The present-day Covid19 environment has hit small businesses very badly. The Small entrepreneurs /Service Providers who have been completely shut down without any work for many days is trying to recover out of the precarious situation but the stringent and strict rules of Bankers and other Regulatory Authorities are not allowing him any breathing space.
To give an example of the way banks are responding to their customers during this Pandemic period is by reducing the OD/CC limit and sometimes bringing it to half or one-third of the limit which prevailed before things went wrong due to the Pandemic. While it is understandable that OD/CC limits are based on drawing power calculations which are again based on the inventory and/or debtor’s position or the Current Assets position which happens to be the primary security for this facility, we need to acknowledge the fact that these are not normal times.
To explain it further, the situation is somewhat like this:
1. An entrepreneur who had been doing good business before the pandemic would have approached banks for OD/CC facilities and got approved say a facility of 1 crore during these booming times which he would have fully drawn. He would have been paying his interest dues promptly and would have been a valued customer of the bank before the Pandemic struck.
2. For the last nearly eighteen months, during the pandemic period what happened is that there was no movement of stock and no collection of receivables as everyone is going through the same problem and nobody is able to make payments until he receives anything from his buyers. Similarly, service providers are also struggling to get their payments from their clients. In fact, during this period the service provider is the most hit category because nobody wants his services for now until it is absolutely essential and people are also not paying his earlier outstanding Bill’s. He is therefore struggling to get off his feet and cannot survive unless he has some cash savings. Many of them have invested in land and property which again is of no use during these times as there are no buyers and the ones who come ask for throw away prices.
3. To add insult to injury, the banks have also decided to reduce their overdraft/cc limits for these small businesses say for example in case of a person who had a limit of 1 crore funds his limit is suddenly cut down to 30 lakhs as their DP goes down due to lower sales and moreover the banks are constantly after the borrower to pay back the 70 lakhs immediately so that his OD/CC limit is brought down to 30 Lakhs immediately. One can imagine what the small scale entrepreneurs would be going through, whether he should look at bringing his business back on line or he should repay the recalled amount to the bank to bring his OD/CC figure within the revised limit?
4. This situation is further aggravated by the fact that with the present stringent stricture that any person who has an OD/CC account cannot open a current account with another bank. As such what happens is all the collections which this entrepreneur gets for his old dues are deposited in the OD/CC account which the bank appropriates for the reduction of the OD/CC limit and does not allow him to withdraw any amount from this account till the OD/CC limit comes down below the revised reduced level.
So basically what happens is that the entrepreneur runs around trying to collect old dues and also trying to get new business to revive his ailing enterprise but the amount which he collects as old dues are all appropriated by the banks for reducing the OD/CC limit to the revised reduced limit from the higher limit figure which was sanctioned when the conditions were good and business was booming.
5. The other alternative which such an entrepreneur has is to start collecting most of his old dues in cash which many are doing. Actually even people who had 100% collections through the banking system have started resorting to cash collections due to this problem. Actually they dont have any other alternative if they have to survive.
The point which needs to be looked at, at this juncture is if we really want to help entrepreneurs to come out of this pandemic situation, especially the small entrepreneurs of our country then we need to adopt a different approach.
We need to do a lot of hand holding and confidence building measures as the situation which we are facing is abnormal and it demands out of the box solutions.