Small and Medium Enterprises (SMEs) are the backbone of the Indian economy, powering innovation, employment, and GDP growth. Yet, for all their contribution, SMEs often face disproportionate financial burdens—especially when it comes to borrowing from banks. While interest is the obvious cost of taking a loan, there are several other hidden and not-so-hidden charges that banks levy on SMEs. These charges, if not tracked and reviewed every month, can silently eat into the profits of a business and create a false sense of financial health.
Here, we explore the different types of charges banks impose on SME accounts, and why it is essential for business owners and finance teams to actively monitor and calculate them monthly.
1. Processing Fees and Renewal Charges
At the time of sanctioning a loan, banks typically charge a processing fee—ranging from 0.25% to 2% of the loan amount. That’s standard. But what many SMEs don’t realize is that renewal of limits (especially for working capital loans and overdrafts) often comes with renewal or review charges. In recent past some of the Banks are also charging renewal fees on term loans, which is absurd but nevertheless happening.
Why it matters:
Even though charged annually, these fees are often amortized into monthly financial planning. If ignored, they can throw off your cost analysis and profitability estimates. Proper negotiation can help in reducing and controlling these charges.
2. Penal Interest and Overdue Charges
Late EMI payments, delayed interest servicing, or exceeding sanctioned limits in an overdraft account can attract penal interest. This can be an additional 2-5% over the normal rate and is applied monthly.
Why it matters:
Penal interest, even for a few days, can significantly inflate your borrowing cost. Monitoring monthly helps ensure timely repayments and early correction of any violations before they snowball into large penalties.
3. Commitment Charges
Some banks charge a commitment fee when you don’t utilize a certain percentage of your sanctioned loan or credit limit. For example, if your business is sanctioned ₹1 crore but uses only ₹30 lakh regularly, you might be paying a fee on the unused portion.
Why it matters monthly:
This is a silent killer. Businesses that maintain credit limits “just in case” without using them can end up paying for money they never used. Monthly reviews can help you adjust limits or shift to more appropriate products.
4. Annual Maintenance and Documentation Charges
These are often levied for maintaining the loan account, updating security documents, or conducting periodic inspections. They may not be billed every month but accrue and reflect in statements periodically.
Why it matters:
If you track your monthly statements, these fees won’t surprise you. If ignored, they can go unnoticed until the year-end accounts, affecting your overall financial planning and audit readiness.A proper review will help you re-negotiate these clauses when the limits are renewed.
5. Inspection and Valuation Charges
For secured loans, especially those backed by property or inventory, banks conduct regular inspections or valuations—either in-house or via third-party agencies. The cost of this is mostly passed on to the borrower.
Why it matters:
These charges can often be significant amount, and specially turns out to be a high percentage on small loans.
6. Cheque Bounce or ECS Return Charges
Each time a cheque is dishonored or an ECS fails, banks impose a penalty—ranging from ₹250 to ₹750 or more. SMEs, due to tight cash flow, often deal with bounces, but may not be fully aware of the cumulative cost.
Why it matters:
One bounce a month may seem insignificant, but over a year, this adds up. Also, repeated failures affect your credit score and banking relationship. Monthly tracking helps instill payment discipline.
7. Foreclosure and Prepayment Charges
In some term loans, especially fixed-rate loans, banks levy charges for early repayment or foreclosure. Even in overdraft and cash credit limits, part-payments don’t always reduce the interest unless the structure allows it.
Why it matters:
If you’re prepaying with the hope of reducing cost, you must ensure it’s not being offset by a penalty. Monthly statement reviews help assess if your repayments are being applied correctly.
8. Account Statement and SMS Charges
Though minor, banks sometimes charge for statement printing, SMS alerts, or online banking services—especially if you’re on a basic plan or request physical statements.
Why it matters:
Individually these are small, but over time and across multiple accounts, they add up. Monthly scrutiny helps identify and cut down on avoidable costs.
Avoid Unnecessary Bank Charges
Why SMEs Must Track These Charges Monthly
– Better Cost Control: Knowing the exact cost of banking services each month allows better budgeting and financial control.
– Avoiding Surprises: Year-end reconciliations become smoother when you already know what charges have occurred.
– Negotiation Power: With clear data, SMEs can renegotiate or switch banks more confidently.
– Improved Cash Flow: Every rupee saved in fees improves cash availability.
– Transparency & Compliance: Regular tracking ensures alignment with internal accounts and external audits.
In Conclusion
Banks do provide essential financial support, but their charges — can significantly erode an SME’s bottom line. As borrowing becomes more complex, it is critical for businesses to actively monitor not just the principal and interest, but all associated costs. Treating monthly loan and account statements like core financial documents, rather than just bank paperwork, can unlock real savings and give businesses the clarity they need to grow sustainably. Remember every penny saved here shall add straight to your bottom line.
A simple monthly routine to track and calculate these charges can make a world of difference. At
Bankkeeping, we not only keep a track of this month on month, but we also make full endeavour to
negotiate and bring down these costs over a period of time.