In this article, Jimsi Tassar who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses how to get a loan to start a business from the government?
Definition of Loan
As per the Business Dictionary, a Loan is a temporary transfer of Cash, from its owner or any financial institution (lender) to the borrower who promises to return it as per the terms and conditions of the agreement, usually with an interest for its use, which is elaborately put down in a Loan Agreement, that becomes enforceable when the Loan amount is advanced to borrower, with a stipulated time period for the amount to be returned to the Lender, along with the interest rates that has been determined as per the Loan Agreement.
There are various kinds of Loan
Demand Loan, Instalment Loan, and Time Loan depending upon its nature. For instance, a Demand Loan is one which is repayable at the demand of the Lender for repayment. If the Loan is repayable at equal monthly instalments, then it is an Instalment Loan, and if there is a time bound payment on the loan’s maturity, it is called a Time Loan. Such specifics of Loan needs to be mentioned in the Loan Agreement between the lender and the Borrower, and could be
The Banking regulations and practise has further classified their Loans into: Consumer, Commercial, Industrial, Construction, Mortgage Loans, and Secured and Unsecured Loans.
A type of Loan which is given to an individual in a non secured basis for personal, family, vehicles and home loans etc. A loan which is in a non secured basis means, without any collateral for security to the bank. Consumer Loans are usually regulated by the Government Regulatory Agencies for their compliances with the consumer Protection Agencies, also known as Consumer lending or Consumer credit.
A type of Loan is usually advanced to a Business rather than a Consumer. Commercial Loans are usually for a short term period of 30 days and up to a year, which has been either secured with collateral or is unsecured, and are generally advanced for financing equipments, or could be a Loan for a Business to Business Transaction and in the form of Machinery, or in a kind of Inventory. The Banks usually requires the Commercial Borrowers to submit financial statements of the banks and to maintain some security by having insurance on the purchased item like machinery or heavy financial vehicle for commercial purposes.
A type of loan which is always forwarded towards financing a project and for commercial and industrial projects in the form of working capital or to finance major capital expenditures, and thus, an Industrial Loans are always forwarded against collateral for a short duration and is made on the basis of financing projects.
A type of Loan which is usually short term for up to three years, and is always a secured loan, and it is a real estate financing, which is secured by a mortgage on the property that is being financed, for covering the cost of construction and land development and is usually advanced through pre- arranged methods and procedures, and are usually categorized as developmental Loans.
A type of Loan which is usually advanced against Collateral, and the Mortgagor or the lender usually gives it to the Mortgagee (borrower) as a lien on the property, which expires when the Mortgage is paid off fully. The bank usually removes the lien on the property, when the Mortgage Loan is paid off in totality.
A Secured loan is a type of Loan, which is usually guaranteed by the borrower giving Assets as security or collateral for security. The normal practise is to secure the land ownership documents or property ownership documents for the best interest of both parties.
A type of Loan which is borrowed without collateral and only with the credit worthiness of a borrower. It is usually called a signature Loan or a personal Loan. The rate of interest can get very high in this regard due to unsecured loan category which puts the Lender in a higher risk category.
Apart from the Personal Loans between individuals, the Banking Sector in both Private and Public sector play the biggest role in advancing Loans to individuals and communities or corporate or organized sectors. Besides, the Non Banking Financial Institute and other Micro Financing institute for various determined sectors like Agriculture and farming is also being encouraged through subsidies and advancing loans with low rate of interests to support the rural economy.
National Bank for Rural and Agricultural Development is an institutional Credit and loan providing body, which has been taken up by the Government in the year through NABARD legislation in the parliament through Act 61 of 1981. Thereafter, NABARD came into existence in the year 1982, with the Agriculture credit functions, and refinance facility of Agriculture Refinance and Development Corporation (ARDC) being transferred to NABARD.
Thus, NABARD is an Institutional subsidy advancing agency of the Government and also, A Micro finance unit that advances small loans for schemes and projects related to Agriculture.
Micro- Finance is a type of Banking service that is provided to an unemployed or low income individuals or groups who otherwise has no access to financial services to start up a project or become stable financially and economically self reliant.
The Government of India, attuned to the governing principle of ‘Socialism’, as highlighted in its preamble in the constitution, has managed to bring out financial structures to reach out to masses that are from a certain financial background, and with no access to capital for initial investment. The Government of India to gives loans, the person (borrower) needs to be an Indian Citizen, and with no criminal turpitude, and with the submission of a Project Report and schedule of Payment, and submitting a solid project plan with profitable profits.
The Start Up India, is claimed to be a revolutionary scheme that has been initiated by Department of Industrial Policy and Promotion (DIPP) and launched by the Prime Minister of India to enable young entrepreneurs and Start up campaigns for making people self reliant.
