Union Budget 2022: Marriage of technology, digitisation, and on-ground interventions will ensure safer, data-driven approach to credit lending
Given that many businesses have bitten dust post-COVID, the finance minister in Budget 2022 introduced bold new fiscal policies, giving tax breaks to MSMEs, and increased liquidity in the market by putting money in the hands of the people to kickstart the economy.
As the nation starts picking up the pieces after two tough years, the Narendra Modi government has extended its symbolic credit arm to favourably reach out to the forgotten middle – the beleaguered SMEs/ MSMEs – a sector that has been under a wrench, but is also one of the largest job creators in the country.
Access to credit for SMEs/MSMEs
With over 95 percent of India’s businesses falling in the SME and MSME category, banks and lending agencies are finding it increasingly difficult to provide credit to this sector. It is noteworthy that this sector contributes to 30 percent of the GDP of India.
The conventional approach to funding SMEs/MSMEs has been through the traditional route of overdraft facilities, bank loans, and enhanced Line of Credit. The repayment of credit is by way of fixed equated payments at fixed rates of interest (sometimes adjusted as per RBI norms). Debt financing involves due diligence of the MSME’s financial health, creditworthiness, and future cash flow. Relationship lending in small banks is based on the loan officer’s relationship with the entrepreneur.
Traditionally, asymmetric information by SMEs such as providing audited financial statements, financial reports, fiscal governance, and often the blurring of lines between business owners, managers, and stakeholders have hampered credit-risk mitigation for banks and lending agencies.
Alternative approach to credit for MSMEs
Asset-based lending, purchase order finance, corporate bonds, or securitized debt are low-risk and low-return types of lending. The medium risk/ return includes hybrid instruments such as profit-participating rights, convertible bonds, bonds with warrants among others. Other high-risk lending includes venture capital, angel investing, crowdfunding, and more.
Budget 2022 has Nirmala Sitharaman delve deeply into these alternative financing instruments, like emergency credit line schemes to 5 lakh crore, a revamped CGTMC with direct infusion of funds that can help small and medium-sized companies kickstart their beleaguered businesses and, create a growth momentum with positive market sentiment. Hiring, purchasing of machinery, exploring new business collaborations, the market expansion will naturally follow, driving the economy upward and forward, leading to de-escalation of unemployment, and creating a new resurgent entrepreneurial wave in the country.
The adoption and implementation of these simple measures such as reduced TAT of loan disbursement, better pricing/ interest rates, EKYC enablement, relaxed norms for collateral/guarantors / and simplified and fewer documentation and faster loan sanctions would bring in the required operational efficiencies and nudge small companies and micro-entrepreneurs to approach banks, NBFCs and other financial institutions for credit.
Specific demands of micro-entrepreneurs like flexible/multiple payment mechanisms, bundled product offerings, could be offered as “Consumption loans” that would help these micro-entrepreneurs to manage liquidity over time.
Digitisation and rate cuts
Special mention of a fintech working in the financial inclusion space and enabling the art of digital payments will eventually lead to them partnering with the government and banks to capture demographic information and create risk profiles that would reduce first repayment loss ratio / high NPAs in this sector.
The highly successful Business Correspondent initiative of the government, through Banks and allied partners, could be leveraged to integrate the extensive customer information held by Bank Mitras and Bank Sakhis, harnessing technology, and enabling due diligence on loans and their speedy disbursal.
This marriage of technology, digitization, and on-ground interventions will help provide a safer, data-driven approach to credit lending, with insights on creditworthiness, repayment ability, among others, thereby reducing risk and increasing the lending landscape for SMEs and MSMEs.
Perhaps a setting up of an agency for direct funding to SMEs and MSMEs could also provide the requisite financial support required by the sector that would go a long way in mitigating the liquidity and credit-access crisis that exists in the sector today.
In addition to the above measures, if corporate taxes could be further reduced, even a 10 percent cut in surcharge, it would infuse new liquidity into the system. Slashing EPF contribution to 10 percent instead of the current 12 percent would automatically create a larger liquidity pool for employees that could lead to increased spending, creating a virtuous cycle of demand generation and consumption, giving the economy a shot in the arm that it desperately needs.
The writer is the Founder & CEO of FIA Global, a fintech company. Views are personal.