Credit and finance for MSMEs: Technology and data intertwined to provide formal lenders with necessary insights into the performance of a business is beginning to make an impact in lending to MSMEs. Non-banking financial companies (NBFCs) and particularly banks are gradually coming to terms with the fact that collateral or balance sheet-based lending is turning out to be a flawed model in lending as emerging businesses neither have enough assets to pledge nor they have a strong balance sheet, unlike large businesses who probably have both.
Hence, real-time data around revenue, business costs, manpower, past growth, compliance, losses, export-import, and more is proving to be a great surrogate for balance sheets and collaterals to meet credit needs of the sector that accounts for around 30 per cent of the country’s gross domestic product.
Data play
A panel of experts at the second edition of the ScaleUp Summit organised by the Financial Express Digital last month emphasized on how payments or cash flow data is driving this change in the small business lending market that can potentially reach $3 trillion by next fiscal, according to Chief Economic Advisor, V Anantha Nageswaran.
Also read: What does cash flow-based lending mean for the future of underwriting credit for MSMEs
MSME lending NBFC Ambit Finvest, for instance, pulls the data around GST, revenue, profitability, profit and loss, etc., to understand the risk-return involved in lending to a small business. “It is about sucking data through multiple sources, processing it from a technology framework, and superimposing it with rules which have a lot of experiential and anecdotal history,” said Vikrant Narang, Deputy CEO, Ambit Finvest.
For example, anecdotally, the chances of a 25-year-old borrower defaulting are more than a 42-year-old borrower. Likewise, if a 42-year-old person is taking a loan for the first time in business, it is potentially a fraud case because typically small business entrepreneurs begin with credit and then grow to a particular stage, according to Narang.
Moreover, the new-age lenders have made lending to businesses end-to-end digital — right from origination to disbursement and repayment. For example, digital lender U GRO Capital. “With data and technology coming into play, right from collecting data, taking decisions and disbursements, everything can be completely automated. I can say that 95 per cent of our total business in a year is completely digitised including onboarding and loan disbursal,” said Prasanna Madhyasta, EVP & Business Head, Supply Chain Finance, U GRO Capital.
Importantly, the Reserve Bank of India
“The addition of GSTN by the RBI has given us more data access to customise and structure loans better as collateral-free loans are always linked to cash flow-based underwriting,” added Madhyasta.
This has worked well for payment companies also which enable loans to merchants who use their payment services. For instance, merchant payment company BharatPe provides loans up to Rs 7 lakh without any collateral. The documents required are basic details along with KYC information including the PAN Card, address proof, and a photograph. The loan amount to the merchant depends on the payments accepted. In other words, the more payments a merchant accepts using BharatPe QR code, the higher amount of loan he/she can get.
The idea of payment volume to decide the loan amount came out from a learning for BharatPe. “Merchants who were accepting maximum volume of payments were business owners who were not in the formal segment of MSME like shop owners, kiranas etc., due to lack of documentation, lack of proper business structure, invoicing, tax filing etc. While they were very well banked because their UPI transactions were linked to their bank accounts, they were underserved from the credit access perspective,” said Dhruv Dhanraj Bahl, Head, Merchant Lending, BharatPe.
The information around the flow of money told BharatPe multiple things about merchants such as their location, frequency of customers they get, repeat rate of customers, new customers, etc., to determine the profile of these small business owners. “Through this, we were able to unlock a lot of credit access for them. So the takeaway from here was that with payments becoming democratic and free, how could we use them from a lending perspective,” added Bahl.
Need for formalisation
While real-time business data is making credit accessible to small businesses, the government’s focus is on bringing more and more enterprises operating informally into the formal fold of the economy. Business registration and registration as a micro enterprise would further help entrepreneurs with benefits offered by the government such as collateral-free credit under the Credit Guarantee scheme.
“A large number of enterprises are not part of the formal economy. However, the technological intervention happening in the MSME sector could be seen as the Aadhaar moment for the formalisation of the sector, wherein we along with the government are trying to onboard informal MSMEs into the formal architecture to provide them with benefits of the formal system. Credit is one such benefit,” said Subhransu Sekhar Acharya, Chief General Manager, Small Industries Development Bank of India (SIDBI).
Currently, 1.27 crore MSMEs are registered on the government’s MSME registration portal Udyam, of which 1.21 crore are micro units, making them eligible for various schemes of the MSME ministry and SIDBI.