Loan against Property

IntelliIndia did a survey of customers seeking LAP loans in leading banks in India and NBFCs too. We spoke with nearly two hundred fifty of them via social media. We found that the majority of banks did not place credit managers in the supply chain of the loan process in the initial stages. It allocates the work to sales and marketing teams. We used Eliyahu Goldratt's theory on the basis of the Central Government's own admission that  traditional banks are reluctant to lend to MSMEs. 

Lot of MSME loans get rejected by sales teams without the credit manager seeing them because in the loan approval process, the credit manager is not present. He is forwarded the proposal after the sales team vets the documentation process. At this stage, the sales team either over promises or outrights rejects without even logging in the file.  After the proposal is logged in, the credit managers ask the Proper questions which the sales team/bank incharge channels acting as postobox. Lot of communication is lost in this stage. Lot of personality issues spill over. The customer is getting frustrated at one query at a time instead of one shot enquiry. The sales manager is getting frustrated acting as postbox. These personality issues are leading to discords and many proposals are getting lost since the branch manager does not want to carry it further. It tells the credit team that customer has withdrawn. The customer has already spent on login fee, technical, legal but now faces rejection all because the credit manager is not being kept in the loop before login. By informally checking the file before logging in, the credit manager saves the branch time, saves the customer from his CIBIL getting logged with their enquiry. Why are banks not doing this is the moot question?

The customer should be made aware and not rush to login the proposal before either getting a in-principle offer letter or written assurance on the amount from the regional office or the credit officer team approval. The customer's credit history gets hurt with rejection. So responsibly, the credit manager should be involved in the personal discsusion, the informal review of the papers before logging in the proposal. The banks and NBFC login, get done technical and legal without first getting the credit officers to vet the proposals.

A private bank manager got customer to spend 18000 rs by giving false assurance of a big amount. The manager said that it would be approved for sure but the credit manager  did not agree with her calculations and outright rejected it. The customer is told that they did not give proper documents. The manager obviously always pushes blame on customer instead of accepting that they did mistake in not vetting the file before logging in. Lakhs of MSME customers thus damage their credit score with these unqualified enquiries. The Customer too should not start giving the documentation checklist. He should find out if they have qualified staff to vet the proposal. Strengthening this weakest link would be helpful to all stakeholders.

Our team found it hard to believe is that several branch managers did not understand the difference between turnover and net profit. If a customer has EMI, he pays the EMI out of the turnover and he clearly mentions the EMI as liability in the balance sheet too. Yet, the branch manager takes EMI out of the Net Profit. They should leave balance sheet analysis to credit managers.

TransUnion CIBIL-SIDBI’s MSME Pulse Report. recently reported that MSMEs have just 3% delinquency rate compared to almost 100% delinquency in political loans. Yet the political loans keep getting sanctioned while credit to MSMEs keep getting restricted. If one were to observe NBFC's business loans, many of them are borrowing at huge interest rates. This is because they have not received any response in the normal banking route. Most originations per the report were in the less than ₹1 crore.

Private lenders have been growing aggressively due to indifference of banks and they are gaining higher interest rate too. The report also stated that credit enquiry rose thirty three percent. Obviously because we MSMEs are perennially looking for new ways to gain credit. PSU banks dominated in below fifty lakh segment. None of these reports ever tell that among the MSMEs, how many were given to the general category, the category who get most rejections in Banks and NBFCs. The report is a stark reminder of how Indian economy works. The report clearly states that out of the 6.3 crore registered MSMEs in India, only 2.5 crore get credit from formal sources.

Ministry of MSME clearly states that traditional banking institutions are reluctant to lend to MSMEs, primarily due to perceived risks and stringent collateral requirements. There is no perceived risk in lending to a company without collateral thousands of crores and then not able to recover even 14% since there is no collateral. To cover their misdeeds, all these loans are written off as non-recoverable loans. So, the Banker who sanctions such "Against Policy" loans never gets punished. MSMEs rarely default and even if they do, they are covered with the collateral. Every morning in the newspapers, we see some or the other MSME's asset being auctioned. More than Individual assets,we find more MSME's assets being auctioned. Govt gets 100% recovery from MSMEs. MSMEs account for thirty percent of GDP, forty five percent of manufacturing output and about forty eight percent of exports. The Ministry says that MSMEs are also a source of income for around 120 million people. To such a segment, hardly fourteen percent get credit from banks indicating a huge cap of nearly Five and Hundred Thirty Billion dollars ($530Bn USD). NBFC unsecured loans are at Rs 339 billion as of March 2023. .

India cannot be a strong country with a strong currency as long as MSMEs are ignored. Banks need to have specialised officers to understand the Entrepreneur's business or have professional credit managers. The Honest MSME gets left out. Most of  the central government schemes are not reaching all.  IntelliIndia found that many Bank managers have not even heard about PMFME. Even Mudra loans which were supposed to be given even to women entrepreneurs were restricted to some classes. 

Bank managers need to undergo training to read and understand  DPRs. How many bank managers have actually the capability to understand a DPR?. Every Bank and NBFC should have specialized financial experts and subject matter experts who understand the business or employ a consultancy who specialises in them. The Central government asks to give grants, subsidies and loans without collateral but the local branch manager refuses to accept any proposal without collateral. This is the BANE of India.  Expecting the branch manager to possess all those capabilities is the biggest problem in Indian finance today. 

This actually presents a huge market for consultants who understand how to write DPRs, understand them, explain them to the lenders and get the loan sanctioned. This specialized market will soon boom since there is a huge unorganized market, $530 Bn Gap.