There was a time when small business enterprises could never approach banks for financing. The principal reason was that banks were not financing business requirements without collateral. From the bank’s angle, this is fine. But, business in India took a heavy beating. Sensing this, the Government of India enacted the Micro, Small and Medium Enterprises Development Act 2006 to cater to SME sector. Let us look at the SME loans procedure now.
Before going into the details of the MSME loans process, let us have a quick definition of the SME sector. This table will make things very clear.
- This Trust will cover SME loans up to Rs 1 crore with the Trust guaranteeing up to 85% of the outstanding amount in case of default by the borrower. In order to avail this facility, the borrower has to pay a one-time guarantee fee of 1.5% and an annual service fee of 0.75% of the loan sanctioned.
- There are concessions to women entrepreneurs and SME units in the North Eastern states.
These are the broad guidelines. The individual coverage will differ from case to case.
Let us now move on to the MSME loan procedure
The MSME loan eligibility criterion is very simple. The business enterprise should qualify either as a manufacturing unit or a services unit based on their initial investment as enumerated above.
How do you apply for SME loans?
Applying for SME loans in India is not difficult. The nationalised banks are under Government obligation to grant SME loans to eligible borrowers.
- The SME loans are in the form of term loans/overdraft/Cash Credit/composite loans for procurement of capital assets and working capital.
- The SME unit should be registered with the District Industries Centre in the respective districts.
- The first step is the preparation of a project report by the unit detailing the entire project, the purpose of SME loan, promoter’s contribution, and projections for the next seven years. In case of infrastructure projects, the projections can even be up to 10 years.
- The unit should have the requisite permission to manufacture or carry on the business activity in the area.
- The unit should provide quotations from reputed manufacturers for machinery in case they decide to purchase machinery out of the SME loans.
- The banks grant SME loans for construction of plant as well as the purchase of machinery. Note that the assets created out of the SME loans are to be charged to the bank by way of hypothecation or mortgage as the case may be. In case of working capital finance, the limits are in the form of revolving credits renewable on an annual basis on submission of proper financial documents,
- There is no need to provide collateral or third-party guarantee for SME loans up to Rs 1 crore.The borrower should be ready to pay the guarantee fee and renewal premiums as stipulated.
The banks grant SME loans after conducting the KYC verification, credit appraisal for project viability, and other credit monitoring norms as decided by them in their Loan Policy. It is a great initiative by the Central Government to enable the development of the SME sector through SME loans.