Context: A ‘hammer looking for a nail’ approach of force-fitting available solutions (credit default swap and interest derivatives) to misunderstood problems will not work in resolving the MSME funding problem.
Understanding MSME funding problem
Credit access is better than widely perceived: As per the MSME ministry, India has 63.3 million MSMEs, out of which 34-36 million MSMEs already have access to formal credit (against the popular narrative of only 6-10 million MSMEs)
Commercial subscribers: As per TransUnion Cibil data, there are 9 million unique commercial borrowers.
Other borrowers: 14-16 million consumers with commercial-vehicle and business loans.
Micro-finance borrowers:3 million unique micro-finance borrowers, at least 25% of them are MSMEs.
MSME credit gap: While sourcing bank loans, the MSMEs without any access to formal credit borrow from informal sources for their ‘cash’ transactions.
Formal accounts only have transactions captured by goods-and-services-tax data systems
Greater formalization could see MSME demand for formal credit jump by 30-50% (i.e., by Rs 8-15 trillion).
Moreover, borrower intent is a major driver of closing the estimated credit gap of Rs 8-15 trillion.
New-to-credit (NTC) MSMEs: The problem they face is longer timelines for loan approval more than outright rejection.
As per TransUnion Cibil, India adds 0.6-0.8 million NTC commercial borrowers each year.
Scope for improving loan efficiency: Large lenders and fintech firms with proven techno-analytical abilities to use data to underwrite loan – consider fraud and credit risk to field investigations.
Need for a shift in approach: Some need to renew focus, while others need to refocus and recalibrate.
Driving on digitization: Available credit and know-your-customer information is leveraged by lenders to digitize the process of lending to MSMEs.
Need for a wider range of products:g. 3-6 months term loans (short term) and expansion of unsecured business lending through banks with greater regulatory encouragement.
Scope of Public-private partnerships (PPPs): Required to provide credit access to the 27-29 million MSMEs that lack access.
Digitalization may enhance operational efficiency, reducing the acquisition cost of small-ticket borrowers while charging them lower interest rates.
A PPP model can be devised that uses a common ‘credit stack’ equipped with advanced artificial intelligence to offer loans to unserved MSMEs.