Trapped in private loan net, TN’s MSMEs struggle for survival

It has been months since K Govindaraj, owner of a lathe unit in Chennai, had a peaceful night’s sleep. After a trying 14-hour-long workday, sleep often eludes him as he wonders how to arrange money to pay the monthly interests for the loans he obtained. For, he hardly makes ₹10,000 to ₹15,000 per month. But the interest amount that he needs to pay every month to private finance companies exceeds ₹25,000. When he delays the payment by a few days, Govindraj says the company’s employees visit his house and lathe shop and humiliate him in front of neighbours and workers. The warnings to pay the interest have now turned into threats.

Govindaraj says the situation could have been avoided only if he had managed to obtain an overdraft (OD) loan worth ₹3 lakhs from a nationalised bank in 2020 instead of approaching a private finance company. As he could not convince the bank manager for a loan and was in desperate need of money, he had no other option, but to borrow money from the private finance company at a hefty interest.

“I had availed a loan worth ₹2 lakh under the government’s MUDRA scheme a few years ago and I was repaying it on time. In early 2020 when I informed the bank manager about my financial crises, he had assured me to sanction an OD loan. But then, the manager got transferred and the new manager refused to sanction the loan. It was only then that I approached a private finance company and they immediately agreed to give the money at an interest of ₹7 for every ₹100. I accepted it,” Govindaraj told The Federal.

Also read: Signs of stress in MSMEs, bad loans likely to rise in 2022: RBI

Govindaraj says around the same time his business took a massive hit due to the complete lockdown imposed by the Centre in view of the COVID-19 pandemic. Even though he had managed to pay the interest and repay a small portion of the borrowed money regularly initially, his situation became unmanageable within a few months. “As a result, I took another loan to repay the amount. As the interest amount kept mounting, I started borrowing more from multiple people and got trapped in the vicious circle. Now, I have come to a stage where I have to pay more than ₹25,000 just as interest every month,” he said.

Unable to pay salaries to three of his employees, he let them go and started managing his lathe unit by himself. He now accepts orders for a comparatively lesser price and has also started to take up work for daily wage at other industries. “I am ready to work even multiple times harder. All I want now is to repay the loan and get out of this deadly circle,” he said.

Gokul, another industrialist from Chennai has a similar story. Gokul says he had borrowed ₹27 lakhs from a private finance company in 2018 after a bank refused to provide him loan, to expand his business, due to lack of sufficient surety.

“I was regularly repaying the amount until the last 10 months and the interest is 26.5 per cent. My payments got delayed when my business started to suffer. In response, they (the bank) started levying hefty late fees for it. So far, I have paid ₹21 lakhs including the interest and a portion of the loan amount. But the company claims that I need to pay them another ₹27 lakhs to settle my debt,” he says.

As Gokul had given his house documents as surety, the company employees now visit his house every day and threaten the tenants to vacate the premises. “I had leased out a couple of my houses. After receiving threats from the company, they now want to vacate the house and have demanded me to repay them the lease amount. I don’t have that much money in hand. When I informed them about my situation and sought some time, they filed a police complaint against me. I don’t know how I will handle the situation,” he says.

These are not lone cases. There are hundreds of industrialists especially from the micro sector in Tamil Nadu who have been entrapped in the nets of private finance companies and are struggling to survive. While several of them have shut shop and sold their machinery to repay the loan, some of them have even ended their lives to escape the trauma. The state has around 45 to 50 lakh MSMEs.

“Even though some of the industrialists manage to avail loans from banks, it is true that many of them, especially from the micro sector, approach private finance companies to manage their expenses even though the latter levy huge interests. It is due to two main reasons: one, the banks reject their application due to lack of surety; and two, due to the tedious application process and amount of time it consumes. For instance, if one has to apply for a bank loan, he has to spend at least ₹15,000 in preparing the required documents including GST and income tax documents and wait for months together. Also, he has to invest 25 per cent of the sought amount in his business prior to the loan application and submit the related documents,” explains V Nithiyananthan, general secretary of Tamil Nadu small and tiny industries association (TANSTIA).

KE Raghunathan, convener, Consortium of Indian Association says that industrialists require loans mainly for four things – to procure machineries, for business expansion, for raw material procurement and for working capital. “As far as MSMEs are considered, 40 per cent of them are struggling to survive in the business and it is only they who are in desperate need of financial assistance. Also, they are the ones who struggle to convince the banks to avail loans,” he adds.

“It would be surprising even if a handful of us get bank loans without much difficulty,” says J James, president of the Tamil Nadu Association of Cottage and Tiny Enterprises. James says the government should streamline the private finance companies and support the micro industries by announcing separate schemes for them. He says it is difficult for them to compete with small and medium industries.

When contacted, an official from MSMEs department said, “Most of the micro industries seek loans for their working capital and most of the time, banks decline their request due to lack of surety. That’s why they end up approaching private finances. As banks are not the state subject, both the state government and multiple industrial associations have requested the central government to relax some of the norms at least for the micro industries.”

Also read: More tradesmen committed suicide than farmers in 2020: NCRB data

However, the department had received 13,508 applications seeking loans and subsidies under multiple schemes from April 2021 till date. While the officials had recommended 9,798 applications after scrutiny, the bank had sanctioned loans worth ₹3,021 lakhs to 2,942 people and disbursed loans worth ₹2,857 lakhs to 2,802 people, according to the department’s website.

Meanwhile, a bank manager says that they would give importance only to collateral loans as the banks would be bearing huge losses if their customers fail to repay it. “Not just that, if they don’t repay the loan, our career would also be put at risk,” she adds.