A Guest Article – MSMEs can fruitfully ask for bank credit against receivables – By Brij Bhushan Goyal—-A retired banker

                  By Brij Bhushan Goyal—-A retired banker

MSMEs can fruitfully ask for bank credit against receivables

Covid-19 pandemic has hit economic activity hard globally. Working capital funds cycle of  manufacturers and traders both have gone struck up and they all are experiencing tough times to keep their operational activities running.GOI and RBI have already announced a number of measures to support the MSME sector for  additional easy credit from banks along with softening of NPA  categorization norms with view to lessen the hardships. Banks have kept open all such announced reliefs for their MSME customers. But, since complete easing of lockdown globally seems to be a distant reality, the payments of manufacturers and suppliers are struck up due to sales issues in the markets and they are facing difficulty besides recent reliefs.

Option available with the MSMEs

MSMEs funds are getting struck-up in stock inventories of raw material and finished goods due to low sales .Besides debtors/receivables may also not be forthcoming timely. All banks ask for regular stock statements from their customers who are expected to tell banks about the quantum of paid for current stocks only. If the MSMEs stocks are due to be paid still to their own suppliers, banks refuse to allow drawing Cash Credit limits funds against these unpaid for stocks due to risk of double financing as  entrepreneur’s creditors have their first lien. In such a scenario like in Covid-19 pandemic times, since the payments are not forthcoming from their own customers, stocks remain unpaid by and large. Normally, almost all micro MSMEs avail Cash Credit limits against Hypothecation of Stocks only without knowing the availability of credit facility against book-debts too.

Opt for Cash Credit against debtors/receivables:

There was a time when banks hesitated giving credit against Book Debts since it was increasingly felt that banks do not have any mechanism/control over this hypothecated working

capital asset component. But, now almost all bankers have started sanctioning credit facilities against book debts /receivables either as a joint single limit with limit against stocks plus book debts or two separate limits for both. For Book debts limits banks normally ask for some more margin from the borrower. To clarify, against stocks of 100 rupees credit may be given up to say 80% but against the value of  Book Debts of 100, the credit may be say up to 60 % or more as per guidelines  and credit worthiness of borrowers. Borrowers may request bankers to convert some of their stock limits into book debts limits. Additional need based working capital limits against book debts may be justifiably sanctioned by the banks if there is increase in turnover. There is no extra interest charged on Book Debts limits normally except for increased margin.

Borrowers’ responsibility of transparency

As Cash credit facility against hypothecation of book debts is granted only after a careful assessment of the credit worthiness of the borrower based on it’s track record, MSME borrowers need to be transparent to the most. Normally, banks accept debtors for financing up to 90 days expecting that this is sufficient for turnaround of payments.  Banks do not accept bad-debts or struck-up payments of the entrepreneurs as security. Banks may ask for extension of charge on existing hypothecated  and collateral security available if any including for personal guarantees .Borrowers have to sign another agreement of hypothecation of book-debts for such facility To safeguard’s bank’s interest is banker’s prime obligation also while serving the borrowers within extant GOI/RBI guidelines too. So, transparency by the borrowers is buzz word in this type of limits. There is no dearth of bank finance for a transparent borrower.

MSMEs may not put all eggs in basket of single customer.

These are difficult times. Entrepreneurs are expected to be the best judge in choosing/retaining their buyers. Such times require that MSMEs may not put all eggs (sales)in the basket of a single customer—meaning they should broad base their customers after obtaining their confidential reports(CRs).Banks too are expected to obtain such CRS both in domestic trade  as well as in export trade finance. For this these may be obtained from borrower’s customers’ banks or independent agencies in case of bigger finances.

Separate Limits for individual customers

For their borrowers banks can also set suitable purchaser/customer -wise limits out of the total Book Debt quantum of limits ascertained. This is helpful both for the MSME as well as the lender bank to keep track on the operations and return of sales proceeds by the debtors to the seller. Banks seldom permit book debt limits against debts of allied firms as sometimes malafide borrowers’ siphon of funds through other closely held allied firms. Borrowers are not allowed to open extra/other current accounts with other banks except with specific permission of the lender .RBI too has recently specifically asked banks to ensure this instruction so that sale proceeds are duly routed through the lender’s Cash credit account only. Otherwise also, this is only in the interest of the borrower, as at the time of renewal of credit limits, banks take into account all such performance parameters.

Brij Bhushan Goyal—-A retired banker