The Union Budget 2024 incorporates numerous initiatives for MSMEs, particularly for manufacturing units, to boost the sector’s long-term growth and profitability. One of these initiatives is the Credit Guarantee Scheme, where MSMEs in manufacturing can access collateral-free loans with a guarantee of up to INR 100 crore, shared Jugal Mantri, Chief Executive Officer, Anand Rathi Global Finance, in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN).
Could you share insights on any recent or new guidelines issued by the RBI on eliminating foreclosure charges for MSMEs – Impact on NBFCs?
In the recent MPC meeting of the RBI, it was stated that banks and NBFCs cannot levy foreclosure charges or pre-payment penalties on MSMEs. A draft circular on this matter is also expected to be issued for public consultation. As per the present RBI guidelines, NBFCs are not permitted to charge any pre-payment penalties or foreclosure charges on floating-rate term loans given to Individual borrowers for nonbusiness purposes.
According to the statement issued by RBI in the MPC meeting on Oct 24, it opined that no foreclosure charges are to be levied in the case of MSMEs, irrespective of the profile of the borrower. The said statement is not applicable with immediate effect and RBI is expected to come out with a detailed circular for the same. For MSMEs, they must submit valid proof of being MSME (say UDYAM certificate) to qualify under the notification.
For NBFCs, foreclosure charges or prepayment charges are one of the important aspects of managing its liquidity and commitment to the funds raised for onward lending. NBFCs will also have to forgo future income in the event of a greater foreclosure if there is no urgent need for financing. Besides, NBFCs will also forgo the foreclosure charges which is a source of income for them.
What impact do you foresee from the ongoing rate cut cycle on interest rates for borrowers, particularly in terms of accessibility and affordability?
During the tenure of a longer-term loan, say 15 years, the borrower experiences both rate cycles—upward and downward. In the case of floating-rate loans, such as home loans that are linked to the RBI repo rate, the borrower benefits from a rate-cut cycle as it lowers the interest rate. This reduces the interest payments and, in turn, shortens both the number of EMIs and the loan tenure. Similarly, if the rate increases, the borrower will pay more interest as the rate rises with the repo rate. Loans become cheaper in a rate-cut scenario.
Recently, the RBI governor, at a Bloomberg conference, cautioned against premature interest rate cuts, citing significant inflation risks. This suggests that the beginning of a rate-cut cycle is still a few quarters away. In my opinion, one should prefer taking a loan with a floating rate to take advantage of rate cuts, which can help reduce the overall interest cost of the loan.
What are your thoughts on the recent government initiatives for MSMEs, like the increase in MUDRA loan limits, credit guarantees, and support for stressed MSMEs?
The Union Budget 2024 incorporates numerous initiatives for MSMEs, particularly for manufacturing units, to boost the sector’s long-term growth and profitability. One of these initiatives is the Credit Guarantee Scheme, where MSMEs in manufacturing can access collateralfree loans with a guarantee of up to INR 100 crore. This will help SMEs overcome financial barriers and enhance their access to capital.
Another initiative provides credit support for MSMEs under distress to prevent their SMA status from converting into NPAs, thus maintaining their financial stability and operational continuity. In addition, the Government of India has doubled the MUDRA loan cap from INR 10 lakh to INR 20 lakh for borrowers who have repaid their previous loans.
These initiatives by the government will help MSMEs increase their share in manufacturing and exports and support the sector’s long-term growth.
How does ARGFL approach credit and risk assessment for MSMEs, especially in balancing digital assessment methods with traditional approaches?
Both approaches have their merits and limitations, and the choice of method often depends on the specific content and goals of lending institutions. The traditional assessment includes a detailed review of balance sheets, income statements, cash flow, and financial ratios, along with observing revenue and profitability trends to assess cash flow generation, checking credit history, and analysing the Fixed Obligation to Income Ratio (FOIR), Loan to Value (LTV), etc. However, this approach has its limitations, such as excluding informal businesses, being time-consuming, and focusing less on real-time business developments.
On the other hand, the digital approach leverages data from digital sources like online sales, social media activity, feedback from suppliers/customers, utility payments, and more. This approach is generally used for businesses that do not have extensive financial documentation or physical collateral.
At ARGFL, we combine both traditional and digital assessments to provide a more comprehensive view of MSMEs’ creditworthiness. Since we operate in the LAP segment, our product is fully secured against immovable assets. We consider three main aspects when assessing the creditworthiness of any loan—FOIR, LTV, and credit score. A lower FOIR, lower LTV, a high credit score, and sound financials are key factors for loan approval.
How does ARGFL navigate RBI norms regarding loans against securities, such as shares, bonds, and mutual funds, and what are your views on the current market scenario for IPO funding and the competitive landscape?
The RBI provides comprehensive guidelines for availing LAS to ensure transparency, fairness, and effective risk management in the financial sector. These guidelines protect the interests of both borrowers and lenders by setting clear rules on loan-to-value (LTV) ratios, documentation requirements, and compliance measures. As per the guidelines, ARGFL maintains an LTV of 50 percent for loans granted against collateral of security. This must be maintained at all times, and any shortfall in maintaining the 50 percent LTV due to movements in share prices must be corrected within seven working days. We ensure adherence to the margin requirements and the guidelines prescribed by the RBI from time to time.
With the growing number of IPOs in the recent past, IPO funding has become one of the preferred ways to invest in IPOs. There are three categories of investors in an IPO— Retail, HNI, and QIB. The HNI segment is further divided into small HNI and big HNI. Retail investors are those with a minimum investment of INR 15,000 and a maximum of INR 2 lakh. Small HNIs are those with a minimum investment of more than INR 2 lakh and a maximum of INR 10 lakh. Big HNIs are those with an investment of more than INR 10 lakh. IPO funding is provided for investors planning to invest more than INR 10 lakh in a particular IPO. In such cases, a margin amount, say INR 2 lakh, is taken from the client, and the balance amount is provided by the lender, who charges interest. Investors in the big HNI category have better chances compared to those in the small HNI category, as even if a customer applies for more than INR 10 lakh, they will be allotted shares worth approximately INR 2 lakh, meaning that a larger number of investors have an assured allotment even in cases of five times oversubscription.
Overall, IPO funding has proven to be a good source of income for NBFCs as they earn interest on the same without possessing significant risk. Many players, like Anand Rathi and Bajaj Finance, provide IPO funding facilities at competitive and attractive interest rates.
Could you share your expansion plans for ARGFL and any strategic areas of focus in the coming years?
As of Sept 24, ARGFL has a loan book size of more than INR 5,500 Cr, comprising Loan against Property, Loan against Securities, and Construction Finance. We plan to cross INR 7,000 Cr in loan book size by the end of FY 25. Currently, we are present at 12 locations pan-India for our LAP business and will be adding a branch in Surat location in Q3 FY 25. We aspire to be a significant player in the markets we operate in. We are continuing to expand our presencein cities we operate and aim to enter new markets as opportunity arise. Our focus is on increasing the LAP and LAS book, with a focus on maintaining asset quality and strengthening processes to improve overall turnaround time and enhance productivity.
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