Ease of Doing Business for MSMEs: Lack of access to adequate and timely credit has been a perennial problem for MSMEs, thwarting their pace of growth. For the uninitiated, the credit gap in the MSME sector was estimated to be Rs 20-25 lakh crore, according to a report by the UK Sinha Committee constituted by the Reserve Bank of India. While banks have been the primary source of raising debt, however, the process of raising bank credit has been complex for MSMEs. In contrast, new-age digital lenders have come forward to solve this problem with quick digital access to credit. This has been part of the shift the MSME ecosystem is witnessing in business finance. To dive deep into the lending scenario in the country, FEAspire (erstwhile Financial Express Online) organised the second edition of its SMEArtha event focusing on finance for small businesses on Tuesday.
Need for formalisation
To crack the problem of lack of access to credit, the first big move involves getting around 70-80 per cent of 6.3 crore MSMEs in India into the formal fold of the economy. “Formalisation of the MSMEs is of utmost importance to ensure access to credit and technology,” said Ishita Ganguli Tripathy, Additional Development Commissioner, Office of DC-MSME, Ministry of Micro, Small and Medium Enterprises in her address as the chief guest at the event.
Tripathy also noted delayed payments and lack of awareness about government schemes among major challenges. Citing the government’s delayed payment monitoring portal MSME Samadhan, she highlighted nearly 30,000 applications for delayed payments were yet to be viewed by Micro and Small Enterprises Facilitation Councils (MSEFCs), which are operated by state governments, and 31,000 cases were yet to reach finality. The additional secretary also touched upon the share of women entrepreneurs, which is only 18 per cent, in the MSME sector, and the upcoming MSME policy.
“We don’t have a national policy for MSMEs yet to help address the problems faced by the sector. But, the department of MSME is waiting for approval on the (proposed) national policy drafted after a series of consultations with stakeholders,” said Tripathy.
Also, the government is in the final stage of integrating Udyam, e-Shram, National Career Service (NCS) and Aatmanirbhar Skilled Employee Employer Mapping (ASEEM) portals to create a database of both job seekers and providers. While all other portals have been integrated, ASEEM and Udyam are expected to be integrated by the end of September, she added.
Innovation in lending
The chief guest’s address was followed by a panel discussion with banks and non-banking financial companies (NBFCs) on innovation in lending to MSMEs. The experts echoed the government’s aim to formalise MSMEs for access to credit. They also deliberated upon initiatives taken by the lending institutions to minimize the need for collaterals that has been limiting the credit flow to small businesses.
“Despite the resilience MSMEs showed during demonetisation, GST (implementation) and Covid, it is a pain that enterprises outside the ambit of the formal sector face a credit crunch,” noted Anubha Prasad, General Manager, SIDBI. In line with the need for formalisation, SIDBI had launched a project with the MSME ministry and stakeholders of the MSME sector called the MSME Formalisation Project to “create designated agencies to handhold smaller NBFCs through a navigation model to help the businesses outside the ambit of GST and PAN.”
Nirmit Ved, General Manager at Export-Import Bank of India (Exim Bank) informed about its Ubharte Sitaare scheme in collaboration with SIDBI to identify small businesses with export capacity and help them leverage their resources to become exporters. “We have financed 30-35 MSMEs with turnover of around Rs 5-7 crore and helped them with technology like drones under the scheme to get into the export ecosystem.”
Dhrubashish Bhattacharya, Head, MSME Business, Bank of Baroda highlighted the loan size ranging from Rs 10,000 to Rs 500 crore given to enterprises for growth. “We want our customers to grow from micro to mid and large corporates and not just remain MSMEs, said Bhattacharya. On the other hand, the chief executive officer of financial guarantee solutions provider Eqaro Surety, Vikash Khandelwal said there would not be a requirement for collateral if a business has ‘capability’. He noted that a business needs more than just loans to thrive and prosper.
