Why MSME borrowers are shifting to Private banks?


We all welcomed the first package of Atma Nirbhar package to help the MSME sector by our Finance Minister Mrs Nirmala Seetharaman. She declared Rs300,000 crore as additional funding to the MSME sector exclusively by Banks and NBFC companies with a Credit Guarantee by Central Government, without asking any Additional Collateral or additional personal Guarantee.


But banks have formulated their own formula, uniformly by both Govt and Private banks to give financial assistance to the MSME sector. The model adopted by all banks is that irrespective of OD limit or Cash Credit limit sanctioned to the borrower, 20% of the loan balance as at February 29, 2020, was sanctioned as Covid Loan as a term loan repayable in 36 or 48 EMI from April 2021.

A Big Shock

So an MSME borrower enjoying a CC limit of Seven crores on February 29, 2020, with a loan balance of say Rs.145,00,000 only, additional loan sanctioned was 20% of loan balance i.e. Rs.29.00 lakh only. If another MSME borrower having same Rs.7.00 crore limit and loan balance of Rs.6,20,00,000 then that borrower sanctioned additional loan under Covid package was Rs.128,00,000. This indicates that though limits are the same, turnover is also the same the packages loan sanctioned are different.

Borrowers don’t know that if some good recovery happens on February 28 or 29, 2020, and CC account comes to the Credit balance, then that MSME borrower is not sanctioned any additional loan, as per formula. All banks should have sanctioned 20% of the sanctioned limit uniformly to all MSME borrowers, then it would have helped all people uniformly.

There is also galore of complaints that the Covid help of 20% sanctioned on the loan due has not been released yet. In some cases, though the banks have released part of the loan but kept mum on releasing the balance payment. Some borrowers have also complained that their repeated persuasion with the concerned authorities proved futile and begin to lose hope on it. “But fear is haunting us as they might insist for the fully repayment of the sanctioned amount as we have already signed the documents 2 months ago”, one of the borrowers expressed his fear who is unwilling to be named.

Ground Reality

The Finance minister declared a package of Rs.3.00 lakh crores additional loans to MSME based on limits enjoyed by the MSME borrowers as per RBI data.

Yesterday the statistics declared by Finance Ministry indicates as under:

A. All banks including 12 Govt and 22 private banks as on July 20, 2020, sanctioned only Rs.1.30 lakh crore additional loan under Covid package to MSME borrowers. That means hardly 43% only achieved in the target of Rs.3.00 lakh crore.

B. 12 Govt banks with 68% of total advance in the banking sector, have sanctioned Rs.71,818 crore to MSME borrowers as additional loan.

C. 22 private banks have sanctioned Rs.58,673 crore as additional Covid loans to MSME borrowers.

What does the above figure indicate?

  1. Private banks are reaching RBI target of 40% of advances to Priority Sectors mainly by sanctioning Housing loans up to Rs.30 lakh and MSME sector only.
  2. Already private banks captured around 45% of housing loans by the appointment of marketing officers and 35% in the MSME sector.

If this trend continues for another 2 or 3 years, it will be difficult for Govt Banks to reach RBI target of 40% of advances to Priority Sector. Slowly MSME borrowers are shifting to Private banks due to quick process and hassle-free loans and quick service.

The top four private banks HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank may pose a big problem to Govt banks. It is only to be seen as to how the national banks compete with the private banking giants. However, it’s a foregone conclusion that unless and until red-tapism, corruption and harassment is put down with iron hand, this wouldn’t be possible. But the question remained to be answered is whether it is possible? Let us hope that Govt banks survive.