Time Span of Credit Dispensation to MSME
I define the span of credit dispensation as the time from the date of complete application of a borrowing unit seeking fresh sanction, renewal, and/or enhancement of either of working capital limits or of term loans to the time when there is actual delivery of such funds.
As a consequence of this delay green filed projects get cost escalation besides multiple collateral damages. In case of requirements of running businesses it delays and defers the production. In nutshell the result is loss of employment opportunities and reduction in economic growth numbers such as GDP.
There was a time say till 2004-5 when credit dispensation time to MSME was around 21 – 30 days. Gradually this time has extended to minimum 90 days which may even be 150 days. Average delivery time now is around 120 days: and this is irrespective of the bank or institution extending the credit. In this respect each one is better than the other. And it has got little to do with who is in centre of governance.
How did we achieve this wonderful target? It is with many great credit reforms that we could achieve this. I deliberate to point out the various steps that helped us to reach to this amazing target potential with prospects to go up further.
- Committee/ Multiple Committee Approach: Since we have doubt on individual we thought that collectively we may be honest. Almost all banks have dispensed with individual sanction power charts and had gone for committee approach. Therefore now no one is responsible either for the quality of loan or for delay in sanction or for achieving the budget of credit despite State’s prioritization.
- Valuation of Collaterals: Banks generally get collaterals valued/ re-valued once in two years. These valuations are done by persons chosen by bank from its own panel. As the trust factor had more to doubt than faith the banks are now not trusting single valuation and are going for two valuations. This had increased the cost and time both.
- Inspection of Collaterals: Yes this takes its own time and if some senior is to visit still more.
- Legal Validation of Collaterals: Banks get collaterals validated every year. The process is done by advocates chosen by bank from its own panel. Hereto the trust factor had more to doubt than faith the banks are now not trusting single validation and are going for two advocates. This too had increased the cost and time both.
- Internal Rating: Almost all banks have rating system. An officer dealing with credit shall fill in minimum 3 years BS data in computerized system and shall as well give grading on qualitative aspects. His superior shall examine the input filled in by him. After this the data file shall be up loaded for yet another committee called ‘rating committee’. This rating committee shall take its sweet time before giving the rating of the customer.
- External Rating Mandatory: It was commenced by Central Bank as a temporary measure till banks develop their own internal rating. It now appears that it has got its strong clutch that too without reason or a reasonable justification or economic rationale. Further these rating agencies apply rating models applicable to large listed corporate borrowers. For example they would ask MSME: Do you have product diversification advantage? Or what percentage of market you cover? Obvious answer is in negation hence single product risk hence poor rating and/or too small hence risky hence not well rated. Many other matters like that: In the nutshell we are in an exercise of futility with time and other losses and without any advantage.
- Processing of Proposal: It is after the completion of above exercises that the operating credit officer shall commence working on proposal. During this process some questions may come to examine the merits etc. And if during this time half yearly time passes half yearly certified data in form of audited or CA certified provisional BS shall be sought; involving further delays. On completion the proposal would be sent as soft copy followed up by hard copy signed by two officers.
- Sanctioning Committee: The proposal now reaches a department that has responsibility to place it to the respective sanctioning committee. An officer here shall re-process the matters and if he has some questions he shall shoot these; enroot these questions shall reach the borrower for reply submission. Sometimes even the proposal is reverted back for changes and re-submission. When the operating officer is satisfied he shall put up the proposal to his superior who may authenticate it for submission to the committee. The said committee would consider the proposal for sanction.
- Resolution Signing: After the committee sanctions the proposal the minutes of committee meeting shall be written. On signing of minutes the individual resolutions as passed by the committee shall be put up to the concerned officer for authentication.
- Passed Resolution: The approved resolution when reaches to the Branch the concerned officer shall inform the borrower for submission of Non-judicial stamps etc. for documentation.
- Concession Committee: If the proposal has some deviations from card rate of various services etc. it would go to yet another committee which is authorised for approving the concessions. In such cases it is bound to take still more (time) than discussed above.
Thus the dispensation of credit is taking very long time usually not less than 90 days and average delivery may be around 120 days. Further in case of new venture involving green filed external rating it may take still long. How this green filed external rating emerges as a business is surprising: For that reason entire external rating is a Pandora Box. Liaison at times may blind economic justification.
In comparison banking of developed economies has deficit financing system which is on trust basis and deficiencies are financed almost along with need.
However we should not lose heart as things can be improved. A few indicative suggestions as to how can we do it are:
- Banks should bring back the trust factor in their own officers and in professionals where outside services are utilized;
- Banks should psychologically accept that some bad-debt are essential expenditure of banking business;
- Bank should do away with witch hunting type of vigilance enquiries;
- Internal rating of bank should be done at branch/ operating level along with proposal drafting; and
- External rating should be done away with in so far as it relates to MSME.
Author: Shri Prakash Gupta is a Consultant, MSME Credit