Financing small business

I am reproducing content of an email which some time back I shared with readers in one of my columns. I found a small but beautiful query, loaded with sensitively emotional style of expression, from a reader in my inbox. ‘Loan Lay Nay Kay Liyai Current Account Kholna Zaroori Hy Kya’. (Is it mandatory to open a current account to obtain a loan). The guy is a small entrepreneur, running a stationery shop in his vicinity (as mentioned in his mail) and had approached the bank for some low ticket size financial assistance, not more than Rs.2 lakhs.

Though he was having a savings bank account, he was asked by his bank branch to open a current account to qualify for any loan assistance. The bank official ‘advised’ him to route all his business transactions through the current account and after six months he would be eligible for assessment of a loan facility. This is what irritated him and questioned the norm of current account as a precursor to a loan facility.

For small businesses like the one mentioned above, there is no requirement of having a current account to access loan facility in a specific bank which has customized a special loan scheme for them. Before coming to the exact features of the scheme, let me carry forward the issue of small businesses/street vendors (Nano entrepreneurs) discussed last Sunday in the backdrop of ‘PM SVANidhi’ scheme which aims to provide street vendors loans of up to Rs.10,000 to restart their business post Covid-19 lockdown. Even as the low quantum of finance envisaged in the scheme has raised many eyebrows, the level of proactive approach of banks in addressing to the needs of this segment of small businesses bears a big question mark. The COVID crisis among other things has exposed the approach of banks where customized schemes have not been tailored to lend this segment and help them to grow. The banks have been entirely banking upon government schemes to finance such Nano entities. May be, the banks have not been considering this segment as credit worthy. But the fact is that these small businesses are the biggest cogs in the wheels of our economy. What they need is access to the finances and paying rate of interest is not worrisome for them.

Now, allow me to debate this issue in the context of J&K region. Ours is a place having the biggest economic strength in hugely spread small enterprises. The region has over 6 lakh small enterprises in horticulture, crafts, tourism and other sectors. There are certain kinds of imbalances in the system which have not allowed this sector to grow the way it should have been. However, we have stories in business ventures, particularly small businesses that have adopted ‘embrace the conflict’ attitude and have survived successfully. Keeping general rules apart, these small businesses have time and again been working as partners – a way of working between people that makes a difference differently.

So, ours is a place having the biggest economic strength in hugely spread small enterprises. The small enterprise sector includes small manufacturing units, service sector units, shopkeepers, fruits / vegetable vendors, food-service units, repair shops, small industries, artisans, food processors, horticulture activities and others, in rural and urban areas.

Notably, the people associated with this small enterprise sector are the ones who have survived worst conflict situations; they have survived hartals, bandhs, which means they have a good business model. So what is needed is to scale them up so that this sector expands and generate more employment opportunities.

Availability of timely and appropriate finance to any business is a key to its success. The flow of credit from banks or other financial institutions is not a problem to big businesses. However, financial support from the formal banking system to small borrowers especially persons of small means has always remained a concern.

We have a network of 42 banks/ financial institutions, including 18 public sector banks and 10 private sector banks, with a branch network of almost 2000 in the J&K region. Most of the banks are offering universal products and services to the customers. Hardly have we seen customization of products by the public sector banks or even major private sector players. However, it’s J&K Bank, the major banking player in J&K, which has been playing a pivotal role in addressing to the financial needs of every sector of economy through a series of customized schemes, besides offering universal products and services to the general people.

For small businesses, including Nano entrepreneurs as mentioned above, the bank runs a scheme; J&K Bank Saral Scheme for Small Businessmen, available at all branches of the bank.

What is the nature of Saral Finance to Small Businessmen scheme?

The scheme provides working capital term loan to small traders/vendors, including small manufacturing units, service sector units, shopkeepers, fruits / vegetable vendors, food-service units, repair shops, small industries, artisans, food processors, horticulture activities and others, in rural as well as urban areas.

Among this section of small traders/vendors, who is eligible to borrow money under the scheme?

The applicant should be in the line of business activity for at least two years and the outlook of the business should not be negative. It’s noteworthy that those small traders/vendors who have already been availing any credit facility from any financial institution/ bank for the existing business activity are not eligible for the loan facility under the scheme.

How much loan can be granted to the eligible trader/vendor?

The quantum of finance is capped at Rs. 3 lakhs. However, the loan limit will be assessed purely on the need-based working requirement of the applicant’s business activity. After arriving at the requirement of funds, the borrower has to pay 25% of paid up stocks and book debts as margin.

Is applicant supposed to open a Current Account before availing the loan facility under the scheme?

No. There is no such feature in the scheme. The modus operandi of the scheme is that the branch has to simultaneously open a savings bank account of the borrower and link it with his term loan account. The borrower has to deposit the daily sale proceeds in the savings bank account. It’s notable that the minimum average daily deposit amount in the savings account shall correspond to the quantum of term loan availed. Where daily deposit is not possible due to any reason, the applicant should ensure the same on weekly/ fortnightly basis as per his comfort. If the borrower deposits any amount over and above minimum prescribed amount, he is allowed to withdraw the excess amount at his will.

Is the scheme having any other special feature?

–       The loan facility is revolving in nature, wherein full admissible loan limit can be restored/enhanced (on merits) after two years from date of disbursement of original facility. It’s subject to the condition that no installment of the availed term loan has remained in arrear ever.

–       Borrower will be issued debit card against the savings bank account to facilitate anywhere money withdrawal at market places for procurement of fresh stocks.

–       All stocks of the borrower are comprehensively insured against all types of risks with usual bank clause and policy would be drawn in the joint names of the borrower and the bank. The borrower has to take the responsibility to renew the insurance policy during the entire period of the loan facility till it is adjusted in full.

Is third party guarantee required to avail benefits of the scheme and how the loan is to be repaid?

It’s a collateral free loan. No third party guarantee is required as envisaged under the scheme. Only existing stocks as well as stocks to be purchased will be hypothecated to the bank.

Meanwhile, the borrower has to repay the loan in 60 Equated Monthly Installments starting one month after the date of first disbursement of limit.