{"id":3145,"date":"2020-08-17T17:52:36","date_gmt":"2020-08-17T12:22:36","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=3145"},"modified":"2024-05-07T19:10:16","modified_gmt":"2024-05-07T13:40:16","slug":"sme-working-capital-loans","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/sme-working-capital-loans\/","title":{"rendered":"Why SMEs Should Look Beyond Banks to Avail Working Capital Loans"},"content":{"rendered":"

The nationwide lockdown to control the spread of coronavirus had put a halt to business operations across the country, especially affecting small and medium businesses. While the lockdown created havoc amongst industries like automobile, it proved to be a unique growth opportunity for industries like EdTech.\u00a0<\/span><\/p>\n

It is still tough to believe that – <\/b>The whole economy was at a standstill for around two and a half months since mid-March 2020.\u00a0 And, every concern revolved around <\/span>survival.<\/i><\/b><\/p>\n

Then after a long pause, the government decided to re-open industries while maintaining preventive measures with Unlock 1.0. But, the lack of money movement made it difficult for businesses to kickstart their business operations again.\u00a0<\/span><\/p>\n

To overcome difficulties and survive, businesses need to strike a balance between cash inflows and outflows. And, it is only possible with effective working capital management.\u00a0<\/span><\/p>\n

However, the difficulty in raising funds from formal sources in India has plagued survival for many SMEs.\u00a0<\/span><\/p>\n

Let\u2019s understand why SMEs should consider options apart from banks to avail loans, especially during such unprecedented times.\u00a0<\/span><\/p>\n

Limited scope under Priority Sector Lending (PSL)<\/h2>\n

PSL is an important role assigned by the Reserve Bank of India (RBI) to banks for providing a specified portion of lending capacity to specific sectors. These sectors include agriculture, MSMEs<\/a>, export credit, education, housing, renewable energy, and social infrastructure. <\/span><\/b><\/p>\n

Today, this specified portion of the bank\u2019s lending capacity is capped at 40%.<\/p>\n

This guideline was set in 1967, and since then, the economic landscape of India has changed remarkably. Unfortunately, the scope of PSL hasn\u2019t changed accordingly.\u00a0 Because of this, a lot of startups and MSMEs remain excluded from PSL and suffer from the lack of credit availability from formal sources.\u00a0<\/span><\/p>\n

The spread of coronavirus accelerated this issue and forced the government to take cognisance. RBI amended the guidelines<\/a> to include startups under PSL and removal of limitations for certain MSMEs.\u00a0<\/span><\/p>\n

But, the question remains the same!<\/b> Is this enough for small and medium enterprises in India to survive?\u00a0<\/span><\/p>\n

Stringent guidelines for working capital loans<\/h2>\n

In India, banks are wary of providing business loans to startups and new SMEs due to the following reasons.\u00a0<\/span><\/b><\/p>\n