In an exclusive interview with SME Times, Shailesh Jacob, Founder & CEO of LoanFrame.com, a fintech company that provides a comprehensive range of financing solutions to small and medium scale enterprises, gives a thorough picture of the SME financing situation in the country.
He adds that India, compared to its global peers, has the most neglected SME sector, which is reeling under some major challenges such as lack of funds and higher interest rates, over-reliance of banks on large corporates as a customer base and demand of collateral by the financial institutions.
Excerpts from the interview…
Please tell us about LoanFrame.com. What’s the idea behind starting this venture?
Shailesh Jacob: Small and Medium Enterprises (SMEs) are widely racknowledged as the backbone of the Indian economy, contributing as much as 9% to GDP. Further, with the advent of the Make In India movement, many SMEs have risen to the occasion and emerged as key job-creators. However, reluctance in the institutional credit market to lend to the SMEs is also a reality. As such, SMEs had to turn to unorganized markets to fund their businesses. This reluctance was not because alternative and exciting funding opportunities were available but because lenders were hesitant to fund new and innovative SME ideas. This was the gap we wanted to address and this is how the Loan Frame journey began.
Please share your views on the unavailability of institutional loans for Indian SMEs?
Shailesh Jacob: One reason for the gap in funding availability, as stated earlier, is the reluctance of institutions to fund startups and SMEs that have untested ideas or established track records. The other key reason is that SMEs usually do not have sufficient collateral to secure the bank loans. Collaterals are considered by banks to be one of the traditional ways to mitigate the credit default risk.
How our SMEs are being affected by high-interest rates?
Shailesh Jacob: The relatively higher interest rates charged on loans to SME are mostly attributable to the weaker credit history of SMEs. One of the leading public sector banks has already linked the interest rates to the credit score of the borrowers. As such, a poor or opaque credit history or low credit score result in higher interest rates. It is imperative that lending to SMEs is cost effective in order for them to be successful and contribute to the growth of the economy.
In terms of financing, where do India SMEs stand against their global peers?
Shailesh Jacob: SMEs across the globe are being seen as major employment generators and are one of the fastest growing segments of the economy. However, India has the most neglected SME sector even if we look just within the Asian markets. As per Credit Suisse estimates, share of retail and SME lending in overall credit in India is the lowest at 33%. In China, the share of lending to this segment is 56% and in Korea, the number is as high as 88%! Indian banks have been more large-corporate focused.
It is often said Indian bank managers are unfriendly towards SMEs. What is your view?
Shailesh Jacob: This is partly true because of over-reliance on large corporates as a customer base. SME loan applications can often take very long to process due to unavailability of reliable documentation. The other reason is that incentives for loan officers are skewed towards target achievement – disbursal targets are more easily achieved by focusing on a handful of large borrowers rather than numerous smaller ones. At Loan Frame, we are trying to ease the former problem by introducing many new SME loan products that are very light on documentation. These are short to medium term unsecured business loans and supply chain loans where we accept minimal documentation in digital format and process the loan application literally within minutes.
How SMEs can enhance their chances to get bank loans?
Shailesh Jacob: The SME sector is finally beginning to find its rightful place in the economy. Even as regulators and lenders are starting to realize their important, these businesses are also set for better transparency due to legislative changes like GST. Loan Frame has a channel for SMEs called “Business Club” running on Reliance JioChat. On this channel, we help SMEs improve their credit profile and explain how they can improve the operating parameters of their business. SMEs can subscribe to the Business Club channel and take our expert help to improve their chances of getting a business loan.
How LoanFrame.com can help SMEs to get the best suitable most cost effective loans?
Shailesh Jacob: Loan Frame is one of the leading SME lending marketplaces that offers the entire portfolio of SME loan products, secured and unsecured, to cater to their varied requirements. Traditionally, SMEs have had limited options on loan products but at Loan Frame, we have as many as 50 distinct products to suit various requirements. We cater to a wide variety of sectors like retail, manufacturing, self-employed, pharmaceuticals, IT, services and specialize in some core sectors like health and FMCG. Our tailor-made solutions meet specific requirements of businesses and sectors, and also help improve the odds of a successful loan application.
Besides offering a wide range of financing products through its network of banks and NBFCs, Loan Frame helps SMEs choose the best lender and the best product. More tangibly, we also help borrowers negotiate the best possible rates for their business loans.
The article was authored by Rituparna Kakati for SME Times on June 02, 2017.