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Last updated: 18 Jul, 2017  

RBI.Thmb.jpg Co-origination model: A new approach to MSME credit

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Bikky Khosla | 18 Jul, 2017
Over the years, the RBI has repeatedly urged our banks to step up credit flow to the Micro, Small & Medium Enterprise (MSME) sector. Time and again, the central government has launched several schemes to address this concern. But the result has turned out to be hardly satisfactory. According to latest figures available, the rate of growth of outstanding credit to MSMEs expanded by all scheduled commercial banks declined from 28.51 percent in 2012-13 to 19.66 percent in 2013-14, then to 12.62 percent in 2014-15 and further to 3.83 per cent in 2015-16. Not just these figures, the anguish our small business owners express over scarcity of bank loans also tells the same story.

SMEs often argue that banks are failing them; they are more interested in serving large businesses. Bankers, on the other hand, blame that SMEs lack credit history; they are unaware about the documentation process. While both these arguments are true to some extent, nowadays the situation seems to be bit different. Today, while SMEs are increasingly becoming aware about the nitty-gritty of the loan documentation process, the banking sector is also showing an increasing interest in lending to SMEs. But in spite of this the situation has hardly changed yet, mainly due to banks' structural complexities, lack of last mile reach and their risk assessment of SMEs and large businesses in the same way.

So, the problem needs a novel treatment, and in a positive development in this respect the RBI is currently working on an innovative framework to address the concern. Called 'co-origination model', this new framework seeks to bring the strengths of two sectors — banks and micro-finance institutions (MFIs)/non-banking finance companies (NBFCs) — together. Under this framework, both a bank and a MFI/NBFC will join at each underwriting and loan level, and share the loan amount at an agreed percentage with all other structures put in place. It is expected that such a blending would not only increase flow of credit to MSMEs but also bring down the cost of credit for the sector substantially.

The proposal sounds attractive. Banks have enough resources, but they lack the understanding of the ground level and last mile reach. Additionally, the structural problems from which our banking system is suffering currently are unlikely to be sorted out soon. Also, we should not blame banks for being driven by viability assessments and cost considerations.  In contrast, NBFCs and MFIs lack adequate resources, but they are more familiar with local conditions and better informed about business viability and credit worthiness of local individuals and business enterprises and their repayment capabilities. So, combining the strengths of these two sectors can certainly be an ideal structure to address the credit concerns of the MSME sector.

I invite your opinions.
 
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Co-origination
A.Ravindran. | Sat Jul 29 02:05:33 2017
I understand the problems on both side. I like to share my opinion.kindly first understand and analyze the project whether it is viable. Even some projects strongly viable are rejected because of credit worthlessness. Here I want to share, to execute viable projects, ( which are helpful for nations healthiness ) on project basis you may look for alternative worthiness of individuals. This is my suggestion.


Proposal attracts future of MSME to scale new heights.
S. B. NAIR, | Mon Jul 24 04:17:23 2017
RBI should innovate a new gen, strong fool proof frame work/mechanism with MFI/NBFC and share the loan amount at an agreed percentage with all other structures put in place, will always a sure shot towards credit flow to MSME sector. This shall develop a situation for young generation to start new MSME and can increase a high level generation of new employment at grass root / gram panchayat level with a vision of all round development through out India. Can contain unrest almost every in youth in rural and urban population. Strong commitment and vision can always change destiny to non-imaginable way of development to new heights. RBI/MFIs/NBFCs combination will also can able to contain NPA to a level of zero percentage.


Credit to MSME.
Harishkumar Trivedi. | Fri Jul 21 19:14:59 2017
I agree with your above note. Banking sectors are not interested to credit to MSME sectors, this is not good for our economy.


