Collaboration Partner

Funding, Banking and Loans

Committee
&
Legal Compliance Committee
 MSME Development Forum
New Delhi
Mr. Rajnish Goenka
Founder and Chairman
SMART FACTORY
MSME Development Forum

LOANS
BANKING

MSMEs

FINANCE

Agenda:
Financial and Legal due diligence in respect of MSME’s loans
 TYPES OF MSME LOANS
Working Capital Loan Term Loan Equipment Loan

A loan that is used to finance day-to-

A loan that is provided for a specific
day business expenses such as A loan that is used to purchase
purpose, with a fixed repayment
inventory, payroll, and accounts machinery, equipment, or vehicles.
period.
payable.

Generally used to finance long-term

Helps MSMEs manage their cash flow capital requirements such as the
Helps MSMEs reduce their labor costs
and maintain a steady flow of business purchase of equipment, expansion of
and increase productivity.
operations. the business, or acquisition of another
company.

Can be secured or unsecured, Can be collateral-based or collateral-

Can be secured or unsecured, and the
depending on the borrower's free, depending on the borrower's
interest rate is generally fixed for the
creditworthiness and the lender's creditworthiness and the lender's
life of the loan.
requirements. requirements.
 TYPES OF MSME LOANS
Invoice Financing / Bill
Letter of Credit Bank Overdraft Facility
discounting
A short-term financing option that
A short-term financing solution that A financial instrument that is used to
allows MSMEs to withdraw more
allows MSMEs to borrow against their reduce risk in international trade
money than is available in their
unpaid invoices. transactions.
account, up to a predetermined limit.
Payment guarantee to the supplier,
Helps businesses manage cash flow
Ideal for businesses with long credit while also ensuring that the buyer
fluctuations and meet urgent financial
terms or slow-paying customers. receives the goods and services as per
needs.
the terms.

Interest is charged only on the amount

Helps improve cash flow and can be a Reduces the risk of non-payment, non-
withdrawn, and the limit is usually
viable alternative to traditional loans. delivery, or non-performance.
reviewed periodically.
 TYPES OF MSME LOANS
Merchant Cash Advance Trade Finance /Letter of credit Mudra Loans

A type of financing that is based on A financing solution that is used to A government-backed loan scheme that
future credit card sales. support international trade transactions. is designed to support MSMEs.

MSMEs can borrow against their future Three categories of loans are available:
Can help MSMEs manage risks
sales at a discounted rate, and repay the Shishu (up to INR 50,000), Kishor (up
associated with foreign exchange,
loan through a percentage of their daily to INR 5 lakhs), and Tarun (up to INR
shipping, and payment delays.
credit card transactions. 10 lakhs).

Loans can be used for a variety of

Helps MSMEs with short-term working Generally requires collateral, and the
purposes, including business expansion,
capital needs, but can be expensive due terms and conditions may vary
working capital, and equipment
to high-interest rates. depending on the specific transaction.
purchase.
 TYPES OF MSME LOANS
Credit Guarantee Fund
Prime Minister's
Trust for Micro and
Stand-Up India Scheme Employment Generation
Small Enterprises
Programme (PMEGP)
(CGTMSE)

A government-backed loan scheme A government-backed loan scheme

A loan guarantee scheme that is
that is designed to support that is designed to support
designed to support MSMEs.
SC/ST/Women entrepreneurs. unemployed youth and rural artisans.

Loans up to INR 1 crore are

Loans up to INR 2 crore are Loans up to INR 50 lakhs are
available for starting a new
available without collateral. available for starting a business
enterprise.

Can be collateral-free or collateral-

Helps reduce the risk for lending
based, depending on the borrower's
institutions, and encourages them to
creditworthiness and the lender's
provide loans to MSMEs.
requirements.
 Types of MSME Loans in India
Working Term Loan Equipment Invoice Letter of Bank Trade Mudra Credit
Capital • Lump sum with Loan Financing: Credit Overdraft Finance: Loans: Guarantee
Loan predetermined
• For purchasing • Against unpaid • For financing Facility • Financing for • Scheme launched Fund Trust
repayment period
• For daily
machinery and invoices for short- import and
• Withdrawal
import and by the Indian for Micro
operational
vehicles term working export operations
above account
export operations Government to and Small
capital provide funding
expenses balance support upto 10 Enterprises
lakhs (CGTMSE)
• Scheme launched
by the Indian
Government to
provide collateral
free loan to
MSME upto 2 cr
 FINANCIAL DUE DILIGENCE BY BANKERS IN
ASSESSING
MSME LOANS
• Understand the purpose of the loan and how it will be used
Purpose of Loan • Ensure that the loan amount requested is appropriate for the intended purpose

• Review the borrower's business plan and financial statements

Business Plan and • Analyze the borrower's financial health and capacity to repay the loan
Financial Statements • Assess the viability of the borrower's business model and strategy

• Analysis of projected cash flows to understand the borrower's ability to repay the loan
• Review of working capital management to understand the borrower's ability to manage their
Cash Flow Projections working capital requirements
• Assessment of the borrower's ability to manage their inventory, receivables, and payables

• Obtain the borrower's credit report and analyze the credit history
• Evaluate the borrower's creditworthiness and repayment track record
Credit History • Assess any outstanding debt obligations and their impact on the borrower's ability to repay the
loan
• CMR (CIBIL MSME RANK) – Best 1, least 10 generated for upto 50 crores turnover
 FINANCIAL DUE DILIGENCE BY BANKERS IN
ASSESSING
MSME LOANS
• Identify and evaluate the collateral pledged for the loan
Collateral • Assess the value and marketability of the collateral
• Ensure that the collateral is free from any legal encumbrances or disputes

