Budget 2018: While digital lending is a nascent industry, a strong push from the government and the RBI on accepting new technologies and enforcing new age repayment architecture can revolutionise the financial services landscape for MSMEs in India. Here is a compilation of recommendations and suggestions by the Digital Lenders Association of India (DLAI) for Finance Minister Arun Jaitley ahead of the Union Budget 2018.
1. Allow a lower MHP for servicing short-term needs of MSMEs: As per the RBI guidelines, term loans up to 2 years need to be held on the originators’ balance sheet for a minimum of 3 months before they are eligible for securitization. However, MSMEs often require working capital for a short term. Digital lenders are in a position to service such requirements. But the minimum holding norms effectively make them ineligible for securitisation. Relaxing the MHP requirement for MSME loans less than Rs 25 lakh will help lenders broaden MSMEs’ access to credit. In order to ensure more “skin in the game” for lenders, a lower MHP may be allowed with a higher MRR.
2. Raise rate caps under MUDRA scheme: The RBI currently has capped the final rate that can be charged above the refinance rate offered by MUDRA at 3% for banks, 6% for NBFCs and 10%-12% for MFIs, depending on portfolio size. Since most of the new lenders incur high opex, this cap should be increased in the Budget 2018 to 10-12% in line with MFIs, for loans up to Rs 5 lakhs, and 8-10% for loans from Rs 5-25 lakh value.
3. Extend the SIDBI net: SIDBI refinances NBFCs that have been profitable for 3 years due to which several innovative digital lenders are unable to work with SIDBI. SIDBI’s refinancing program should be extended to innovative start-up lenders, subject to exposure limits, as well as made available for smaller ticket unsecured loans.
4. Make P2P platforms more attractive: While the new guidelines were a welcome step in recognising the growing influence of P2P lending platforms, the regulations have also restricted the reach of these platforms. Caps on the amount that can be invested and borrowed on the P2P platforms are restricting these platforms. Globally the amount of money that is invested in P2P platforms is defined as a % of net worth of potential lenders. A cap of 5% of net worth for lenders and a maximum individual loan amount of Rs 25 lakh for the borrowers would make these platforms attractive for both lender and borrower. Also, P2P platforms should be allowed to offer credit enhancement backed by a sufficient Capital Adequacy Ratio in order to ensure that these guarantees can be met. Finally, AIFs and corporates should be allowed to invest through P2P platforms.
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5. Expand access to MSMEs: With the biggest push for digitization coming from the Central government, it should be followed up by making credit accessible to MSMEs on a massive scale. The government may embed financing linkage with digital lending platforms and introduce incentives for various programs (e.g. textile/footwear program), and allow lender access to various ecosystems like eProcurement Portal and Army Canteen Suppliers (DGSND) to finance a wide range of suppliers.
6. Introduce PSU Banks turndown program: PSU banks should be mandated to pass on all the leads that have been rejected by them for various reasons to digital lenders. Since the lenders have different means of underwriting, there could be a potential partnership that would allow MSMEs and retail consumers access to funds.
7. Raise eKYC-based lending limit: The cap for lending through OTP based eKYC should be increased from Rs 60,000 to Rs 5 lakh. This will allow lenders to make the entire experience of borrowing small loan amounts a hassle-free experience. The eKYC should also be extended to cash credit lines, thereby expanding access to working capital for MSMEs.
8. Promote eSign: Currently digital lenders face a lot of resistance to eSign (on digital loan agreements) during recovery process, with courts asking for wet signatures on physical loan agreements or police asking for a hard copy to file Section 138. An express notification from the Law Ministry will go a long way in strengthening legal infrastructure around digital lending agreements and backing paperless lending.
9. Mandate eMandate: The current adoption of e-Mandate is largely restricted to a few private and public sector banks. All scheduled banks should be mandated to support eMandates. Also, it takes up to 2 days to register an eMandate. A faster turnaround time will help lenders push money out of the door with the knowledge of having registered mandate in their hand. Allowing API based eMandates will help accelerate the process. Also, eMandate registration should be extended to Business Accounts (including Current Accounts) and Joint Accounts, as it will enable more MSME and Consumer lending, as most borrowers tend to repay from their current or joint personal accounts.
10. Increase the flow of data for lending: With hundreds of thousands of data points available today, access to some of these could help lenders underwrite borrowers and extend the access to credit for a larger section of the population. Some of the steps recommended would be sending utility and mobile payment records to bureaus, providing open API access to the GSTIN database to verify the authenticity of financial records and to banks to directly retrieve a borrower’s transaction data.
(By the Digital Lenders Association of India)