Protect Banker's money by removing tax authorities powers to freeze accounts
Bhagawath Prasad | Wed Jul 19 18:24:16 2017
Sir, As you rightly mentioned MSMEs are always short funded ,in order to improve funding eco system my first suggestion is to MSME ministry is to get bill passed to remove all powers of tax authorities from freezing bank accounts against all litigated tax notices , all of us are aware that 90% of tax demand orders are primarily to achieve revenue targets or to show revenue numbers on their system..If ministry brings in legislation to remove tax officers powers to freeze cash credit accounts with litigated cases , half the funding problem and employment issue is sorted out , banks and industry will be happy , Currently,One side bank funds and the other side tax officer throw goggly and take away funded money , if MSME refuses to pay , he will simply freeze accounts and ensure that MSME will get into NPA list, in this scenario how would banker fund MSME further , I don’t think they are at fault,we need a policy to protect bank funded money so that banks will be daringly funds , secondly ,MSEMs work hard without fear for repaying, rest is all growth, I know tax revenue is critical for growth as well, raise tax percentage for growth, but don’t raise litigations to take bank'€™s money to kill he whole thing at beginning itself.


Bank Not cooperating msme
Rajiv | Wed Jul 19 14:36:16 2017
You are right that banks are not cooperating MSMEs because they are unable to satisfying banks.


"Co-origination model" By RBI
Rakesh Kumar | Wed Jul 19 11:21:17 2017
The co-origination model' will wont work properly in India and both banks & MFIs/NBFCs will definitely lose their entity drastically, equally more people will suffer out of it.


MSME Credit facility
TUSHAR MOHANTY | Wed Jul 19 10:06:01 2017
Availing credit facility from nationalized banks by MSME units is very difficult task as banks are very slow & reluctant to extend their support for this issue. Inspite of Government's approach of speedy process of all such activities banks are very slow on this . This is more difficult for the startups in the field of engineering consultancy & construction activities as they do not have have infrastructure as collateral, its a business with manpower & knowledge ,but they need a fund to support their day to day activities for getting a job for generating revenue. Banks are reluctant to support without any security or collateral by means of FD or property. while govt is promoting business of MSMEs & startups it should be in financial terms also. Thousands of crores are spent by govt for waiver of agricultural loans but no support to professionals or technocrats,they have to stand by their own neither they have to die giving up every thing. There should be at least some minimum limit fixed by govt & RBI for extending support to Engineering start ups,as they have to also get chance for doing business in India.Large engineering & infrastructure companies are scaled down due to financial constraint and being not able to repay the bank loans ,of course no body knows where the money was spent by them but in the process well experienced employees are losing their jobs & if they tries to do some thing of their own govt is not supporting them ,so how they will live ,commit suicide?


Bank finance to sme
Jitu tah | Wed Jul 19 08:46:47 2017
Sir, There is too much of paperwork and antipathy in banks towards sme businessman and there is rampant corruption in loan department of banks genuine people don't get loans only people who pay up and agree to whims of loan officers manage to get loans even today We need a central authority in every bank where proposals are Sent examined and passed without bothering to cater to whims of branches , the RBI guarantee money is charged but no facility given at all it is a whimsical thing depending on freezing of palms of officers concerned.


MSME credit
Sanjiv Sarnaik. spaclec@gmail.com | Wed Jul 19 08:34:57 2017
The Banks and the Government have already acted on this theoretically!The Credit guarantee scheme allows up to 2. 0 Cr loans without additional mortgage or collateral. Problem still persists in practice!Private sector and co operative banks do not extend loans under this scheme. Secondly even Nationalized banks do not encourage this scheme willingly. Secondly, interest rates for MSME are higher than normal.Ideally the interest rate should be 8% p.a. or lower.It is a documented fact that the new MSME fail because of a) Delay in project implementation. b) Increase in project cost by at least 20%. c) Delay in attaining break even turnover by as much as 1 to 2 years. None of the knowledgeable players(SFCs, BANKS, SICOM, Chartered accountants preparing the project reports) involved in MSME loans address these points. Nobody advises the entrepreneur that the project cost overrun provision has to be 20%, that interest on borrowed funds for at least two years should be taken as capital requirement, that any subsidy as and when accrues should be taken as bonus and not as a means of finance. In fact the entrepreneur is absolutely in dark about possible consequences of any miscalculation. The guides(Read: CA's techno-commercial evaluation staff of SFC / Banks) themselves are unaware of these points and without giving a single thought to the future of MSME, they only worry about DSCR ratio adequacy! In spite of such odds, the MSME has done very good.


