By Alok Mittal
The Covid-19 pandemic, breaking out in early 2020, has triggered an unprecedented change in the economic landscape since. The micro, small and medium enterprise (MSME) sector in India realised the full extent of its vulnerability and is yet to return to normalcy. Busineses that are still reeling from the impact of Covid-19 hold high expectations from the Union Budget 2022.
A major challenge that small businesses face today is cash-crunch and credit accessibility. The high cost of capital for non-banking financial companies (NBFCs) servicing this sector translates to a higher cost for MSME borrowers.
Most new-age fintech NBFCs continue to borrow at rates that are higher than 14-15%, which eventually makes it difficult to participate in the schemes of the government that have been already announced, and also translates into high costs—over 20% paid by MSMEs. This high rate of interest constrains the growth of these businesses, which form the backbone of the Indian economy—bear in mind, they account for 30% of India’s GDP and 45% of our manufacturing exports.
In response to the economic hardship created by Covid-19, several liquidity measures to support the MSMEs have been announced. These include the Targeted Long Term Repo Operations (TLTRO) announced by RBI, Partial Credit Guarantee Scheme (PCGS), Emergency Credit Line Guarantee Scheme (ECLGS), and the revision of the definition of MSMEs. While the headline schemes did seem quite attractive, the fine print made it very difficult for the new-age fintech NBFCs to take advantage of these.For instance, the ECLGS caps the interest rate at 9.25% for banks and 14% for NBFCs. When the cost of borrowing for fintechs/small NBFCs exceeds 14%, it is quite clear that the benefit of such a scheme could not get transmitted to the bottom of the pyramid in the MSME space.
Among the cushion schemes to support MSMSEs, the Fund of Funds scheme is yet to be operationalised.
Therefore, the upcoming Union Budget must lay down the path to pursue better implementation and transmission of the schemes already put in place.
The Small Industries Development Bank of India introduced the Special Liquidity Support (SLS) for MSME through fintech NBFCs. Such a scheme ensured operational continuity and liquidity support to MSMEs, in a bid to tide over the impact of the second wave of Covid-19.
We expect Union Budget FY23 to come up with schemes that are similar to SLS II-NBFC 2021 in order to quickly rejuvenate the economy, by coming to the aid of MSME and the emerging fintech ecosystem.
When it comes to lending to players in the MSME sector, the public sector banks (PSBss) seem to be ceding ground to private banks and NBFCs. With the drastic decline in the share of PSBs in the overall lending to the MSME sector, small businesses often fail to get loans on time, mainly due to the lack of digital footprint and sufficient documentation, a low number of years of operation, low turnover, etc. However, fintech players are changing that by making easy and affordable loans available to these underserved businesses and using data-driven models to calibrate credit risk.
Budget FY23 must recognise this and should announce measures to incentivise and strengthen support from SIDBI-like institutions and PSBs when it comes to lending to smaller NBFCs to ensure credit-flow to SMEs at lower costs of capital.
In the rebuilding phase of the economy that all stakeholders must focus on, it is imperative that access to capital for MSMEs is easy, feasible and seamless.
The financial services domain is being continually disrupted by the digital lending institutions which have significant potential when it comes to ensuring better credit penetration in India.
Given the country is veritably in the midst of a boom in digital technology adoption, the Union Budget for the coming fiscal year needs to make certain that a smooth path is carved for all such relevant measures that can ensure that the right amount of thrust is given to fund allocation with relation to new-age fintech NBFCs to meet financial inclusion of underserved enterprises in the true sense.
The author is Co-founder & CEO, Indifi Technologies