The credit crisis of MSMEs: Time to think digital

By Sanjay Anandaram

It suddenly seems like the 63-million-enterprises strong MSME sector (micro, small and medium-sized enterprises) is being recognised for what it truly is. This sector contributes about 45% to the overall manufacturing output, more than 40% of the country’s exports, over 28% of GDP, while creating employment for about 111 million people, which, in terms of volume, stands next only to the agricultural sector, according to an annual report of the Ministry of Micro, Small and Medium Enterprises. Manufacturing, services and trade each comprise about a third of the overall MSME sector.

Clearly, MSMEs deserve a lot of attention and care, given that a majority don’t have websites, many are not registered, only 3.3 lakh of these are between Rs 5 crore and Rs 70 crore in size (in terms of annual turnover), with just a tiny number of 5,000 MSMEs being between the Rs 70 crore and Rs 250 crore turnover.

Last year, the definition of MSMEs was changed to allow for turnover-based thresholds with enhanced limits as well as including services alongside manufacturing. In July, wholesale and retail trade were classified as MSMEs by the Reserve Bank of India (RBI) for the purposes of accessing credit. To address the effects of Covid-19 on MSMEs, the government announced a series of stimulus measures that included the Rs 6.28 lakh crore package, an equity infusion of Rs 88,000 crore into the ECGC (Export Credit Guarantee Corporation of India), loan guarantees of Rs 1.1 lakh crore and the passing of the Factoring Regulation Bill last year, an emergency credit line guarantee scheme (ECLGS) of Rs 1.5 lakh crore was also announced in June, among other efforts, to enhance credit to MSMEs.

All of these measures were driven by the government and RBI through banks, which, in the absence of appropriate incentives (and a host of disincentives), naturally disbursed funds only to safe borrowers, i.e. those with an unblemished record of paying back. This focus on a narrow set of borrowers got exacerbated as the credit slippages increased to significant percentages of NPAs. The vicious cycle in motion made banks more nervous about lending, while leaving MSMEs struggling to find funds to manage their businesses. Greater throughput of settlement of trade credit (thanks to the Factoring Bill) will be helpful assuming the now eligible NBFCs can do so at low cost and high speed.

So, how does one provide low-cost, risk-managed loans to MSMEs speedily? Resolving this requires us to think beyond silos and extant constraints of cost, time, paperwork, credit verification, disbursements and recovery, and the like. Otherwise, the 84% of MSME debt, amounting to about Rs 58.4 lakh crore, which is sourced from informal sources, will continue to remain informal, NPAs will continue to rise and banks will continue to practice lending to ‘safe’ borrowers.

India’s digital platform stacks, protocols and frameworks—Aadhaar, UPI, eKYC, eSign, GSTN, IT, Account Aggregator, etc—provide the answer. There is no reason why all the financial information that is available cannot be harnessed by lenders to provide loans directly into the bank accounts of borrowers. The borrower’s financial health can be ascertained from the GSTN, bank and IT data, eKYC can be done through Aadhaar, documents can be eSigned, and money can be transferred via UPI into bank accounts that in many cases are Aadhaar-linked too. All of this can be enabled from the mobile phone of the borrower.

The sharing of financial information with the permission of the borrower can also be enabled through the consent of the borrower, another pioneering feature of India’s digital stacks. In effect, usage of such digital means will ensure the creation of a credit score dynamically for each borrower that, over time, can create a credit history or bureau equivalent. The Open Credit Enablement Network (OCEN) is a related initiative that can democratise lending by making lenders of service providers, with access to potential borrowers. Think of, say, a food delivery company that can offer loans to restaurants using the order history of the restaurant, its GST, bank balance and IT and other information.

Effecting the above requires multiple entities—regulators, ministries, lenders, MSMEs and third-party providers—to come together, cutting across silos, to use the existing digital frameworks and protocols. Digital awareness needs to be enhanced along with the framing of a techno-legal policy that empowers MSMEs to fulfil their destiny.

It is time Indian MSMEs become like the vaunted German Mittelstand that have access to sound financial models, are innovative, and are supported for R&D, skills shortage, financing, starting-up and foreign trade. For that, we have to think differently. The good news is that all the blocks are in place. The talent and expertise exists. We have to act.
Are we ready to create hundreds of thousands of Ubharte Sitaare from our MSMEs?