Shortage of working capital is one of the common problems for the MSME sector. As a business owner, you can always take an MSME loan to support your financial needs, including loans for business expansion, purchase of machinery, pay rent or lease property, or any other. While it is convenient to approach a bank or Non-banking Financial Company (NBFC) for a business loan, what confuses most borrower is varied MSME loan interest rates.
Although it’s regulated by the Reserve Bank of India (RBI), each bank applies its own rate of interest. Hence, it is recommended to approach a few banks to find out which one offers MSME loan at the lowest interest rate. Apart from the interest rate, you also need to consider other fees that a bank charges such as processing fee, etc., as this may increase overall cost or the Equated Monthly Instalments (EMI).
What are the MSME loan interest rates currently?
As mentioned earlier, the rate of interest of MSME loan differs from bank to bank. Here are a few instances of the same.
State Bank of India (SBI) MSME loan interest rate: 9.65% onwards
Bank of India MSME loan interest rate – 9.10% onwards
Union Bank MSME loan interest rate: 9.05% onwards
Indian Bank MSME loan interest rate: 10.15% onwards
PNB MSME loan interest rate: 9.60% onwards
HDFC Bank Business loan interest rate: 15.75%
Note: It is recommended to check the loan interest rate with the respective banks as interest rates are subject to change.
Also Read: Business loan interest rates from top indian banks
In general, public-sector banks offer lower interest rates when compared to private sector banks and NBFCs. However, public sector banks require greater documentation and timelines, compared to private sectors, which often makes it convenient for MSME owners to approach private banks over public banks.
How to determine the right interest rate for your business?
Many a times, banks or NBFCs offer attractive rates of interest on MSME loans to gain attention. However, if looked closely, there can be many hidden charges. Therefore, you need to keep in mind that the lowest interest rate may not be always the best choice. Here are some questions that will help you in making a right choice:
- What is the rate of interest on MSME loan bank/NBFC is charging?
- What is the tenure of the loan?
- What are other fees charged by the bank/NBFC?
- Will those charges be included in EMI or paid separately in one go?
- What is the effective interest rate?
If processing fees and other charges are included in the EMI, then the amount will be added to the principal amount and the interest will be charged on the whole figure.
• Processing fee
• Documentation charges
• Bounce charges
• Loan processing charges
• Pre-payment charges
Please note that all banks or NBFCs do not apply all above charges on MSME loan.
How to calculate EMI on MSME loan?
While seeking financial help, what matters the most is the EMI. How much EMI do you have to pay every month?
Hence, it is important to learn MSME loan interest rate calculation. However, before you start calculating, learn how the loan is going to be paid off.
- Is the processing fee and other charges included in the EMI?
- Are initial instalments same as the rest of them?
- Is interest rate an effective Annual Percentage Rate (APR)?
[1 + (nominal rate / number of compounding periods)] (number of compounding periods) – 1
Effective APR is calculated by considering compounded interest rate plus other lending costs.
Once you have all the required elements to calculate EMI:
EMI = P x R x (1+R)N / (1+R)N -1
P = loan amount
R = interest calculated every month
N = term of the loan in months
Here is an example for you. If, your loan amount is ₹1,00,000, Rate of interest is 9% and term is 2 years, here is a calculation:
To calculate, we need to start with rate of interest:
R = 9/12/100 = 0.0075
Now, let’s fit in the numbers in the formula:
EMI = 1,00,000 x 0.0075 x {(1+0.0075)24 / (1+0.0075)24 -1}
EMI = ₹4,568
There are several websites including the banks and NBFCs that have a loan calculator. You can use the same for calculating EMI free of cost. You just need to enter loan amount, tenure in year or months as specified and interest rate. An automated function will calculate MSME loan’s interest rate for you.
You can also visit the Business Loans section on Tata nexarc and use the EMI loan calculator to calculate the details. These are unsecured business loans, i.e., collateral-free loans, which are offered based on the creditworthiness of the borrower and the financial health of the business, with minimum paperwork. The process is online, and you can get a loan offer in as less as 5 minutes.
Things to check on business loans interest rates
- Do not forget to compare lenders and their offerings. Do not make a decision only on the basis of interest rate.
- Along with checking various banks, also check your eligibility for various loan schemes announced by the central government and respective state government. In order to encourage the MSME sector, the government has rolled out various schemes. Usually, these schemes offer MSME loan interest rate subsidy.
- The government has launched PSBLoansin59Minutes initiative. Business owners can visit the portal to find out interest rate of MSME loan at PSBLoansin59Minutes.
- Banks have separate loan schemes for women entrepreneurs, professionals such as doctors, and also industry specific schemes like loan for agricultural MSME, hospitality, retail, etc. The interest rate varies for these loans. Hence, business owners should also enquire about various schemes that bank has rolled out to obtain lowest interest rate on MSME loan.
Pradeep a SEO professional and passionate content writer who loves writing on various topics with 5 years of experience. At Tata nexarc, it has been 4 years since he is helping MSMEs to know the business challenges deeper and strategies to solve those. While not writing, he loves reading about digital marketing to hone his skills for business growth.
