Caught in the private lending net, TN’s MSMEs struggle to survive


Several industrialists in the MSME sector who benefited from loans at high interest rates from private finance companies after being turned away by nationalized banks, have faced difficulties in paying interest due to losses suffered during the pandemic. of COVID-19

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It has been months since Chennai film unit owner K Govindaraj has not had a peaceful night’s sleep. After a hard 14-hour working day, sleep often escapes him as he wonders how to find the money to pay the monthly interest on the loans he has obtained. Because, he barely earns ₹10,000-15,000 per month. But the amount of interest he has to pay monthly to private finance companies is over ₹25,000. When he delays payment for a few days, Govindraj says company employees visit his home and lathe shop and humiliate him in front of neighbors and workers. Warnings to pay interest have now turned into threats.

Govindaraj says the situation could only have been avoided if he had managed to secure an overdraft (OD) loan worth ₹3 lakhs from a nationalized bank in 2020 instead of approaching a private financing. As he could not convince the bank manager for a loan and desperately needed the money, he had no choice but to borrow money from the private finance company at a rate of high interest.

“I had been granted a loan worth ₹2 lakh under the government MUDRA scheme a few years ago and was repaying it on time. At the beginning of 2020, when I informed the bank manager of my financial crises, he had assured me of sanctioning an OD loan. But then the manager was transferred and the new manager refused to sanction the loan. It was only then that I approached a private finance company and they immediately agreed to give the money at an interest of ₹7 per ₹100. I accepted it,” Govindaraj said The Federal.

Read also : Signs of stress in MSMEs, bad debts expected to rise in 2022: RBI

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Govindaraj says around the same time his business took a hit due to the Center’s full lockdown imposed due to the COVID-19 pandemic. Although he had managed to pay the interest and regularly repay a small portion of the money initially borrowed, his situation became unmanageable within a few months. “As a result, I took out another loan to repay the amount. As the interest amount increased, I started borrowing more from several people and got trapped in the vicious cycle. Now , I got to a stage where I have to pay more than ₹25,000 in interest every month,” he said.

Unable to pay the salaries of three of his employees, he lets them go and begins to run his film unit on his own. He now accepts orders for a relatively lesser price and has also started working for a daily wage in other industries. “I am ready to work several times harder. All I want now is to repay the loan and get out of this death circle,” he said.

Gokul, another Chennai industrialist has a similar story. Gokul says he borrowed ₹27 lakhs from a private finance company in 2018 after a bank refused to give him a loan, to expand his business, for lack of sufficient collateral.

“I was regularly repaying the amount up to the last 10 months and the interest is 26.5%. My payments were delayed when my business started to suffer. In response, they (the bank) started charging high late fees for this. So far I have paid ₹21 lakhs including interest and part of the loan amount. But the company claims that I have to pay them another 27 lakhs to settle my debt,” he says.

Since Gokul had given his house documents as collateral, company employees now visit his house every day and threaten tenants to leave. “I had rented out some of my houses. After receiving threats from the company, they now want to leave the house and have asked me to pay back the amount of the lease. I don’t have that much cash on hand. When I informed them of my situation and asked for time, they filed a police report against me. I don’t know how I’m going to handle the situation,” he said.

These are not isolated cases. There are hundreds of industrialists, especially from the micro-sector in Tamil Nadu, who have been trapped in the nets of private finance companies and are struggling to survive. While several of them closed up shop and sold their machines to repay the loan, some of them even ended their lives to escape the trauma. The state has around 45-50 lakh MSMEs.

“Even if some manufacturers manage to obtain loans from banks, it is true that many of them, particularly in the micro sector, turn to private finance companies to manage their expenses, even if the latter take enormous interests. This is due to two main reasons: first, the banks reject their request for lack of a guarantee; and second, because of the cumbersome and time-consuming application process. For example, if someone has to apply for a bank loan, he has to spend at least ₹15,000 to prepare the required documents including GST and tax documents and wait for months together. Also, he has to invest 25% of the sought amount in his business before loan application and submit related documents,” says V Nithiyananthan, Secretary General of Tamil Nadu Small and Small Industries Association (TANSTIA).

KE Raghunathan, head of the Consortium of Indian Association, says manufacturers need loans mainly for four things: to buy machinery, to expand their business, to buy raw materials and to have working capital. “When it comes to MSMEs, 40% of them are struggling to survive in the business and they are the only ones who desperately need financial help. Moreover, they are the ones who find it difficult to convince banks to obtain loans,” he adds.

“It would be surprising even if a handful of us got bank loans without too much difficulty,” says J James, president of the Tamil Nadu Small and Small Business Association. James says the government should streamline private finance companies and support micro industries by announcing separate programs for them. He says it is difficult for them to compete with small and medium industries.

When contacted, an official from the MSME department said, “Most micro industries seek loans for their working capital and most of the time banks decline their request due to lack of collateral. That’s why they end up turning to private finance. Since banks are not the subject of the state, the state government and multiple industry associations have asked the central government to relax some of the standards, at least for micro industries.

Read also : More traders killed themselves than farmers in 2020: NCRB data

However, the department had received 13,508 applications for loans and grants under several programs from April 2021 to date. While officials had recommended 9,798 applications after review, the bank had sanctioned loans worth ₹3,021 lakhs to 2,942 people and disbursed loans worth ₹2,857 lakhs to 2,802 people, according to the department’s website.

Meanwhile, a bank manager says they would only give importance to secured loans because banks would suffer huge losses if their customers did not repay them. “Not only that, if they don’t repay the loan, our career would also be in jeopardy,” she adds.

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