The Reserve Bank of India (RBI) is working towards a formal co-origination model to give a boost to the flow of credit to the micro, small and medium enterprises (MSME) sector, S.S. Mundra, Deputy Governor, has said.
A co-origination model is something where the bank is not only financing the microfinance institution (MFI) or the Non Banking Finance Company (NBFC) for on-lending to the ultimate borrowers. Rather, both of them join and each underwrite as well as share the loan amount in an agreed percentage with all other structure put in place.
“The advantage is that it can bring the strengths of the two sectors together-MFIs have better understanding of the ground level and last mile reach and banks can supplement the resources”, Mundra said at a Bankers-Borrowers Business meet organised by Assocham here on Friday.
“In my mind, rather than simply going in for refinancing or on-lending, this co-origination can become an important way of catering to the MSME sector”.
Timely institutional credit
Mundra’s remarks are significant as it comes at a time when the MSME sector is now faced with challenges of non-availability of adequate, cheap and timely institutional credit. In the Indian economy, the MSME sector serves as the backbone to its growth story. The contribution of this sector to the overall GDP is more than 30 per cent and further accounts for nearly 45 per cent of the Indian industrial output.
However, the rate of growth of outstanding credit to MSMEs extended by all scheduled commercial banks over the last four years has declined from 28.51 per cent in 2012-13 to 19.66 per cent in 2013-14 to 12.62 per cent in 2014-15 and further to 3.83 per cent in 2015-16.
Furthermore, the outstanding credit to the MSME sector as a share of Adjusted Net Bank Credit has remained in the 17-18 per cent during the last four year period from 2012 to 2016.
As per data compiled by the RBI, outstanding credit to the MSME extended by all scheduled commercial banks increased from Rs 11,71,118.14 crore on March 31, 2015 to Rs 12,16,007.17 crore as on March 31, 2016
Mundra came up with “mantras” for bankers and borrowers. On bankers, Mundra said that it is very important for lenders to understand the life cycle of MSMEs. “Putting MSME in one bracket is a misnomer as micro enterprises and SMEs are like comparing chalk and cheese”, he said.
Mundra underscored the need for products that meets the life cycle need of MSMEs. There is also a need for strong oversight mechanism in banks to see that MSME-related policies are implemented at the operating level.
Another mantra for bankers is in respect of supporting faltering MSMEs. “Let us recognise that when we are talking about MSMEs, we are talking about entrepreneurship. Let us recognise that failure is an integral part of entrepreneurship anywhere in the world. Unfortunately failure in our system is still a stigma”, he said.
For borrowers, Mundra said that they need to understand the changing economic dynamics and impact for businesses. For micro borrowers, one has to be imaginative and one has to think about other ways of assessing their credit worthiness, he said. “If banks would continue to feel that traditional rating model that they do for micro units would be their guiding principle, then it is never going to work”, Mundra said.
On their part, SME borrowers have been raising the issue that bankers are in general not sensitive towards the needs of SME borrowers. They feel that the NPA guidelines (90 days) are too stringent and do not take cognisance of the life cycle of SMEs and delayed payment matters.