The financial year has begun badly, with the pandemic engulfing India. The Nomura Business Resumption Index has slumped back to October 2020 levels and small businesses are reeling under mini-lockdowns across India. The government has been announcing support measures to stressed MSMEs, but the impact on the ground has remained limited.
The lifeline offered through the Emergency Credit Line Guarantee Scheme (ECLGS) of Rs 3 lakh-crore has been extended in scope and duration. However, less than 10 million of India’s 63.3 million MSMEs have benefited from the ECLGS so far. There is the Rs 20,000 crore sub-ordinate debt scheme, intended to help about 200,000 MSMEs who are already stressed or under NPA. The pickup is low, less than 500 beneficiaries by March-end. The Rs 10,000 crore fund of funds announced last year, an innovative concept to help young MSMEs with growth potential to scale up, is still to be actioned.
Thus, despite all good intentions from the government and the Reserve Bank of India (RBI), there is little relief to the majority of the MSMEs, typically the micro units. For instance, five out of six MSMEs lack formal credit and hence are ineligible for otherwise comprehensive schemes such as the ECLGS. Further, interactions with hundreds of MSME members at the Mahratta Chamber of Commerce, Industry and Agriculture, Pune, indicate that intended beneficiaries still know very little about the sub-ordinate debt scheme, let alone take advantage of it.
The crux of the problem, however, is not the schemes, it is that despite the RBI mandating credit to the MSMEs under priority sector lending, just 40 percent of the sector’s credit demand is met by formal credit. The credit gap to the MSMEs is estimated at a whopping Rs 30 lakh-crore, presenting both a challenge and an opportunity for new ways to serve this huge unmet demand.
The Expert Committee on Micro, Small and Medium Enterprises, headed by UK Sinha, in 2019, highlighted three reasons for this credit gap: one, high risk in lending to the MSME sector due to inability to pay and unwillingness to pay; two, high cost-to-serve as credit-worthiness is difficult to assess due to information asymmetry, absence of collateral, etc. and; three, poor coverage of lenders in rural and semi-urban areas.
As we dive deeper, within the MSME segment, the micro firms, which account for more than 99 percent in number of the MSMEs and have lower NPAs, pick up just a quarter of formal credit on offer. This is the real problem to solve — how do we bring micro and small firms in the ambit of formal credit?
The answer lies partly in new rigour and drive from banks, coming through now; for example, the recent MSME lending performance of the HDFC Bank and the State Bank of India. But a step change in the outcome requires a step change in the input itself. Here, many industry players are keenly following the ‘Fintech’ space as a beacon of hope for a step change.
In fact, fintechs are addressing the very issues raised in the UK Sinha committee as their digital lending models allow both last-mile connectivity with the MSMEs and ability to customise creditworthiness assessment. Their ever-evolving algorithms aggregate data from varied sources, using AI and ML technologies for analysis. Another key differentiator for fintechs is their ability to offer risk-based interest rates — an ability that will continue to get more sophisticated with increasing transactions on digital platforms.
Digital lending to the MSMEs is still in its nascent phase in India and a scoping exercise by Dvara Research identified over 60 digital lenders offering loans from Rs 25,000 to Rs 5 crore to the MSMEs. Digital lending can help bridge the credit gap, and bring micro and small firms within the ambit of formal credit.
Currently, digital lending is estimated at about 1 percent of total lending in India as against 15-25 percent in the United Kingdom and the United States. It is time to maximise the potential of fintech to meet India’s small business credit needs. One, this calls for banks and the NBFCs to work with fintechs through data sharing and evolving new products. Two, the government and the RBI should incentivise and support these innovative models, while putting in place appropriate regulation towards customer protection covering data security and privacy. Here, the forthcoming recommendations from the RBI Working Group on Digital Lending should be addressed at the earliest.
Finally, fintechs in the MSME lending space need a godfather, like Nandan Nilekani for UIDAI, to coordinate across the various departments and ministries and promote fintech to bridge the credit gap.