The Post-Demonetisation Borrowing Landscape – Navigating the Changes

The crucial 50 day period following the demonetisation announcement is about to end. This period has been characterised by economic convulsions, adjustments, and apprehension about the future. The difficulties that businesses small and large have faced in this time are real and well known. However, the feelings of apprehension are as real for lenders as they are for borrowers.

Following demonetisation most lenders have gone into wait and watch mode as their risk appetite has gone down even as borrower risk profiles have gone up. According to RBI data , credit or loan growth for the fortnight that ended November 25 – the first reporting fortnight after demonetisation – declined to 6.6% from 7.9% on a year-on-year basis in the previous fortnight, i.e. before the demonetisation announcement. This is nearly half of the long period loan growth rate of 12.9% between 2012 and 2016. In the fortnight ended December 11 (the latest available), YOY growth dropped even further to 5.7%.

Some of the popular loan products that SMEs resorted to for short and medium term funding have in particular either been completely discontinued or have seen approvals and disbursements severely restrained:

Liquid Income Programs (LIP)

Informal business set-ups and under-developed recording, accounting, and reporting systems are common in small businesses. In order to validate borrowing and repayment capacity, lenders conducted their own specialised audits of borrower businesses through their appointed Chartered Accountants. These relatively informal set-ups have been badly hit by demonetisation both due to lack of cash to sustain business and the demand crunch. Lenders are therefore wary of lending to them, thus choking capital supply to this segment.

Loan Against Property / Working Capital

Collateralised loans against property or working capital were another popular borrowing option for SMEs. The secured nature of the loan was a win-win; lenders were assured of recoverability and borrowers paid a lower rate of interest since the loan was covered by tangible assets. The loans served both long term (asset purchase, expansion, etc.) and short term (working capital) needs.

Effect of demonetisation on these type of loans has been of a second order. The slump in the real estate transactions post demonetisation has led to expectations of moderation of prices. Value of working capital collateral too is under a cloud – inventory value may not be reliable due to the demand crunch and likelihood of debtor default has risen. Given that these loans are extended with a lower margins of some lenders are vary of adequacy of cover.

So if you are a SME borrower, how do you navigate these rough seas? The changed business landscape, lower volumes and cash crunch are exacerbated by narrowed borrowing options. In this scenario, you need specialist and objective advice. At Loan Frame,

We believe the lending market is at the cusp of a new revolution and SMEs are overall going to benefit immensely from the new policies, notwithstanding the short term pain that they are feeling.

There are quite a few reasons for the optimism:

  1. Given the fact that the large amount of physical cash has come into the banking system and that it will not leave in a hurry due to the shrinkage of the cash economy, banks are going to be flush with liquidity to lend for some time to come;
  2. This additional liquidity will exert downward pressure on both lending and deposit rates;
  3. The deflationary pressure on the economy due to lowered consumption post demonetisation is going to lead to lower benchmark interest rates; and
  4. Per force, SMEs will now have more banking transactions and digital data, which will enhance their credit-worthiness as well as ease evaluation for

All this means more financing options for SMEs, which will make them more prosperous over time through improved and steady capital access, aided further by improved compliance, which will make them more credit worthy.

Are you the owner of a SME evaluating financing options for your business? Realise that you still have plenty of funding choices available. All you need is the right guidance in connecting to the right lender.

Apply at to know about the many options available to you.

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