The high cost at which credit is made available to small and medium enterprises (SMEs) is the foremost impediment to enhancing their growth and competitiveness in the domestic and global market, and also drives them to sickness.
These are the findings of a recent survey undertaken by the PHD Chamber of SMEs located in UP, Haryana, Punjab, Rajasthan, Madhya Pradesh, Himachal Pradesh, Jammu & Kashmir, Uttarakhand, Punjab, Chandigarh and Delhi.
The survey found that around 80 per cent of those surveyed rely on banks for meeting their credit needs, while 16 per cent use internal sources of finance, including family.
SMEs said it was not easy to secure funds from banks, with about 55 per cent of the respondents saying that insufficient collateral was a deterrent. About 17 per cent blamed poor documentation for delays in loan sanctions, while 13 per cent each complained of lack of personal contact with banks and non-acceptance of project proposals by banks.
Around two per cent felt that banks were reluctant to provide loans since it was felt that the promoter’s contribution was too small for the project to be viable. Such responses demonstrated that banks perceived SME start-up ventures to be high-risk borrowers, the chamber said.
The majority of respondents said their primary expectation from banks was a prompt sanction of loans and adequacy of credit limits.
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According to the survey, among the most important factors contributing to delays in rehabilitation of sick units is the long time taken for the sanction of credit. This could be due to non-availability of collateral or on account of the requirement of promoter’s margin.
Banks are reluctant to lend despite a government scheme that stipulates that they should provide collateral-free loans to SMEs up to a limit of Rs 1 crore. This affects their ability to hire the best workers, purchase the latest machinery and equipment, and acquire the latest technology.
The chamber suggested that banks should increasingly rely on relationship banking as against transactional lending, to reduce the risk perception. And once a project is recognised as credit-worthy, bank credit should be forthcoming at cost-effective rates. Lenders also need to relax their lengthy procedures and other norms for extending credit to SMEs, it said.
Besides, sanction of credit should depend upon clean balance sheets and regular payment of taxes to the government rather than on availability of collateral, the chamber suggested.