Credit to MSMEs
George Lloyd Mushore, Zimbabwe | Wed Jul 19 07:45:53 2017
I do agree with the above statement. Today's environment is made of MSMEs and there is need for financial institutions to go to the ground and investigate the conditions so as to appreciate the operating environment. They also need to educate this sector on the credit requirements from banks. Central/Reserve banks have a big role to play. The environment has changed, it is now business unusual



Meghraj Chandnani | Wed Jul 19 06:14:29 2017
MSMEs should be provided funds as it is backbone of company every district should have minimum 3 Banks to finance small scale industry also there should be govt guidelines on various project with some fee Keeping them out of GST up to 7500000.


Msme registered but of no back support.
Nilesh shah | Wed Jul 19 05:51:19 2017
NPA to our CC limit without enhancing the limit and charging interest on interest sometimes even though I am a graduate infinite and MSME registered.The limit before MSME and after MSME is same.please guide us properly.Also many agency for whom we had worked have not paid our bill payment since three to five years amounting total of sixty lacs of government project.


Bank Loan to SME & Common people
Narayan Avhale | Wed Jul 19 05:04:31 2017
It is the fact that the banks are not giving the loan to common person & SME.Many banks are yet doing the fraud practices while sanctioning the loan. Most of the cases, the loan are sanctioned under the following condtion.. 1. The person who got the loan sanctioned are the relative of bank employee i.e wife or husband and rarely any other. 2. On percentages basis without checking the practical viability of repayment. Best example Mr. Mallya. The main issue is the document & procedure ---It is really difficult task. Repitative document requirement & checking system, No. of hefty bonds, Specific advocate. Banks are charging the process fees, beside that they are charging advocate fees ( Heavy fees for 30 min repetitive work ). No. of bonds are unnecessarily required but as per blind procedure, the person or clerk of bank are follow the system. The bank officer can't able to understand the whole system and hence he is unable to take any decision. We follow this procedure only hence the needy person has follow all steps. Again the registry of document is unnecessary steps, which spends lot of money of lender. Loan interest is again a issue. RBI urges continuously to all banks for the reduction of interest. But banks can't respond as they come up for their facility & salary rise. Most of the bank employees are doing the work very slow as compared to private bank. Ok. these are the facts that we can't deny.


SIDBI
Dr Mrs Sushma Joiya Pandit | Wed Jul 19 02:20:55 2017
Dear Sir, As the name implies, Small Industries Development Bank of India was brought into existence by Shri Naran Dutt Tiwari to cater the needs of SME Sector. It is not understood as to why RBI is not taking note of the functions of SIDBI. If branches of SIDBI are opened within the premises of District Trade and Industries Centers in every District under the umbrella of GMDIC. Huge fund is given to SIDBI to avoid NPA position of other Banks. Task Force Committee must sanction loans and forward it to SIDBIfor disbursement But the industry department is forwarding the sanctioned loan applications to Banks whereas Banks have no respect for the sanctioning officers and reject the applications giving one reason or the other.If SIDBI takes up the responsibility, the problem could be made easier.Secondly the field staff of DICs is not monitoring the functioning of units who have availed financial assistance from Department with the result the Banks face NPA position. Banks never go to beneficiary to provide loan it is the sanctioning authority which sends applications to Banks therefore the sanctioning authority must also be made responsible to realise the installments from the beneficiary because they are always in touch of the UNITS.


 
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