InnovationsinMSMEFinancing:CreatingCreditHistory,aPathway?AnishaSinghandRupikaSingh,IFMRLEAD
OverviewTheMicro,SmallandMediumEnterprises(MSME)sectoriscrucialtotheIndianeconomy.AsperthelatestMSMEannualreportbytheMinistryofMSME,thesizeofthesectoris361.76lakhunits,ofwhich55.34%unitsarebasedinrural India1. IndianMSMEsprovide employment to 805.24 lakhpeople, and contributed 37.54%1 to GD in 2012-2013.Moreover,theMSMEsectorhasshownconsistentgrowthoverthelastfewyearsasshownbelow:
ChallengesforMSMEstoBorrowThe financingneedsof the sectordependon thebusinesssize,customersegment,andindustryandhowestablished the business is.MSME’s tend torelyheavilyondebtfinancingduringtheirstartingand growth phases. Though there are manyinstitutionsand schemes inplace in India tohelppromoteMSME growth, financial institutions stillperceive MSME’s as high-risk borrowers. As of2012-2013, there is a total financial requirementof INR 32.5 trillion in the MSME sector. Formalsources cater to less than one fourth of totalMSME debt financing. Of the overall financedemandofINR32.5trillion;78%iseitherself-financedorfrominformalsources.Formalsourcescatertoonly22%ofthetotalMSMEdebtfinancing.Thesector’sdemandforcreditishighlightedintheflowchart.2
Oneof themain reasons formal lending institutionsperceiveMSME’s as high-risk is their lack of credit history andidentification documents. One of the schemes implementedby the Indian government in 2005 provides financialassistance to fund a proportion of fees by credit ratingagencies that scoreMSME’s on their credit worthiness. Thebenefits of this scheme are two-fold – it aims to createawareness amongst MSME’s on their strengths andweaknessesand thusenable themtoassess theirposition inthe market, secondly, it helps assess credit worthiness and
1MSMEAnnualReport2015-20162IntellecapMSMEReport2012-20133PerformanceandCreditRatingSchemeforMicro&SmallEnterprises,MinistryofMSMEReport
11.7710.45
11.83
18.45
14.312.44
17.1818.74
8101214161820
2007-2008to
2008-2009
2008-2009to
2009-2010
2009-2010to
2010-2011
2010-2011to
2011-2012
2011-2012to
2012-2013
2012-2013to
2013-2014
2013-2014to
2014-2015
2014-2015to
2015-2016
YearonYearGrowth%oftheMSMESector1
3850 5011 753110327
1354719676
24886 23374
050001000015000200002500030000
No.ofUnitsRated3
recognize how to improve on this. This facilitates them to access credit at cheaper rates and on easier terms byincreasingtheiracceptabilitywith banks, financial institutions,customers/buyersandvendors. In theperiod from2005-2015, over 1.10 lakh MSME units3 have been rated under this scheme. As for the lack of identificationdocuments,therehasbeenapushbythegovernmentforMSME’storegisterthemselvesundertheUdyogAadhaarscheme.AsofDecember2016,over57lakhunitMSME’shaveregistered4. TechnologyInnovationsinMSMEFinancing
TheuseofmobileInternetandsmartphoneshasseentremendousyearonyeargrowthinthepastcoupleofyears.Yet,thelevelofpenetrationislow,especiallyinruralareas.Itisestimatedthatonlyabout9%oftheruralpopulationhas access tomobile Internet, whereas, 53% of the urban population does5. TheMSME report indicates 45% ofMSMEunitsareinurbanareas.Thisprovidealargenumberofcustomerswhocanbetargetedintheshort-runbydigitalwallets,datacapturedviasmartphones,technologyinnovationsinMSMEfinancingwhichresultfromtie-upsbetweenlendinginstitutionsandtechnologyproviders.
Whileborrowers inurbanareasmaybemore favourablyplaced toaccess these innovations in theshort run, it isprojectedthatby2020,315millionindividualsinruralIndiawillhaveaccesstomobileInternetascomparedtothecurrent 120million6. Thus, as smart-phone andmobile Internet penetration increases, rural Indiawill be able togreatlybenefitfromtheseinnovations.
3PerformanceandCreditRatingSchemeforMicro&SmallEnterprises,MinistryofMSMEReport
4http://udyogaadhaar.gov.in/UA/UdyogAadhar-New.aspx5MobileInternetinIndia,20156InternetusagepicksupinruralIndia,LiveMint,Aug2016
Digitalfootprintbasedlending• Lenddo,acreditassessmentfinancialtechnologycompanythatusessmartphonetrackingisexpandingitsrafngservicestoincludemicrofinanceinsftufons(MFIs)inIndia.ThiswillcoverindividualMFIcustomerswholiveinurbanareasandhaveanandroidphone.AsanMFIofficeruploadsthecustomer’sinformafon,thecustomerreceivesatextwithaloanapplicafonlink.Oncethecustomerdownloadstheapplicafonandagreestosharedata,Lenndoanalysesthecustomerscontacts,SMS’s,callhistory,andbrowsingbehaviourtogivethecustomeracreditrafngwhichisthensharedwiththeMFI.
AlternateDatatoevalulatecreditworthiness• AsinIndiaorganizedlendingisavailableonlytoaluckyfewmainlythosewithhighCIBILscores,IndiaLendspromisestochangethisbyusingvariousrelevantdatapointssuchasbanktransacfons,uflitypayments,etc.tobuildacomprehensivecreditscore,evenforthosewhohavenopreviouslendingorcreditcardhistory.Thishelpsborrowerswithnopreviousaccesstoformallendingtoaccesstheformalsystem.
OvercominglackofKYCdocuments• SwadhaarFinAccesshasfacilitatedthelinkbetweenAxisBankandAirtelMoneywhereincustomerscanperformavarietyoffinancialtransacfons–deposits,withdrawals,andloanrepaymentsthroughtheAirtelMoneywalletontheirsmartphone.TheKYCnormsonthisproductaremorelaxthanthosewithcommercialbanks.ThisisespeciallyusefulforMSME’sintheunorganizedsectorthatdonothaveproperKYCdocumentafon.
Flexiblerepaymentterms• NeoGrowthfocusesonMSME’s,specificallymerchantsandretailers.ItusesaMerchantCashAdvance(MCA)modeltotargetMSME’swhereinitprovidescredittomerchantsinexchangeforanagreeduponpercentageoffuturesalesmadeviacreditcard/debitcard.TherepaymentoftheloandependsontheturnoveroftheMSME’sdailycredit/debitcardsales.Accordingtotheirreport,21.4%clientswereintroducedtotheformalcreditsystemforthefirstfme.
