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MSME credit and gold loan companies - lenders of last resort for fund starved small businesses

Commercial lenders are shying away from their primary business as they turn risk averse despite the government and the Reserve Bank of India (RBI) doing whatever it takes to spur credit flow to MSMEs

With commercial lenders staring at the possibility of piling up of stressed assets, credit from the formal sector has dried up for small businesses With commercial lenders staring at the possibility of piling up of stressed assets, credit from the formal sector has dried up for small businesses

What stands between the life and death of millions of micro, small and medium enterprises (MSMEs) - collectively referred to as small businesses - is the timely availability of credit from lenders from the formal financial sector or commercial banks. 

Though the issue of paltry credit flow from the financial sector has been a fly in the ointment for this systemically important sector's growth for a while, the problem has just gotten compounded after the COVID-19 pandemic - the first and the second wave with a third wave said to be in the making - ravaging the economy in general and small business in particular.

Also Read: COVID-19 impact: 59% small biz likely to scale down, shut shop

Commercial lenders were treating small businesses as high-risk borrowers due to a variety of factors and as a force of habit.

The second wave of the pandemic and its derivative economic impact on small businesses has only increased their weariness. 
Needless to say, the credit flow to this segment from the commercial banks has literally turned out to be a trickle since May this year after the second wave of the pandemic put the clock back for the economic activity crimping the businesses of small businesses. 

Ironically, commercial lenders are shying away from their primary business as they turn risk-averse despite the government and the Reserve Bank of India (RBI) doing whatever it takes to spur credit flow to MSMEs billed as the engines of exports, job creation, and overall economic growth. 

The flourishing gold loan industry is filling the space vacated by commercial banks by opening credit lines on time to the small businesses to bring them back from the brink and back to life.

In fact, the gold loan companies can now proudly sport the moniker of `lenders of the last resort' for small businesses as cagey banks shy away from their primary task of providing risk capital to the segment.

Also Read: Allow cash flow-based lending for MSMEs: industry body to RBI

In fact, timely credit lines from gold loan companies are instrumental in keeping small businesses staying afloat during these stressful times.

The current credit practices and risk assessment measures followed by commercial banks do not allow a free flow of credit to small businesses from lenders. 

Rather, the new schemes have left small businesses at the mercy and discretion of the banks to render pandemic support if they choose to follow the government and RBI's instructions. 

Arguably, the credit window for small businesses under the credit guarantee scheme hinges on a number of conditions laid down in policies. 

What matters is the way they are interpreted by each institution. In this scenario, gold loan schemes come as a saviour to small businesses and enterprises by facilitating them with instant access to cash and at a longer tenure making it an alternate source of long-term capital without any credit or bureau checks.

This line of credit from gold loan companies takes care of the immediate cash and capital requirements of small businesses, which is central to the sector's very survival. 

Suffice it to say that gold loan companies have fast emerged as the chief source of credit for small businesses through these pandemic-induced stressful times. It goes without saying that the availability of credit is the chief thing that keeps any business going and small businesses are no exception.

With commercial lenders staring at the possibility of piling up of stressed assets, especially after the breakout of the second wave, credit from the formal sector has dried up for small businesses.

Gold loan companies are now filling this vacuum by opening credit lines without hassles to get small businesses back into the business. 

(The author is Executive Director & CEO, Indel Money)