Should MSMEs Avail Loans From Public Sector Banks?
Micro, Small and Medium enterprises are spreading in India like wildfire. People are investing their time and energy in the new ideas. They want to convert their thoughts into actions and contribute to the development of the country. However, the major hurdle in this process is the finance. The process of fundraising has always been one of the most challenging and significant steps in initiating an enterprise. One can imagine if the funds are raised from wrong sources or with high costs, the entire dream of starting the enterprise can flow down the drain.
Out of all the questions related to the funding of an enterprise, the most important one is the source. In other words, from where to raise the funds? In this respect, many have raised doubts regarding the effectiveness of different resources. Some feel public banks are the best, while some feel that the government schemes are better. Others might feel that a venture capitalist is also an option. So, there is a lot of confusion going on. Whatever resources are mentioned, the most important questions are raised on the credibility of the public sector banks. The question has been asked whether MSMEs should take MSME loan from public sector banks or not. Well, we will answer that question after a thorough evaluation of its pros and cons.
- Easy Access to funds: The public sector banks have a vast network. Therefore, it is very easy for entrepreneurs to approach the banks for loans. This in turn increases the chances of the procurement of funds. Also, public banks are willing to provide loans as they are happy to associate with the high potential new ventures.
- Low-interest rates: Public sector banks provide loans at very competitive interest rates. The interest rates are very low as compared to the cost incurred in raising funds from other sources. The rate of interest varies inside the bracket of 10 to 15 per cent. This makes loans cheap and affordable.
- Flexibility: The government is urging the banks not only to provide loans but also ensures flexibility during the times of repayment. Public Sector banks allow people to take loans and pay on flexible terms. Through these, people can better plan their finances of the business and do not feel the pressure at the time of the decided repayment period.
- Variety in loans: Public sector banks provide a lot of variety in the loans. One can choose according to one’s risk appetite, tenure, the amount required. One can also choose as per the purpose of the loan. For instance, the purpose can be initiating the business or expanding the same. Whatever the reason or the choice of the individual may be, the loans can be tailored as per the needs of the seeker.
- Better financial planning: It might happen that the business may not earn profits all the time. The probability is even higher in the early stages. At such stages, public sector banks provide regular funding to the MSM enterprises so that they remain in the business.
These are the advantages but to answer the question, we must also look at the other side of the coin.
- Delay of work: Although the public sector loans are easily accessible, the processing and sanctioning of loans is delayed by a good amount of time. The main reason behind it is the cumbersome procedure. The banks have a bureaucratic structure which leads to the inclusion of many stages, hence the delay.
- High processing fees: Public sector banks generally provide loans without the collateral requirement. Since the loan is without collateral, the security of the loan raises doubt. Therefore, to ensure security, many banks charge high processing fees. They may also not fully sanction the loan amount because of the same reason.
- Piling of interest payments: It can happen that due to flexibility, people might not make interest payments at the time. In the end, the interest culminates, and the payment makes a huge hole in their pockets.
So, should we apply for loans to public sector banks? The answer is yes. However, whenever we are applying for the loans, we must be prepared for those limitations. We can plan better to avoid any piling up of interest and bearing of processing fees. As far as the delay can be concerned, nothing much can be done about it.
After this discussion, we can conclude that the public sector funding is a better option, specifically for MSMEs. Indifi is a market leader in helping small enterprises. In case of any queries, please reach out to us. We will be happy to help.