Pradhan Mantri Mudra Yojana (PMMY)
Micro Units Development and Refinance Agency ( MUDRA) bank is a new institution being set up by the Government of India, for development and refinancing activities relating to Micro Units, with the main objective of providing funds to Non-corporate small Business sector, with the long term goal to youth for being job creators and not job seekers. As per the scheme, there are three loan structures:
- Sishu-Loan upto 50,000/-
- Kishore- Loan upto 50,000/- to 5,00,000/-
- Tarun- Loan upto 5,00,000/- to upto 10 lakhs.
MUDRA Bank, or Micro Units Development and Refinancing Agency Bank, is a public sector financial Institution in India which has been launched on 2015. The MUDRA Bank provides loans at low rate of interests to Micro Finance Institute and Non Banking Financial Institutions, and which ultimately provides credit to the MSMES or the Micro, Small and Medium Enterprises, and it has been found that Artisans, fruit and vegetable vendors, shopkeepers, Small Manufacturing Units have been able to borrow from MUDRA Banks.
MUDRA Bank therefore, has been launched for benefitting small entrepreneurs, and act as a regulator for Micro Finance Institutions (MFI), besides laying down guidelines for Policy for Micro Finance Business and registration of MFI entities and their accreditation.
MUDRA bank objective is to provide last mile financers with money to reach out the small scale entrepreneurs and business holders who usually remain cut off from the banking system. Thus, the main target group of MUDRA Yojana is the young, educated and skilled workers, entrepreneurs including women entrepreneurs. It was established as a subsidiary of the Small Industries Development Bank of India (SIDBI) with an initial corpus of Rs 5,000 crore to provide capital to all banks seeking refinancing of small business loans under PMMY.
Small Industries Development Bank of India is a financial Institution that was set up on April 2, 1990 through the Small Industries Development Bank of India Act,that aims to provide financial aid to the growth and development of micro, small and medium scale enterprises (MSME) in India. SIDBI is a subsidiary of Industrial Development Bank of India (IDBI), and is owned and controlled by 34 government Institution, and actually started off as a Refinancing Agency to banks and state level financial Institutions for their credit to small industries. SIDBI has the main function of Promotion, Development and Financing of the MSME and related institutions.
Credit Guarantee Fund Trust for Micro and Small Enterprises popularly known as CGTMSE is widely being used by many PSU Banks and Private sector banks to fund MSME sector.
Stand up India Scheme
Start up India is a flagship initiative of the Government of India to build a sustainable eco system for growing and nurturing start ups in the country that will lead towards a sustainable growth to enable start ups to grow through innovation and design.
Start up is an entity incorporated or registered in India, not prior to five years, with annual turnover not exceeding INR 25crore in any preceding financial year, and which is working towards innovation, development, deployment, or commercialization of new products, processes or services driven by technology or intellectual property, and is eligible for tax benefits after it has registered with the inter ministerial Board for tax benefits.
For Scheduled Tribe or Scheduled Caste or a Women Entrepreneur for starting an entrepreneur skill, and it was launched to facilitate a loan amount of Rs 10 lakhs to 1 crores, to at least one scheduled Tribe or scheduled Caste citizen, and one women entrepreneur borrower per branch in a bank, and only for setting up a Greenfield Enterprise, which could be in manufacturing or services or Trading sector.
Also, if it is a Non Individual Enterprise, then at least 51% of the shareholding and controlling stake is required to be held by the member of ST/SC or Women Entrepreneur. Thus, the main objective of such scheme is to economically empower the women or members of ST and SC community with financial aid through lending such amount with very low rate of Interest. It is also to be noted that, such a Loan, under the scheme is not required to have a Guarantor as it is in the case of other Loans and schemes.
The eligibility criteria for a Borrower have been put down as a guideline for being qualified for the Scheme.
- The Scheme applies only to a Scheduled Tribe and scheduled caste person as defined in the Constitution of India under the Schedule VI and V.
- The Scheme applies also to Women Entrepreneurs who are above 18 years of age.
- Loan under the scheme is eligible only for Green Field Project, which signifies, a first project from the grass root, which consists of a first time venture of the beneficiary in the Manufacturing, Services or the Trading sector. Here Manufacturing would apply to a establishing any unit from the scratch, a project without any previous investment. Services could apply to establishing Service provider or unit centres to cater to other business houses. A Trading sector applies to any sort of trade which indicates all sorts of exchange and production of goods and products in exchange of the monetary units or currency.
- The Loan under this scheme is also eligible for Non Individual enterprises, and business house, with 51% of the share holding, or the major stake is in control of woman, or a ST/ Sc entrepreneur. Thus, the enterprise eligible for loan has to be within these criteria.
