Over the last two years, sectors such as ed-tech, pharmaceuticals, e-commerce witnessed exponential growth, but MSMEs were left high and dry.
The Micro Small and Medium Enterprises (MSMEs) sector plays a crucial role in enhancing and ensuring India’s socio-economic development. The sector has gained significant importance due to its contribution to the country’s Gross Domestic Product (GDP) and exports. A survey by the International Labour Organisation indicates that MSMEs account for more than 70% of global employment and 50% of GDP.
However, it was one of the sectors impacted by the Covid-19 pandemic and the resultant lockdowns, capital crunch, high risk perception by banks, etc., in India. Further, the protracted nature of the pandemic has resulted in global slowdown and all-time high inflation rates.
Over the last two years, sectors such as ed-tech, pharmaceuticals, e-commerce witnessed exponential growth, but MSMEs were left high and dry. About 67% of MSMEs in India were temporarily shut for three months or more in FY21 and more than half of all establishments in the sector saw a decline of over 25% in revenues.
As the pandemic worsened, it became clear that the MSME sector would require a helping hand to survive. The Reserve Bank of India (RBI), in order to cushion the impact of the pandemic on the vulnerable sections of the society, came up with a policy that facilitates collaboration between banks and registered non-banking financial companies (NBFCs) to provide funds to the priority sector at affordable cost. The idea is to improve flow of credit to the unserved and underserved sectors of the economy, benefitting from the lower cost of funds from banks and greater reach of NBFCs.
This model provides for either the banks to mandatorily take their share in the loans originated by the NBFCs in their books (Non-Discretionary Model) or retain the discretion to reject certain loans after their due diligence, prior to taking the loans in their books (Discretionary Model). The key difference between the Discretionary Model and Non-Discretionary Model is that the participation of banks under the Non-Discretionary Model is upfront (i.e., at the time of origination of the loan). However, under the Discretionary Model, even after origination of loans by the NBFC, banks have the right to reject loans after undertaking due diligence.
(BOB) has recently launched an end-to-end digital platform in collaboration with Paisalo Digital Limited, a leading NBFC for deploying around INR 10,000 crore for the benefit of the country’s micro, small and medium enterprises (MSMEs) and women entrepreneurs. This is a commendable step by BOB and will definitely pave the way for other banks and NBFCs to give life to the co-lending policy of the RBI. In fact, other banks and NBFCs are already in the process of developing similar digital platforms and engaging IT vendors for providing technology solutions for this model.
The co-lending model has the potential to bring about a significant change in the priority sector. Implementation of this model in the right spirit will be key. Wider customer reach and integration of technology of NBFCs such that the end users at remote places are able to take advantage of the scheme, combined with the robust financial backing of large institutions may transform the lending and borrowing market in the priority sector. The regulator is backing the proper implementation of this scheme by banks as banks may claim priority sector status in respect of their share of credit while adhering to the specified conditions. This policy reflects the endeavour of the RBI, banks and NBFCs to drive financial inclusion, by providing tailor-made and affordable financial solutions at the grassroot level. This bodes well for accelerating the country’s overall economic development as well. If implemented in the manner envisaged by the RBI, the co-lending model may just prove to be the catalyst the industry was looking for to uplift the priority sector from its economic hardships.
(Subhojit Sadhu is Partner; Gautam Saran, Principal Associate; and Aayushi Bindal, Associate at Cyril Amarchand Mangaldas)