Majority of the MSME Borrowers do not regularly cross check the interest amount debited by Banks on a monthly basis, owing to the following factors:

• ‍They / their team members are already pre-occupied in other work and give much less importance to this particular task
• They feel / think that interest debited by Bank is automatic & computerized and cannot have any error
• Even if they calculate, they themselves are not sure whether their calculation is correct or not – so as to challenge the bank officials.‍
• Consequently, this work is not being done and you shall be surprised to know that most of the time, there are lots of discrepancies in such calculation from bank’s end – either knowingly or unknowingly.

‍Hence, it is imperative that someone must do cross these calculations timely and regularly and then inform the banker of corrective measures needed (if any). Please note that if you inform the banks too late about it, they shall not be able to help you much on this to reverse the excess amount.

BankKeeping is your friend who shall do this diligently – month on month across all your banking limits and ensure that the Banks only charge what is due to them and not a single penny beyond that. This not only generates consistent savings for your business but also frees up your time and resources.

Overview

For years, MSMEs have constituted a major sector of the Indian economy contributing significantly to the GDP of the country, creating job opportunities, encouraging innovation, and preservation of Indian culture. To secure their expansion, the Union Government has thus extended various credit facilities for things such as covering daily costs, procuring daily expenses, recruitment of personnel, procurement of raw materials, setting up certain projects, purchasing assets, etc.

The loan costs are contingent upon the interest rate applicable which affects the financial health and growth rate of an MSME entity. Recently, there have been increasing instances of lending institutions engaging in unfair practices charging exorbitant sums as interest on loans, and creating unnecessary financial pressure on SME entities.

Are Banks Overcharging Interest to the MSME Borrowers?

While undertaking an in-depth assessment of the lending institutions undertaken during the period till March 2023, the RBI discovered the unfair lending practices conducted by lenders like banks and NBFCs, where it was found that-

• Banks overcharge sums as interest from the date of loan approval as opposed to the actual date of loan disbursal to the borrower. This discrepancy leads to overpayment of interest by the SME/MSME borrowers. 
• Where loans were disbursed by cheque, numerous instances have seen interest levied from the cheque date rather than from the date when the cheque was handed over to the borrower. 
• Where the loan was disbursed or loan repayment was made during the month, certain lending institutions were charging interest for the month completely, and not for the period for the outstanding loan period.
• There were instances where lenders had charged interest for the complete month whereas the loan was either dispersed during the month or where EMIs were pre-paid in advance, technically causing the borrowers to pay interest for the whole month even when they didn’t owe the loan for the entire period. 

Need for regular Interest Verification by the MSME Borrowers

Whenever an SME borrower seeks a business loan from lending institutions like Banks or NBFCs, aside from the repayment of the sum of the loan principal and interest, there are other charges applicable i.e. documentation charges, processing charges, application fees, etc. 

The RBI Fair Lending Practices Code directs lending institutions to issue a Key Fact Statement (KFS) to SME borrowers, specifying all interest rates and other charges. It shall be essential for the lending institutions to get an acknowledgment from borrowers to the effect that they have understood all the terms and conditions including the charges before signing the loan contract. Any additional fees or charges not mentioned under the KFS statement shall be levied only after the borrower’s consent. Further, rather than disbursing loans through cheques, the sum should be transferred directly to the business bank account through online transfers. It will help borrowers to get a clear idea about the charges applicable from the exact date.

How to check Discrepancies in the Monthly Interest Debit

1. Read all the charges applicable to the loan transaction carefully. 
2. Assess the lender policies for any hidden costs. 
3. Discuss and negotiate any terms for lower monthly EMIs and favourable rates of interest payment which will naturally lead to more capital in the hand.
4. Look for any prepayment options on SME loans with the lending institution.

What to do when lenders are Overcharging on MSME loan interest?

