By Irfan Mohammed and Arjun Sood
Credit and Finance for MSMEs: Micro, Small, and Medium Enterprises are a critical instrument in India’s growth trajectory. As per the National Sample Survey’s (NSS) 73rd round, the MSME sector has created 11.10 crore jobs and has contributed a whopping 31 per cent to the country’s overall GDP. The sector is poised to grow even more with a strong push from the Government’s Make in India initiative, favorable regulations, shifting global supply chains, and the increasing interest of global investors (FDI) to invest in India. The confluence of all these factors will aid the growth of MSMEs in India and directly contribute to India’s vision of a $5 trillion economy.
What remains one of the biggest roadblocks in the growth of the sector, however, is the lack of credit accessibility. As per reports, there is an addressable credit demand of Rs 40-45 trillion from the MSME sector against which only Rs 20 trillion is available through the formal banking system. While the government and the RBI have collectively brought several structural reforms and regulations to accelerate credit to the MSME sector, the gap remains high.
The emergence of the co-lending model (CLM) in India for priority sector lending (PSL) is a welcome development in bridging this gap and re-shaping the MSME credit industry. In the co-lending setup, banks and NBFCs can disburse joint loans to end borrowers. Banks can leverage the partnerships to build a scalable PSL-compliant retail portfolio and extend loans to MSMEs. NBFCs, on the other hand, have distribution networks in areas where the presence of banks is minimal, and can target customer segments that are creditworthy but not able to access credit from the formal banking ecosystem. NBFCs specialize in underwriting MSMEs using assessed income and a deep knowledge of the local ecosystem, are cost-efficient in collections, and have sustained low delinquency numbers.
Role of technology
The increased adoption of technology and the formalization of traditional sectors have led financial institutions to rethink their approach when it comes to servicing the MSME space. Co-lending has emerged as one of the most important focus areas in recent years, forging collaboration between banks and fintechs. Co-lending partnerships have been a win-win for all stakeholders and have helped unlock a dormant pool of capital. Access to credit has become affordable and more accessible for end consumers. This unique arrangement has the potential to present massive opportunities in the future, unlocking a credit flow of more than $10 billion in the next 24-36 months.
Technology plays a critical role in accelerating the process of bringing new MSMEs into the formal financial ecosystem. New-age NBFCs and fintechs are using the latest technology, data analytics, and algorithms to onboard, underwrite, and service customers across the country. Meanwhile, traditional banks and NBFCs are investing in technology upgradation and automation. Both factors are leading to the digitization of processes in retail credit offering at a never-seen-before speed.
A platform-led digital co-lending partnership between two regulated entities creates a powerful information-sharing framework that allows both partners to securely and seamlessly exchange critical data.
This ongoing and real-time information exchange empowers the partners to identify, assess, and satisfy borrower needs accurately and quickly, backed by a robust API integration layer in the backend. Furthermore, technology-enabled co-lending ensures that the entire process is fully automated starting from the application step to the disbursal stage. It improves the turnaround time of these processes, thereby bringing in higher efficiency. With the advent of technology and B2B platforms, banks and NBFCs can now have a completely digital experience of co-creating a partnership. Processes such as the discovery of new partners, defining a credit policy, defining the processes, loan allocation, data and document transfer, fund transfer, portfolio management, and collections are all digitized. With the data flow and loan journey being digital, reconciliation, invoicing and accounting becomes seamless, enabling MSMEs to experience a transparent and accountable procedure.
Given the role of MSMEs in driving national economic growth, the collaborative model between new-age digital lenders and traditional financial institutions can help bridge the credit gap, and bring micro and small firms within the ambit of the formal financial ecosystem.
Irfan Mohammed is the Chief Business Officer of Financial Services at Yubi and Arjun Sood is the Deputy Vice President at Yubi Co.Lend. Views expressed are the authors’ own.