• Analysis of the borrower's industry to evaluate market trends, competition, and growth
Industry Analysis prospects
• Assessment of the borrower's competitive position within their industry

• Calculation of key financial ratios such as debt-to-equity ratio, current ratio, and quick
ratio to evaluate the borrower's financial health
Financial Ratios • Assessment of the borrower's ability to meet their financial obligations
• Compare with ideal ratios, example ideal D:E ratio is 2:1, Adani’s ratio is 20:1

• Understand the terms and conditions of the specific government scheme

Government • Assess eligibility criteria and application requirements
Schemes • Ensure all necessary documents and approvals are obtained for government scheme
 LEGAL DUE DILIGENCE BY BANKERS IN
ASSESSING
MSME
• Verification of the borrower's legal entity LOANS
type, ownership structure, and governance
Business Structure • Assessment of the borrower's compliance with statutory regulations and licensing
requirements

• Evaluate any guarantees or co-signers for the loan

Guarantees and Co- • Assess the creditworthiness and financial capacity of the guarantors or co-signers
Signers • Ensure that the T&C of the guarantee or co-signature are legally valid and enforceable

• Review of the borrower's legal compliance to ensure compliance with applicable laws and
regulations
Legal Compliance • Verification of the borrower's tax compliance, including income tax, GST, and other
applicable taxes

• Review of any litigation or claims against the borrower or the business to assess potential
Litigation and Claims legal risks
• Assessment of any potential liabilities arising from litigation or claims
 LEGAL DUE DILIGENCE BY BANKERS IN
ASSESSING
MSME
• Verification of the ownership LOANS
of collateral offered as security, including property
Property Ownership documents, lease agreements, or rent agreements
• Assessment of any potential legal issues related to the collateral

• Review of contracts and agreements entered into by the borrower, including loan
agreements, partnership agreements, and customer contracts, to ensure legal compliance
Contract Review • Assessment of any potential legal issues arising from these contracts and agreements

• Review of any intellectual property owned by the borrower, including patents, trademarks,
Intellectual Property and copyrights, to assess the value of assets
• Assessment of any potential legal issues related to intellectual property

• Assessment of the borrower's compliance with environmental regulations and laws to

evaluate any potential environmental risks
Environmental • Verification of any necessary permits and approvals required for the borrower's business
Compliance operations
 LIST OF DOCUMENTS ASKED BY BANKERS
FOR LOANS
Application form: A completed application form with all relevant details of the
borrower's business.
KYC documents: KYC documents of the borrower and the business, including PAN card,
Aadhar card, and address proof.
Business plan: A detailed business plan outlining the borrower's business operations,
financial projections, and future plans.
Financial statements: Financial statements of the business, including balance sheet,
profit and loss statement, cash flow statement, and income tax returns.
Bank statements: Bank statements of the borrower's business and personal accounts
for the past 6-12 months.
GST registration: GST registration certificate of the business, if applicable.
 LIST OF DOCUMENTS ASKED BY BANKERS
FOR LOANS
Income tax returns: Income tax returns of the borrower and the business for the past
2-3 years.
Proof of ownership: Proof of ownership of the business, such as property
documents, lease agreement, or rent agreement.
Collateral documents: Collateral documents such as property papers, insurance
policies, or other assets that are being offered as collateral.
Credit score: Credit score of the borrower, obtained from a credit bureau TransUnion
CIBIL, Equifax, Experian and CRIF Highmark
Legal documents: Legal documents related to the business, such as licenses, permits,
registrations, and contracts.

Project report: Project report for new projects, including details of the project,
financial projections, and other relevant information.
 LIST OF DOCUMENTS ASKED BY BANKERS FOR
LOANS
Valuation report: Valuation report of assets being offered as collateral, prepared by a
qualified valuer.
Audited financial statements: Audited financial statements of the business for the past 2-3
years, if applicable.
Industry-specific documents: Industry-specific documents, such as NOCs from regulatory
authorities or certifications required for the business.
Insurance documents: Insurance policies related to the business, such as fire insurance,
product liability insurance, or any other relevant insurance policies.
Board resolution: Board resolution of the company, authorizing the loan and its terms.

CMA report: CMA (Credit Monitoring Arrangement) report, which is a detailed analysis of
the borrower's financial position and repayment capacity.
Balance confirmation: Balance confirmation of outstanding loans from other banks or
financial institutions.
Any other relevant documents: Any other documents that may be required based on the
type of loan and the borrower's business operations
 Committee Convener, Funding, Banking and Loans Committee
Co Founder, Dugain Advisors LLP

TEAM Brief Partner, KDA & Associates, Chartered Accountants

FCA, B.Com (Hons.), CFA Level 2 (US), Ex- Ernst & Young
Experienced financial expert with a proven track record in
assisting startups, enterprises and SMEs with debt restructuring
and a wide range of financing solutions

Ankur Dugar

Reema Jain, Legal Compliance Committee

Founder, Dugain Legal, Advocates & Solicitors
Reema is an Advocate and specializes inv corporate and civil laws. She is
an expert in Indian corporate laws, published books, and articles on the
subject, and serves as an independent director of public and listed
companies in India. She is also a visiting faculty member at several
management institutes and a mentor with the Startup India initiative.

Reema Jain