Credit and Finance for MSMEs: The proposal to allow NBFCs to extend invoice-based financing to MSMEs will boost productivity in the sector and lower their cost of borrowing as well as improve liquidity.
By Shachindra Nath
Credit and Finance for MSMEs: SME accounts for 45 per cent of industrial output and 40 per cent of the total exports in India. It generates employment for 60 million people and creates 1.3 million jobs every year. Given that a majority of India’s population lives in villages and tier-1 and tier-II cities, the SME sector has also emerged as a key factor to urbanize rural India. However, after demonetisation and implementation of GST, the sector has been suffering and an overall slowdown in the economy has broken the back of the SMEs.
The budget has tried to address the credit under-penetration in the farm sector and the MSME sector. The proposal to extend the NABARD’s refinancing window for farm loans to the MSME segment is a welcome move since it will not only improve the credit flow from NBFCs to the agricultural segment but also help NBFCs to enhance their exposure to the farm sector without impairing their asset quality. The proposal will give NBGFCs much space to expand their farm credit portfolio without stressing their balance sheets any further.
Another proposal in the Budget that augurs well for NBFCs is the reduction in the threshold limit for NBFC’s to Rs100 crore from Rs 500 crore under the provisions of SARFAESI Act. By reducing the resolution threshold, the Finance Minister has boosted the confidence among small NBFCs to take more risk by lending to MSMEs. This will put the recovery process on a fast track and also help NBFCs to resolve the non-performing loans (NPL) problem by widening the ambit of stressed assets that can be recovered. This should lead to credit delivery at a better price for small businesses.
Further, the proposal to allow NBFCs to extend invoice-based financing to MSMEs will boost productivity in the sector and lower their cost of borrowing as well as improve liquidity. Invoice financing, often called accounts receivable financing, is a type of asset-based financing solution that allows MSMEs to free up unpaid invoices. This again serves its dual purpose of freeing up working capital locked up for MSMEs. On the other hand, it will improve the asset-based financing portfolio of NBFCs in a big way, a win-win situation for both NBFCs and MSMEs.
However, the Finance Minister could have done much more by helping NBFCs to lend more to MSMEs by opening a refinancing window for MSME loans by NBFCs on the lines of the proposal to extend NABARD’s refinancing facility to NBFCs for their credit to the farm sector. Therefore, the Finance Minister will do a great service to the MSMEs and NBFCs by revisiting the proposals to improve credit flow to the farm sector and MSMEs by NBFCs before the vote on the Union Budget 2020-21 in the Parliament.
Shachindra Nath is the Executive Chairman at UGRO Capital. Views expressed are the author’s own.