Access to formal sources of credit has been a perennial issue for small businesses with large number of entrepreneurs being dependant on the informal sources to fund their business. Within the sources of institutional credit, businesses largely relied on NBFC’s to provide funding. However, the recent crisis in the NDFC sector has led to a shortfall in the supply of credit. In a chat with ET Digital, Union Bank of India (UBI), Chairman & Managing Director, Rajkiran Rai G, talks about how his bank is playing an active role in MSME financing and how entrepreneurs can count on banks to meet their financial needs. Edited excerpts:
Economic Times (ET): Availability of credit for SMEs has been a longstanding issue for the sector? According to you, what are some of the ways that can ease the accessibility of loans?
Rajkiran Rai G (RRG): Micro, small & medium enterprises (MSMEs) are nurseries for entrepreneurship and school of decentralised innovation. Contrary to perceptions, overall fund flow to MSMEs have grown at a faster pace during last five years with the share of MSME credit as a ratio to GDP rising 4 percentage points to around 14% presently. This fact doesn’t undermine need for further credit penetration, as still a bulk of MSMEs rely on informal sources for meeting credit needs. The problem is more acute at the entry level entrepreneurship. The conventional ways of assessing credit worthiness does a lot of disservice to millions of entrepreneurs who do not have proper records, say audited financials, tax returns, clean collaterals, and likewise. While formalisation has expedited with digitalisation and goods & service tax regime, the deterrence in accessing institutional credit, both real and psychological, remain. The elevated risk perception does no good to either entrepreneurs or lenders.
Union Bank follows the mantra of ‘Adequate Credit at Appropriate Time’ for MSMEs. We have worked to enhance access and improve the service experience through dedicated branches, equipped with skilled manpower and technology support, and centralised credit underwriting to enhance quality and reduce turnaround time (TAT) significantly. There are dedicated 65 MSME Focused Branches (MFBs) and 259 Business Banking Branches (BBBs), exclusively focussing on extending finance and other services to MSME Sector. We have centralized processing centres, namely SARAL (Systematic Appraisal and Risk Assessment of Loan) for speedier and standardised underwriting of credit to MSMEs. Presently, 48 such SARALs are operational Pan India at major centres. Catering credit needs of rural non-farm economy holistically, the Bank has launched 49 Union Samriddhi Kendra (USK) based on a hub-spoke model, with decision making digitally enabled. All this structural transformation has helped build a quality MSME portfolio with better customer satisfaction.
ET: What are the solutions that your Bank offers for SMEs?
RRG: Union Bank has been a leading banking solution provider for SMEs. The Bank has various tailor made MSME products with best-in-class features. To give you an example, our ‘Union Trade’ product makes an innovative mix of short-term and term loan facility for traders. The ‘Union GST Input Credit Scheme’ is a pioneering initiative in helping address working capital needs of entrepreneurs under the GST regime. Likewise, ‘Union Liqui Property’ aims at quick credit enablement of enterprises seeking short term credit facility. Our ‘Union Nari Shakti’ aims at meeting credit needs of women entrepreneurs. We are an active participant on the psbloansin59min.com platform and seen many quality MSME leads coming to us. Besides, 35 cluster based products, appreciating the geographical distinction, has been designed catering to the specific set requirement of MSME in that particular cluster.
ET: There are many schemes, especially targeted at the MSME sector like the Mudra, CGTMSE etc. What are your views on the performance of these schemes and any suggestions on making it better?
RRG: The MSMEs are vehicles for generating jobs, sustaining livelihoods and contribute a substantial share of manufacturing value added. The development of the MSME sector is crucial in realising India’s aspiration of becoming $5 trillion economy over next five years. Government is seized of their importance as evident in its extensive support for the MSMEs through schemes like Mudra, CGTMSE, Stand-up India and Start-up India.
Performance under the various MSME schemes, especially MUDRA, which addresses credit needs of entrepreneurs at the bottom of the pyramid, is very heartening. There was a credit flow of Rs 8.9 lakh crore under MUDRA scheme during last four financial years, providing credit access to 18.25 crore micro loan beneficiaries in sub Rs 10 lakh basket. Of the issues about quality, seen from the overall portfolio perspective, stress still remains below aggregate portfolio, which is medium & large corporate heavy for banks. The MSME segment is highly remunerative as interest spreads are highest here. However, lenders need to invest in better credit-underwriting, skilling manpower, and leveraging technology, for example, pooling emerging digital footprints of MSMEs to appropriately price the risk-reward therein.
ET: The use of technology is expected to be a great enabler in financial inclusion and reaching out to a new set of borrowers. What is the Bank’s experience in leveraging technology and your plans for the future?
RRG: Union Bank has always been the frontrunner when it comes to adoption of technology. Our state-of-art lending automation solution (LAS) enables holistic evaluation of credit proposals, while the data analytics help in building key insights on usage of facilities. More recently, the Bank empowered the customers to apply for Mudra loan online as well as an online application facility for MSMEs is also available. The Psbloansin59minutes.com, the initiative taken by the Government of India, is also one of the products in which our Bank has excelled and the performance speaks for itself. We are also pioneers in TReDS (online bill discounting platform) where MSMEs are financed in real contactless mechanism. We are in fact one of the leading banks in the industry as far as exposure in TReDS is concerned.
ET: Another issue is the availability of reliable data about a borrower to make a lending decision. What steps is your bank taking to ensure you have a more robust data/information funnel to make informed decisions?
RRG: Union Bank is using the most advanced version of banking software, i.e., Finacle 10, which has robust capacity to store data/information for a large number of customers. The Bank has been a pioneer in the public sector space in setting up state-of-art business analytics unit, with advance analytics capabilities, leveraging machine learning and artificial intelligence. It has helped in identifying potential opportunities by analysing the transaction data, their digital footprints, etc. The Bank has developed a model on stress identification, which reads stress signals much ahead of an account shows financial vulnerabilities and slips into Special Mention Account (SMA) and turns non-performing. It has helped us address incipient stress in time and enable clients to focus on gainful opportunities. We are also availing services of various credit information companies before taking any decision about lending for any borrower.
What is the amount of funds that the Bank can lend and is there an amount within this that has been earmarked for SMEs?
RRG: The Bank has invested ahead of the curve in building capacities and capabilities to tap into opportunities. We are having surplus funds at the moment; capital is not a constraint anymore. We are looking for all lendable opportunities; especially MSMEs which are major constituents of our focus RAM sectors (Retail, Agriculture, and MSMEs) led growth strategy.
The economy is going through a challenging time and the crisis in the NBFC sector has hit small businesses hard. Can SMEs expect/look at the Union Bank of India for support?
RRG: Let us not be too affixed to credit slowdown. The crisis is transitory, the opportunity ahead is huge. Union Bank was founded to serve India’s entrepreneurial aspirations. We have been strong support in nurturing enterprise and democratising finance. As we begin our second century in service to the Nation, our commitment to the SMEs has grown firm, given their importance in India’s journey to become $5 trillion economy.