By getting NBFCs to play a greater role, using technology to make the credit process easier and addressing NPAs in the SME sector and Budget 2018-19 has the makings of bridging that gap.
As bank credit to micro, small and medium enterprises shrink, the government has decided to get innovative by getting Non-Bank Finance Companies (NBFCs) and the burgeoning fintech industry to play a larger role in financing. However, NPAs in the MSME sector would also now undergo greater scrutiny.
“Non-Bank Finance Companies (NBFCs) stepped up financing of MSMEs after demonetization. NBFCs can be a very powerful vehicle for delivering loans under MUDRA. Refinancing policy and eligibility criteria set by MUDRABSE 0.00 % will be reviewed for better refinancing of NBFCs,” said Finance Minister Arun Jaitley while presenting the Union Budget for 2018-19.
Jaitley added that the, “Use of Fintech in financing space will help the growth of MSMEs. A group in the Ministry of Finance is examining the policy and institutional development measures needed for creating the right environment for Fintech companies to grow in India.”
Jaitley’s statement calls for greater scrutiny.
If we look at the NBFC segment first, it specialises in catering to sector specific financial needs covering retail; consumer and vehicle loans; micro, small and medium enterprises (MSMEs) and micro finance among others.
If we look at growth of the sector across sectoral deployment, retail credit increased at the highest pace on account of consumer durables and credit card receivables. This was followed by services and industry. On the other hand, credit to agriculture and allied activities contracted mainly because of demonetisation .
However, what should be noteworthy is that, “Credit to the micro and small segments in both industry and services sectors displayed robust growth during 2016-17 reflecting the transient impact of demonetization,” said the RBI.
The Central bank has also played a proactive role when it comes to the Fintech sector. It has recently come up with a regulation for the peer-to-peer lending sector by classifying it as an NBFC. “Regulations governing NBFCs are being increasingly harmonised with the banking sector, while encouraging them to focus on specialised areas as evidenced by the recent notifications for setting up two new types of NBFCs by the Reserve Bank – Account Aggregator and Peer-to-Peer Lending Platform,” said the Central Bank.
With the Finance Minister now talking about using the 12 types of NBFCs in the country to deliver loans under MUDRA, credit to MSME should become better and easier.
Jaitly also laid out a roadmap to use data generated by the Goods and Services Tax (GST) to enhance credit availability to the SME sector.
“It is proposed to onboard public sector banks and corporates on Trade Electronic Receivable Discounting System (TReDS) platform and link this with GSTN. Online loan sanctioning facility for MSMEs will be revamped for prompt decision making by the banks. Government will soon announce measures for effectively addressing non-performing assets and stressed accounts of MSMEs. This will enable larger financing of MSMEs and also considerably ease cash flow challenges faced by them,” said Jaitley.
GST and its underpinning, the GSTN, has thrown up valuable insights about the hitherto data scarce SME segment. This year’s Economic Survey had an entire chapter dedicated to unexpected benefits of GST, with the Survey stating that, “almost unnoticed is its one enormous benefit: it will create a vast repository of information, which will enlarge and surely alter our understanding of India’s economy. Making credit easily available to SMEs and allowing Banks to make informed decisions on extending credit will surely be one of them.
“It is heartening that the FM, in his budget speech, has acknowledged the need for online loan sanctioning for MSMEs. Government’s decision to target disbursal of Rs 3 lakh crore under the Mudra Yojana and to encourage credit-access to women SHGs can provide a huge boost to the Indian economy, if done right. We are hopeful that the government will invest through registered P2P Lending platforms to directly fund or co-fund MSMEs, NTCs and women entrepreneurs – the very backbone of the Indian social and economic ecosystem,” says Co-founder & CEO, Faircent.com, Rajat Gandhi.
The other part of Finance Minister’s statement regarding NPAs in also worth taking a look. While the role of big corporate and their contribution to NPAs have been well chronicled, RBI data shows micro and small enterprises (MSEs) NPAs rose to reach 8.4 % in March 2017 while retail loans and the real estate sectors continued to record moderate NPAs.
Similarly, RBI says during the year, NBFCs faced some deterioration in their asset quality, mainly on account of the sluggishness in industrial activity. Both their gross non-performing assets (GNPAs) ratio and net non-performing assets (NNPAs) ratio increased during 2016-17. “The recent spike in these ratios also reflects the revision in the recognition norms of NPAs being implemented in a phased manner beginning 2015-16,” says RBI.
At end-March 2017, there were 11,522 NBFCs registered with the Reserve Bank, a number that is only bound to increase with fintech sectors like P2P being clubbed in the segment. The Economic Survey has revealed that the amount of credit or loans disbursed by banks amounted to Rs 26,041 billion as on November 2017, but 82.6% of this was cornered by large enterprises.
For millions of SMEs in the country, banks only lent out 17.4 % of the total credit. By getting NBFCs to play a greater role, using technology to make the credit process easier and addressing NPAs in the SME sector and Budget 2018-19 has the makings of bridging that gap.