Creating a bankable future for MSMEs
Accurate information about the borrower—a critical input for decision-making by banks in the lending process—is not easily forthcoming in the case of MSMEs, as the sheer ticket size of SME lending makes it non-viable for banks to invest in developing information systems about MSME borrowers. This leads to banks curtailing the extent of lending even when MSMEs are willing to pay a fair risk-adjusted cost of capital.
Another issue is that of granularity. Granularity arises from a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks.
The consequence is a tightening of credit terms, or an increase in prices, or both. From the borrower’s perspective, this leads to an outcome where the bank is over-pricing good risks and under-pricing bad risks. It is difficult for individual banks to develop adequate expertise in MSME lending-risk assessment exercises, which leads to problem of granularity.
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