SME borrowers shall keep themselves aware of the monthly interest debits on the loan amounts. Correspondingly, for all the SME loans issued after Oct 2024, the borrowers shall periodically assess the Key Fact Statement issued by the lender to find out all the charges levied along with the sums already received from the SME borrowers for any third-party service provider. Post which if any inconsistent information is discovered they could request clarification and error rectification from the lender.

But all this has to be done within a certain time so that it does not face further delays and impediments. It may increase the paperwork, lengthy communications with the banks, and substantial delays. It is a cumbersome task for a business to divert resources for such banking tasks. This is where the role of BankKeeping is of utmost importance. From checking the key fact statements to communicating with the banks and handling any other related paperwork to rectify the wrongs, if any, bringing down your banking costs and time consumption immensely. 

Can the interest rates on MSME loans change over time?

The answer is Yes! It depends on the type of loan the MSME/SME borrower has opted for. The monthly interest debits on SME business loans could be either fixed or floating in nature. In the case of fixed interest rate loans, the rate of interest for the overall duration does not change, but, in the case of fluctuating interest rate loans, interest rates vary in accordance with the market settings or the base rate of the concerned lender.

Will Interest Rate Impact EMIs?

The interest rate applicable is directly proportionate towards the monthly interest debits of SME loans. While higher rate of interest on the SME loan will lead to a rise in the sum of EMIs and the overall interest payable during the loan duration and a lesser interest rate leading to reduced loan cost and the EMIs.

FAQs

Are interest rates for MSMEs the same for all banks? 

No, the interest rates to be charged on SMEs are different depending upon several factors such as the sum of the loan, duration for repayment, creditworthiness and repayment ability of the borrower SME, business reputation, and any specific interest rate where SME loan applied in pursuance of any Government scheme.

What are the penalties for late payment? 

Lenders may charge late payment charges on delayed monthly interest payments on SMEs. 

How to avoid late payment penalties?

Here are some expert-guided ways to avoid it –

• Awareness regarding repayment terms – Keep yourself aware of the loan whether the interest rate is fixed or floating, the duration of payments, and penalties applicable for any delay or paying off your loan early.
• Make a separate budget for repayment – Incorporate a certain sum aside for repayment purposes within your budget as a fixed expense, which will remove any unnecessary pressure on the entity upholding your entity and evading penalties.
• Adopt Strategic Repayments – Accelerated repayment allows the SME entity to increase repayment sums to reduce the total loan duration and lessen the total interest payments.

Focus on your Business; We’ll take care of your Banking needs

Role of BankKeeping

Borrowers seeking an SME loan should conduct thorough research for lenders with clear and transparent loan policies. Before agreeing to the terms of a loan, they should make themselves aware of all the necessary terms including all the charges. Further, to ensure accuracy on the monthly interest debits, SME entities must review the KFS statements at regular intervals and seek clarification from the lender for any discrepancies found.

These tasks can be demanding while you try to manage your business and banking together. You can leave your banking needs to the dedicated team at BankKeeping. We are a team of experts in the banking and financial industry. We help SMEs deal with their banking requirements on a day-to-day basis. The daunting task of reviewing the Key Fact Statements, reviewing the month-on-month Interest Debits, can be cumbersome to handle for the SME or a proprietor alone. It is here where the BankKeeping team can help you through its dedicated team, for preparation, presentation, and even negotiations with the banks/lenders. 

We are challenging the Status Quo of how SMEs & Banks work together. We use our expertise to empower your business by managing your banking communication and documentation. From preparation of a full-fledged CMA data report, and checking the DP statement to reviewing the banking interest debits monthly; we handle all tasks required by the Banks. We not only help you in report preparation but also presentation to the banks. The BankKeeping team even helps you negotiate better terms with the Bank by either lowering the interest rates or getting better bank credits. We help you consolidate your banking needs, create a banking compliance calendar so that you never miss a deadline and even help you reduce the banking cost and communicate better with the banks in the desired format.

All this is just a click away. Leave your details and we will call you for a better Banking experience as you sit back and concentrate on your Business.