Home / Economy / Credit to MSMEs gathers pace, but needs a tech push

Bank credit to micro, small and medium enterprises (MSMEs) has fluctuated for most of the pandemic. It picked up in some quarters and dropped in others, based on the intensity of lockdowns. However, it has been gaining momentum in the last few quarters. Disbursements to MSMEs rose 32% in 2021-22, led by medium, small and micro enterprises in that order, according to data from TransUnion Cibil and Sidbi. That momentum has carried into 2022-23, with priority sector lending to micro and small enterprises rising 5% between this March and August, according to the Reserve Bank of India. However, it needs new pathways to unlock latent demand and potential.

Traditionally, public sector banks led credit disbursement to MSMEs, with a 50% share prior to 2019. They have since ceded share to private banks. In the fourth quarter of 2021-22, for example, private banks accounted for 51% of loan origination for micro enterprises, and 69% for small and medium enterprises.

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Recent gains notwithstanding, MSMEs face a huge credit gap. A report by the parliamentary standing committee on finance this April said the MSME sector faced a credit gap of 20-25 trillion (against 22.3 trillion outstanding, as of August 2022). Greater use of data and technology is expected to help plug some of this gap. In his address at the recent Global Fintech Festival, chief economic adviser V. Anantha Nageswaran said digital infrastructure such as the account aggregator framework and the open credit enablement network can potentially lead to 3 trillion lending to MSMEs next year.

Bad loans

Even as credit flow to MSMEs has risen, so have bad loans. While private banks have managed to maintain their NPA (non-performing asset) levels in the MSME segment at 5-7% in the last nine quarters, public sector banks and non-banking finance companies have seen their NPAs for Q4FY22 increase to 20.8% (17.8% in Q4FY20) and 9.6% (8.2% in Q4FY20), respectively.

This could get worse. According to a survey by industry grouping Federation of Indian Chambers of Commerce & Industry (Ficci) and the Indian Banks’ Association, banks representing over three-fourths of total credit expect NPAs among MSMEs to increase in the next six months. High NPAs push MSMEs into a vicious cycle—it makes banks reluctant to lend money to them, which adversely impacts their business operations. While some problems are systemic (such as delayed payments from customers), better data can help banks map risk profiles of MSMEs better.

Data flow

Availability of quality data can give lenders a better picture of an MSME’s ability to service loans. In the last few years, India has strengthened its digital public infrastructure, enabling better capture and flow of data. For example, the Goods and Services Tax Network (GSTN)—which provides IT infrastructure and services to the central and state governments, as well as key stakeholders—has 13.9 million registered taxpayers (https://www.livemint.com/news/india/gst-data-aids-lenders-decision-on-sme-loans-11664734596927.html).

Till August 2022, they had filed 945 million tax returns, uploaded 1.58 billion invoices and raised 2.95 billion e-waybills that are needed to move goods. In the calendar year 2022, till August, about 593 million e-waybills have been raised, up from 481 million during the same period last year. Each bill offers data about an individual MSME and its credit-worthiness. This in addition to other developments such as the account aggregator framework (which enables sharing data) and trade receivables discounting system (TREDS) platform that enable a better flow of data—and eventually credit.

Fintech partnerships

For most banks, exposure to MSME ranges between 10% and 30%, said an ICICI Securities report in September. Lending to MSMEs involves significant human interactions, a constraint in credit growth. Data and technology promise to increase productivity. In the last few quarters, a number of banks, across categories, have been partnering with NBFCs, even as the RBI encouraged co-lending models.

These NBFCs have either built their business on technology or have tied up with hardcore fintech companies. For example, State Bank of India tied up with U Gro Capital, a small lending business platform in November 2021. This August, U Gro itself tied up with Sequoia-backed fintech Yubi, formerly called CredAvenue, for co-lending. Similarly, the Bank of Maharashtra tied up with LendingKart, which has over 150,000 SMEs as its users. Such partnerships promise to fuse old-world expertise and new-age data to increase credit flow to MSMEs.

www.howindialives.com is a database and search engine for public data.

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