How Can Small & Medium Businesses Reduce Bad Loans? Bad loans can dent a company's image as well as spoil future prospects
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The Indian MSME sector that contributes for 37 per cent of the fastest-growing country's GDP and generates millions of jobs every year is now on the radar of the government.
In a major impetus in the 2018 Union Budget, the Narendra Modi-led government attempted to address major issues faced by the small and medium sized entrepreneurs who form the backbone of the economy.
From extending credit support limit to calling for a revamp of online loan sanctioning to the SMEs, the provisions made by the Government for MSMEs have been viewed as the need of the hour for the sector and to formalize the economy.
The sector that pays 99 per cent of income tax to the government will also pay 25 per cent lesser corporate tax. This is applicable for companies that have an annual turnover of up to INR 250 crore.
While it's all good news, the one bad news that has been plaguing the industry has proven to be a major hurdle in the growth of sector till date.
Rising bad loans or NPAs of micro, small and medium-sized enterprises have been a major cause of concern for banks, the government as well as enterprises. India has been ranked fifth on the list of countries that have highest Non-Performing Assets (NPAs) revealed CARE Ratings.
In its attempt to address the elephant in the room, the Government of India has said it is creating a road map to address bad loans of MSMEs that will be ready by February- March 2018.
Entrepreneur India talked to a few bankers to know what exactly causes these bad loans and if there are any measures MSMEs can take to reduce those loans with banks. Here are their insights:
Limited Financial Knowledge is a Major Cause
Most of the bankers cited limited financial knowledge of small entrepreneurs as a major reason for increase in NPAs. According to them, the small entrepreneurs lack in financial awareness in deciding how to allocate capital in business.
The Managing Director of PAISALO Digital Limited, Sunil Agarwal said, "Because of limited financial knowledge and lack of professional services, banks under estimate MSMEs. Thus any delay in their inward payment makes them vulnerable for default."
Agarwal emphasized on the measure that MSMEs should take i.e. they should not avoid inward payments.
Improve Revenue by Cost Reduction
MSME should focus on improving revenue by cost reduction, said K Paul Thomas, MD and CEO of ESAF Small Finance Bank.
If they would cut the extra expenditures from the business and for a certain period of time focus on improving revenues for the business, they can make their payments on time to banks. This will also help companies maintaining a cordial relationship with banks.
Differentiate Between Working Capital and Personal Money
Agarwal also talked about how MSME owners do not differentiate between their personal money and working capital of business. "Many a times they spend their working capital for personal needs thus leaving gap in liquidity and the risk of default increases," he said. MSME owners do not focus on different nuances of balancing equilibrium in allocating funds. The need is to provide basic financial literacy by the financing partner and hand hold him and keep the entrepreneur in financial discipline.
Public Procurement Opportunity Could Provide Extensive Help
Many SMEs turn sick SMEs because of their non-payment of dues with banks. Terming this as major concern, the CEO of ESAF Small Finance Bank, Thomas explained how MSMEs can reduce the burden of heavy interest rates from them.
"Not many SME have used this opportunity, only less than 250 companies are listed in SME exchange. If small entrepreneurs can access money through capital market it will help increase rating and enable further low cost funds," Thomas said.
His other tip includes making use of the public procurement opportunity available with the government to improve sales. "Try to get rated and based on that ratings try to negotiate with banks and financial institutions to reduce interest burden," he added