Top 5 Challenges of an MSME Loan in the Current Year

Businesses play a vital role in the growth of any country. In developing nations like India, micro, small, and medium-sized enterprises (MSMEs) are the engines of economic growth. The MSME sector contributes significantly to GDP. It also provides employment opportunities for millions.

Despite being the engine of growth, when it comes to business expansion, the MSME industry faces enormous obstacles in getting an MSME loan. This major factor prevents the MSME sector from achieving its full potential.

The government has revised earlier policies and regulations to help fund MSME owners. This new help from the government could boost the MSME sector. However, financial institutions are still hesitant to approve MSME business loans. Let’s learn about the challenges of getting an MSME loan.

Challenges of MSME Loan in the Current Year

1. Lack of Confidence

• Even before the COVID-19 pandemic, the MSME sector of India was struggling.
• Then, it was due to the ongoing trade war between China and America.
• The two extended lockdowns during COVID-19 broke the backbone of the MSME sector in India.
• Because of the lockdowns, many businesses defaulted on their EMIs.
• This resulted in a lack of confidence in the repayment capabilities of MSMEs.
• Banks have adopted strict eligibility and approval criteria for lending to MSME businesses.
• Because of the absence of credit histories, banks consider most MSMEs high-risk businesses.
• Thus, there is a higher MSME loan interest rate for these businesses.
• Due to the high MSME loan interest rate, companies avoid applying for an MSME business loan from banks.
• Another factor that affects banks’ confidence in MSMEs is the loan amount. Compared to big corporations, MSMEs require small amounts of loans.
• Due to the lack of credit activity, banks prefer to avoid taking a chance with their capital.

2. Lack of Financial Awareness

• Many businesses have shown exemplary courage in making business decisions.
• However, most fail when it comes to financial knowledge.
• The inability to make the right financial choice at the right time can affect your business.
• It can result in high operating costs and a lower debt score.
• Moreover, if you fail to choose the right lender for your business, the interest rate on your MSME loan could also be high.
• A high-interest MSME business loan could lead to unequal working rates and low credit scores.
• A business owner who lacks financial knowledge may be unable to make critical financial decisions.
• This can affect the business negatively.
• So, basic financial education is essential to help you secure a low-interest MSME loan.
• Moreover, as an MSME owner, you must learn about MSME loan interest rates and compare them to other loans before availing of an MSME business loan.

3. Lack of Collateral

• As mentioned, banks now have strict eligibility and approval processes for MSME business loans.
• The MSME loan might also include collateral at some point.
• Some businesses may find it hard to fulfil the strict collateral rule for the MSME loan.
• For example, small companies may need more space and collateral to guarantee loan repayment terms.
• Due to the inability to secure a loan through collateral, many MSME owners prefer to borrow unsecured business or personal loans.
• In some cases, they also choose to borrow money from relatives and other sources.
• The government is trying hard to make corporate loans easily accessible to MSMEs.
• Most small businesses are finding it hard to get MSME loans.
• With the strict collateral policy, small business owners need help to get an MSME loan.
• For example, regional businesses such as handicrafts, stonework, and wood carving are performing very well in the international market.
• Yet, banks aren’t showing any significant initiative to support them financially.

4. Lack of Modern Financial Solutions in MSME Loans

• While the government is updating the older management systems, the remnants of the licence raj are hurting the financial sector, including the MSME sector.
• For MSME loans, banks need various documents related to licenses, insurance, and certificates.
• Because of this reason, MSMEs don’t get loans on time.
• Different regulatory gaps also consume valuable time in obtaining required licences and certifications, thus hampering growth opportunities for MSMEs.

5. Outdated Technology

• While the banks fail to distribute MSME loans on a large scale, small business owners need to update themselves with the latest technology.
• Many small business owners refrain from using online transactions.
• It is due to trust issues and the inability to deal with new technology.
• Failing to adjust to new technologies also affects the expansion plans of MSMEs.
• While the government is trying hard to boost the MSME sector, some businesses are still using the old method.
• These methods affect productivity as well as product quality.
• Due to this inability, small businesses fail to benefit from technological advancements. So, this is also a major challenge faced by MSMEs.
• If the bank notices a single red flag in your loan application, it might reject it.
• Thus, as an MSME owner, you should be aware of the latest technological advancements in your field.
• If you are applying for an MSME loan for increasing production, the banks will be more likely to consider it.

Summing Up

The MSME sector has faced various hardships recently and is healing slowly. However, the challenges faced by the MSME sector in securing a loan are many. Apart from the government’s will, financial institutions also need to put in some effort.

As the driver of the Indian economy, a positive performance by MSME is the need of the hour. With an MSME loan, businesses can prosper and help the country become “Aatmnirbhar.” However, if you fail to get an MSME loan for your business, you can get a personal loan from Piramal Finance.

You can also increase your financial awareness by reading similar articles about topics such as applying for business loans, MSME business loans, and various types of business loans on the Piramal Finance website.