- The Loan Scheme would not be eligible for any person or enterprise that have been a defaulter or has not been able to make a repayment and the Asset had been declared as a Non Performing Asset (NPA), as per the SARFAESI Act. The Loan would also mean the amount taken by any other Non Banking Financial Institution.
Purpose or Objective of Loan is for economic empowerment of women entrepreneur or member of the Scheduled Tribe or Scheduled caste, which means that the Loan is nothing but an extension of a scheme of the Government of India to reach out to the start up or innovative or fresh ventures, and small to medium scale entrepreneurs in the field of Trading, manufacturing and Service sectors.
The Loan structure
The Loan is called a composite loan, which is 75% project cost of term Loan and the working capital for investing in the venture or the project instantaneously. The 75% scheme would not apply if the convergence cost covered by the borrower exceeds 25%, of the Project cost.
Rate of Interest of the Loan
The rate of Interest as per the scheme would be the lowest as compared to the categories available to any bank and their rate of interest. However, the rate of interest cannot exceed the base rate + Marginal Cost of Lending Rate+3%+ tenor premium.
The Security required is the basic primary security
The loan may be secured by collateral security or Guarantee of Credit Guarantee Fund Scheme for Stand Up India Loans, (CGFSIL) which is at the discretion of the lending bank to decide as per the terms.
Repayment terms and conditions
The loan amount is to be made repaid within seven years of repayment period, and with an extended maximum moratorium period of eighteen months.
Working capital and overdraft
The process of drawing an amount of Rs 10 lakhs the amount may be sanctioned by the way of an overdraft. A credit card is possible to be drawn for drawing the capital for the convenience of the Borrower The working capital limit above Rs. 10 lakhs that needs to be sanctioned by way of cash credit limit.
As per the scheme, the borrower is supposed to be investing 10% of the cost of the project as its own contribution towards the project. The Scheme highlights that about 25% of the margin money towards the project which can be converged against any other central or state schemes available.
The Guideline for availing Stand up India scheme is to be operated from the by all the scheduled commercial Banks of India. The loan can be availed directly from the Branch, or through a SIDBI’S Stand up India Portal. (standupmitra.in) or through the Lead District Manager of the scheduled bank. The portal would be quite a platform for availing information as well as feedback for preparation and for providing a feedback for hand holding of potential borrowers and projects that put forth as proposal.
The information required for initial stage for the project to be facilitated by the interface portals are to create a portfolio of the borrower and the potential project in the form of understanding the proposal of the project and the background of the borrower in terms
The information required for initial stage for the project to be facilitated by the interface portals are to create a portfolio of the borrower and the potential project in the form of understanding the proposal of the project and the background of the borrower in terms of the character and handholding required for accumulating margin money or not, with any background experience of the borrower, thus allows the portal to make a distinction between a Trainee borrower and a ready Borrower.
A Borrower who does not require any handholding and the application process for Loan starts at the selected bank, and an application number is generated, and the information of the borrower is shared with the concerned bank, and the relevant linked office of the NABARD / SIDBI. Also, the LDM posted in each district, is informed of the concerned bank is informed of the same. The SIDBI/NABARD is made the Stand up Connect Centres, and the loan application is tracked through the concerned portal.
When the portal and initial application of Loan requires handholding, then the application is forwarded to the LDM of the concerned District, and the relevant officer of SIDBI/NABARD. The application process would be electronic, and could be applied by a borrower, or through a bank branch officer dealing with MUDRA.
Grievance Redressal and District Level credit Committee: There will be portal for grievance addressing and also, a periodical meet to follow up the project accepted.
The stakeholders are the Borrowers, SIDBI, NABARD, DLCC, LDM, and the bank branches to monitor, facilitate, handholding, support, solve problem, monitor performance etc.
Loan by Government for Business is therefore not possible through any other institution but the banking sector and any other such Non-Banking Financial Institutions which advance loan or act as lending agency to potential borrowers.
The definition of Government or State is wider than the institutions and constitutional bodies that are authorities for advancing loan amount to any borrowers. The Public Sector Banks and Private Sector banks, and Scheduled and Commercial banks are institutional bodies that provide loan to borrowers as per their own guidelines and through the governing principles of reserve Bank of India, like Credit Reserve Ratio, Statutory Liquidity Ratio, Repo Rate and Reverse Repo Rate.
However, The Government provides scheme that could facilitate the lending of Loan amount to the Borrowers through Public Sector units like SIDBI, IDBI, NABARD etc.
Therefore, the Government through legislation can promote schemes that enables the Borrower and the Lender to have a relationship that enables and promotes entrepreneurship, start ups, skill developments, and thus, enables the Government to achieve its long term goals through its action plan, as a roadmap towards achieving the principle of Justice- Economic, Political and Social, and dwell on the Socialist principle highlighted in the Preamble of the Indian Constitution.