Financial services industry has been an early user of the JAM infrastructure. In fact, the cost and scale impact of JAM is already visible in small-ticket sized MSME loans.
Small businesses have been recognized as engines of growth across many countries. In an environment where public investments can no longer power growth and job creation, and where larger corporates find themselves in middle of recurring global volatility, small businesses remain the stable gears of most economies. For developing economies, they also continue to be the dominant engine of job creation.
While the growth of small and mid-sized businesses (MSMEs) is recognized as an important lever for India’s continued development, policy and financing constraints continue to inhibit the growth of this sector. The upcoming budget is a great opportunity to unshackle the MSMEs, and help them bounce back from what has been a year of massive changes in the business environment for them.
Over the past few years, banking credit to the MSME sector has actually shrunk, while the extent of credit losses continues to expand. This point to a clear need for innovation in the MSME financing sector. The emergence of technology-led lending platforms provides a unique opportunity to transform credit delivery to MSMEs. In fact, despite its young pedigree, the digital lending industry has already enabled credit to over 30,000 MSMEs. With the right policy support, the potential to address over a million MSMEs over next 3 years is in sight.
Expanding Sources of Funding
Much of the credit demand in the MSME sector is on account of working capital – these tend to be short tenure loans. Current the policy environment around securitization actually makes shorter tenure loans harder to finance. This is due to the minimum holding period norms applicable to securitization. While digital lending technologies enable shorter tenure working capital loans, a commensurate reduction in minimum holding period (MHP) will help unlock the potential of such products.
Similarly, such short tenure and low ticket loans also carry a smaller revenue opportunity while the operating costs are similar to larger loans. Government initiatives like MUDRA impose margin caps on lenders that are more attuned to larger and longer-tenure loans. Similar to the MFI industry, graded margin caps on MSME lending will allow for greater flow of credit to MSMEs – thus loans up to Rs 5 lakh could have relaxed margin caps of 10-12%, and those up to Rs 25 lakh at 8-10%.
Finally, most of the digital lenders are relatively younger platforms, and hence often do not qualify for refinancing support from agencies such as SIDBI. Relaxation in qualification norms for such MSME platforms will enable their potential to be realized, in turn expanding access to credit to millions of MSMEs.
Establishing Financial Linkages to Markets
Over the past few years, the government has successfully enabled market linkages to MSMEs. Be it through specific programs to promote industries like footwear and leather, or through setting up procurement platforms such as Government e-Marketplace. However, MSMEs are unable to utilize the complete expansion opportunities available through such programs due to lack of working capital finance. There is a ready opportunity for the Government to enable access to financing through the same market-linkage programs, by integrating these programs with digital lenders. Such linkages can easily be enabled using existing connectors such as Udyami Mitra.
Credit to MSMEs has also been affected due to risk aversion amongst many of the public sector banks. While the PSBs will correct these fluctuations over time, immediate boost can be provided by requiring PSBs to connect the turned-down MSMEs, which approach them for credit, to digital lending platforms. This will allow MSMEs which are not able to avail bank credit to immediately get access to alternative options.
Realizing Paperless and Presenceless Credit
Financial services industry has been an early user of the JAM (Jandhan, Aadhaar, Mobile) infrastructure. In fact, the cost and scale impact of JAM is already visible in small-ticket sized MSME loans. However, there is still significant friction in the enabling ecosystem around these technologies.
Some of the key reforms in streamlining usage of JAM infrastructure include extension of mobile based eKYC to loans beyond Rs 60,000 (clearly too small for most small businesses), express notifications clarifying validity of electronic signatures to loan contracts, and requiring a time-bound rollout of electronic payment mandates by all scheduled banks. While each of these is a small step, when taken together, they would remove the key barriers to remote delivery of credit.
Unlocking Customer Data
Rapid deployment of public infrastructure over past few years has created massive repository of information, which can be used to enable credit. This data needs to be unlocked and put in hands of customers who ultimately own this information, and easy tools need to be provided for them to use this data to gain access to services. Such data includes utility and telecom data, banking transaction data, and direct and indirect tax data, amongst others. Enabling API-based access to such data, through a mechanism based around suitable use and customer consent, will allow MSMEs to access credit and power their dreams.
Digital Lending is a movement whose time has come. Over the past few years, the infrastructure for this change has also been laid. As MSMEs constantly resolve their position in the Indian economy against the support that has been made available to them, the timing is right to provide them with a much needed boost with what they rightfully deserve.
The writer is Cofounder and CEO of Indifi – a technology and data platform to enable small business financing.