Need For Inclusive Credit Delivery

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Need For Inclusive Credit Delivery
Shachindra Nath - 06 July 2020

The MSME sector has been witnessing liquidity stress due to prolonged economic slowdown. The COVID-19 pandemic has made the scenario even more challenging as the lenders have drastically reduced their credit exposure to the sector. On the other hand, economic disruptions due to COVID-19 have disturbed the cash-flow cycle of the MSMEs. As a result, the SME sector which contributes approximately 25 per cent to the GDP from the service segment and more than 33 per cent to the manufacturing output is going through immense working capital stress. And a section of the SMEs becoming unsustainable because of liquidity stress is not a good sign for the economy, as the sector generates 1.3 million jobs every year. So, given the role the SMEs have been playing to drive the economy forward, the segment needs to be rejuvenated so that economy gets back on track and becomes truly self-reliant. The success of the government’s call to ‘be vocal for local’ depends on the collective resilience of the SMEs.

However, the inherent strength of the SME segment can be measured from the fact that almost 90 per cent of the SME doesn’t have access to formal credit. Due to the lack of credit support, the SMEs are unable to leverage their scalability potential. Bridging the SME credit gap of $600 billion is a huge challenge. The fragmented nature of SME sector makes it challenging for the large financial institutions to service the needs of the small businesses as they follow a pre-defined underwriting process which doesn’t deep dive into the revenue cycles, per-customer-value of those small businesses. As a result, the SME segment has always been suffering from credit under-penetration. Given the present SME lending scenario, access to credit is set to become even more challenging, as conventional channels of credit are turning increasingly risk-averse and NBFCs are fighting their own liquidity issues.

 SME sector now desperately wants government support to survive this time of crisis and return to the growth path. The recently announced Rs 3.75 lakh crore package for the MSME has made an earnest attempt to address the capital crunch of the sector. Announcements like Rs 3 lakh crore collateral free automatic loans, Rs 20,000 crore subordinate debt for stressed MSMEs, Rs 50,000 crore of equity infusion for MSMEs through a fund of funds, etc. are expected to offer the liquidity support to the government.

 However, to ensure effective transmission of those benefits to the SMEs, the government needs to make SME credit delivery system more inclusive. One way to do is to leverage digital underwriting capabilities of NBFCs and SME lending institutions. The government needs to rethink their approach to SME credit underwriting mechanism, risk assessment framework so that small businesses become an integral part of the economic revival post-COVID.

 In addition, the SME credit eco-system should also address the immediate challenges that the SMEs are facing due to disrupted revenue cycle such as payment commitments to vendors, salary commitments to employees and other recurring payment commitments. The SME lenders need to roll out sustainability finance to the SMEs in the form of term loans to help SMEs meet those expenses.

 Simultaneously, the government should also focus on developing an enabling environment so that new-age SME lenders can build deep sectoral specialisation and technology proficiency in order to develop underwriting platforms capable of reaching out to all the SME segments.

 The SME growth story of India is quite inspiring and the impact of COVID-19 will not be able to destabilise the sector in the long run. The sector requires liquidity flow to restart their activities. The banking and financial institutions, regulator and the government must come together to support SMEs so that the story of the indomitable spirit of entrepreneurship continues to fascinate
SME sector.


The author is Executive Chairman and Managing Director at U GRO Capital


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