.

The loans being given to the MSMEs are mainly under project finance, equipment finance, business loan or loan against property. There are over 1.70 million such enterprises in the state.

“The NBFCs are charging higher lending rate compared with banks despite the fact that MSMEs are approaching them. Driven by latest technology, they offer easy documentation and faster turnaround time. The (commercial) banks must focus on the issue otherwise they will lose an important business segment,” said Punjab National Bank General Manager PK Anand at a bankers’ meet held recently. Banks charge interest between 9 and 16% from the MSMEs, while NBFCs charge up to 24%.

Earlier, lending to the MSMEs had been the forte of banks and NBFCs had a limited role in this segment. The absence of sufficient and timely funds from the banking sector for their working capital or investment needs are the common problem faced by the MSMEs.

The MSMEs have no choice but to borrow money at exorbitant interest rates from NBFCs, which erodes their competitiveness, industry experts said.  

“Ironically, the banks’ interest rates for the industry are higher than that of car loans, which have an unproductive status. There should be a 2% interest subvention by the banks for the MSMEs,” Punjab Pradesh Beopar Mandal state president Piara Lal Seth said. 

During April to Septemer 2018, the total NPAs of the MSMEs were Rs 6,827 crore in Punjab, 14% of total loan outstanding. As on September 2018, the total loan outstanding was Rs 50,078 crore.