“As businesses move towards becoming larger from micro, they go to multiple banking partners to loan out money. Businesses that have an understanding of financial discipline go on to become fairly large businesses, said Sangram Singh, President of Commercial Banking Coverage Group (CBG), Axis Bank. He added that while entrepreneurs have to be optimistic, bankers have to be realistic on their part.
In fact, according to Shachindra Nath, Vice Chairman and Managing Director, U GRO Capital, “The only three things a lender needs to calculate (in lending to MSMEs) are the intent, eligibility and ability of MSMEs to repay.”
The session was moderated by Jyoti Prakash Gadia, Managing Director of the financial advisory firm Resurgent India. He expressed concern that despite the first bank in India getting nationalised in 1969, borrowers today still do not know if they would be able to avail loan from a bank or not.
The panel discussion was followed by a masterclass on ‘How can TReDS help MSMEs manage their cash flows’ by Kailashkumar Varodia, Chief Financial Officer of invoice discounting platform Receivables Exchange of India Ltd (RXIL). He informed that RXIL, which is one of the three TReDS platforms licensed by the RBI, helps connect buyers, sellers and financiers (of invoices) with each other. “Buyers create a link and MSME vendors have to accept the link and vice versa for transactions. Both of them have to agree to trade terms before they start a transaction,” said Varodia. RXIL has 12,031 MSME suppliers, 914 buyers including 109 central public sector enterprises, and 54 financers on its platform as of August 31.
Access to timely credit
The third session discussed the role of fintechs in providing credit to MSMEs in a timely manner. The moderator of the session and Secretary General at MSME body Federation of Indian Micro and Small & Medium Enterprises (FISME), Anil Bhardwaj noted that fintechs have an opportunity to tap the section (of the MSME sector), which has not been able to access credit from traditional (banking) platforms, as fintechs do not rely on physical collaterals. “Only 10 per cent of institutions have managed to access funds despite having bank accounts since a large number of startups do not have assets to pledge.”
Siddharth Mahnot, Co-founder and COO at online lending platform Indifi Technologies said that since every MSME is worthy of a loan, the interest rates Indifi offers range from 16 per cent to 25 per cent based on the level of risk involved. Mahnot stressed access to funds without collateral on the Indifi platform within a span of 24 to 48 hours with minimum documentation.
“We look at somebody who has already started their business and has cash flow. We assess risks and store enough information to ensure that it is not a temporary set up and more of a permanent one before lending, which is reflected by their six months’ bank statement,” said Manish Lunia, co-founder at lending platform Flexiloans.com on the due diligence undertaken on the borrower looking for credit.
Vikesh Agrawal, Chief Executive Officer and Founder of business services provider Ajva Fintech in his remarks highlighted the company’s eMSME SAARTHI portal that puts out relevant credit schemes available for borrowers according to their requirements.
Insurance adoption by MSMEs
The event concluded with a session on deliberating insurance adoption among small businesses. Pooja Yadav, Chief Product Officer, Edelweiss General Insurance said business owners don’t actively think about the risks involved in business and look at insurance as an expense item rather than a safety net (against various risks).
Raghuveer Malik, Senior Director, Head, Corporate & MSME Insurance, Policybazaar.com echoed Yadav as he pointed out how the natural ability of humans to procrastinate risks is the source of neglecting the need for insurance among small businesses. However as the credit penetration would go up, insurance penetration will go up too, he added.
However, insurance companies should reach out to the trade bodies and clusters and offer them custom-made products to build trust, said Animesh Saxena, CEO of apparel and fashion company Neetee Apparel and former President, FISME. If the clusters explain to their less-educated peers who do not understand the fine prints, they too would be able to garner trust in insurance, he said.
Sasikumar Adidamu, Chief Distribution Officer, Institutional Sales, Bajaj Allianz General Insurance in his remarks highlighted that the company is working on a platform — Prime to analyse business risk and provide an array of policy suggestions to MSMEs to choose from. The session was moderated by Neha Gupta, Managing Director and Partner, Boston Consulting Group.