Credit and finance for MSMEs: MSMEs starved of access to formal credit through traditional collateral-based financing channels are gradually warming up to the short-term alternative to no-cost EMIs in order to solve their cash flow problem. Essentially, the pay later option or business-to-business payments enable small businesses to let’s say, buy inventory, pay employees, manage day-to-day operating expenses, etc. As a result, the BNPL model has caught both lenders and borrowers attention for short-term credit and competitive interest rates that help MSMEs manage their working capital cycle on one hand and lenders in attracting more customers to their portfolio on the other hand.
The BNPL market in terms of transaction value is expected to be worth $4.9 billion in 2022 and grow at a likely compound annual growth rate (CAGR) of 32.5 per cent to become $15 billion in size by 2026, driven by increased demand for short term credit coupled with growing consumer preference for online shopping, according to a November 2022 report by data and analytics company GlobalData.
Creating Experience
According to experts at a panel discussion on how BNPL is solving MSMEs’ working capital crisis at the second edition of the ScaleUp Summit organised by Financial Express Digital last month, the growth in the BNPL model for MSME lending stems from removing friction existing in traditional lending model.
Also read: High processing fees make BNPL difficult for small businesses: Report
“BNPL helps in improving the customer experience because it has been known to be associated with fast transactions, instant approvals, short-credit limit, flexible payment options, minimal documentation, etc. So, I would associate BNPL with low friction, very good customer experience, digital journey and a way to promote credit penetration in the economy. Companies like us try to replicate the consumer-grade experience for MSMEs,” said Anubhav Jain, Co-founder and CEO of Rupifi. The company operates in the B2B payments space through its B2B BNPL and B2B checkout products and has over Rs 2,000 crore loans since its launch in 2020.
The consumer-grade experience refers to making a product intuitive enough for users to operate it with little or no training. Manish Kumar, Founder and CEO of supply chain finance platform KredX, which provides B2B BNPL solutions said that BNPL is about giving a payment experience on a credit platform instead of asking an MSME to go to a bank, furnish documents and get the overdraft or cash credit limit by the bank. “What if an MSME is not interested in going to a bank? Hence, giving a payment-like experience which is fundamentally a checkout experience is a win-win situation.”
BNPL ‘stress’
According to a report by the Reserve Bank of India (RBI) in November last year, even though the amount disbursed under BNPL loans (B2B or B2C) is only 0.73 per cent by commercial banks and 2.07 per cent by NBFCs of the total amount disbursed, the volumes are quite significant (37 per cent by banks and 11.9 per cent by NBFCs) indicating a large number of small size loans for consumption.
Keeping this in view, the report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps by RBI received feedback from stakeholders that the central bank must clearly re-define what constitutes credit so as to classify BNPL as a loan and hence bring it under regulatory coverage as BNPL has remained outside the direct RBI regulation.
Also read: Transforming Online shopping: Buy-now-pay-later to become big in e-commerce
“Currently, BNPL platforms claim that since there is no interest being charged (in BNPL loans), they are not required to book the loan on an NBFC or to report it to a credit bureau. Hence, no regulations are applicable to them. The platforms do take creative steps once a loan turns NPA, including post-facto creation of a loan on the books of NBFC,” the report had noted.
The working group had also proposed restricting balance sheet lending by digital lending apps (DLAs) only to regulated entities of the central bank or entities registered under any other law for specifically undertaking lending business, enacting a separate legislation to prevent illegal digital lending activities and treating BNPL as part of balance sheet lending, and the prohibition on unregulated entities from offering first loss default guarantee (FLDG). The central bank in its Payment Vision 2025 document presented in June last year had also noted that “this novel method shall be examined, and issuance of appropriate guidelines on payments involving BNPL shall be explored.”
Moreover, what might also be of concern to RBI is BNPL delinquencies. According to TransUnion Cibil data last year, reported by the Indian Express, delinquencies in the BNPL segment are 18.9 per cent and 10.1 per cent in the non-BNPL segment for the 60-day past due (DPD) credit. However, according to experts, the situation looks much better for both underwriting and collections as BNPL transactions for MSMEs are mostly closed-loop and end-used defined.
Jain explained, “While on the consumer side, it is still a stress as he/she who let’s say wants to buy an iPhone of Rs 1 lakh for which he will pay Rs 10,000 monthly but on the MSME side, it is only about managing cash flow to say buying Rs 20,000 inventory which he would probably sell in few weeks and pay back with the payment he gets.”
So as a platform we know the “end-use” of the capital and hence, from an underwriting perspective, it is much safer because it is based on historical data, Jain added. Also when it comes to collections, “If the MSME borrower doesn’t pay for some reason on time, there is always control on the receivables, supply, etc. So invariably there is a chance for this payment to come back. While you may still have to deploy collection teams, the effort required in collections from these borrowers is much less,” Jain said.
Cost
When it comes to the cost, BNPL B2B credit levies an interest rate of up to around 24 per cent in comparison to up to 48 per cent in the case of other short-term credit instrument credit cards. This is among the reasons for BNPL’s rise in the country. However, with the central bank’s monetary policy committee (MPC) raising the repo rate multiple times, the cost of funds for lenders has also increased.
“In every MPC meeting, the (repo) rate has gone up in 2022. Hence, it is more about the execution-based phenomenon in BNPL. So, you need to execute relentlessly for years to make sure your customer is profitable. If you do it for once and think of making money in the BNPL model, it won’t happen. Hence, from the product perspective, it is important to understand merchant subvention,” said Pankaj Bansal, Chief Business Officer, BankBazaar.