How Can Small & Medium businesses Reduce Bad Loans?

The rate of non-performing loans (NPLs) for most of the small and medium-size banks in Tanzania is reportedly to be increasing in the recent years.

A review of some financial statements published late last year by banks indicated that NPL rates during the third quarter of 2017 ranges between 4 and 51 per cent, while the industry benchmark is capped at five per cent.

In Tanzania like in many other developing countries, the role that micro, small and medium enterprises (MSMEs) play is highly acknowledged due to their significant contribution to the economic growth and employment creation. Their contribution to GDP is estimated to one third, and employs about 20% of labor force.

Rising bad loans or NPAs of micro, small and medium-sized enterprises have been a major cause of concern for banks, the government as well as enterprises.

Entrepreneur India talked to a few bankers to know what exactly causes these bad loans and if there are any measures MSMEs can take to reduce those loans with banks. Here are their insights:

Limited Financial Knowledge is a Major Cause
Most of the bankers cited limited financial knowledge of small entrepreneurs as a major reason for increase in NPAs. According to them, the small entrepreneurs lack in financial awareness in deciding how to allocate capital in business.
The Managing Director of PAISALO Digital Limited, Sunil Agarwal said, “Because of limited financial knowledge and lack of professional services, banks under estimate MSMEs. Thus any delay in their inward payment makes them vulnerable for default.”
Agarwal emphasized on the measure that MSMEs should take i.e. they should not avoid inward payments.

Improve Revenue by Cost Reduction
MSME should focus on improving revenue by cost reduction, said K Paul Thomas, MD and CEO of ESAF Small Finance Bank.
If they would cut the extra expenditures from the business and for a certain period of time focus on improving revenues for the business, they can make their payments on time to banks. This will also help companies maintaining a cordial relationship with banks.

Differentiate Between Working Capital and Personal Money
Agarwal also talked about how MSME owners do not differentiate between their personal money and working capital of business. “Many a times they spend their working capital for personal needs thus leaving gap in liquidity and the risk of default increases,” he said. MSME owners do not focus on different nuances of balancing equilibrium in allocating funds. The need is to provide basic financial literacy by the financing partner and hand hold him and keep the entrepreneur in financial discipline.

Public Procurement Opportunity Could Provide Extensive Help
Many SMEs turn sick SMEs because of their non-payment of dues with banks. Terming this as major concern, the CEO of ESAF Small Finance Bank, Thomas explained how MSMEs can reduce the burden of heavy interest rates from them.
“Not many SME have used this opportunity, If small entrepreneurs can access money through capital market it will help increase rating and enable further low cost funds,” Thomas said.
His other tip includes making use of the public procurement opportunity available with the government to improve sales. “Try to get rated and based on that ratings try to negotiate with banks and financial institutions to reduce interest burden,” he added

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