MSME sector: Accessibility and affordability of collateral

THE MSME sector is very much in the news and the Government has announced several financial packages towards assisting this sector. This has prompted me to share my thoughts and expertise for the benefit of all stakeholders particularly the MSME sector in requirement of such financial assistance.

- By M.C.V. Rajanathan

The MSME sector considered as the backbone of the economy, is categorised as high risk sector by the financial institutions. Most of these entrepreneurs and mainly “start-ups” are dependent on one single personality without any succession plan. The moment the aforesaid personality is out of the scene due to death or disability, the exposure of the financial institution will face the risk of non-payment and fall into the NPA category without any prospect of recovery apart from the lack of realisable collateral.

This is the reality and one of the main factors and reluctance of banks and financial institutions to assist such category of borrowers. They may feel comfortable to grant facilities to professionals with dependable income, against acceptable collateral or in some cases on clean basis, (i.e., without any security) as the possibility of default for the aforesaid category is considered remote. This will not only ensure the safety of their exposure, it will greatly minimise their follow-up costs on post monitoring towards recovery.

Towards achieving this task and boosting their asset portfolio many financial institutions assign targets to their marketing personnel to aggressively canvass such facilities. All such facilities are approved instantly due to less documentation, easy evaluation process, etc., in contrast to the MSMEs, as granting facilities to this sector is a tedious process which requires effective follow-up, constant monitoring apart from the time consuming mechanism towards appraising the facility application.

Assisting the MSME sector the backbone of the economy