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MSME Lending fuelled by Digitisation

R Kannan

MSMEs play a major role in Economic development of India. There are around 63.4 million units and they contribute to 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities and 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India. The sector grows at a rate faster than the large ones at more than 10% pa.

About 20% of the MSMEs are based out of rural areas.They provide employment to more than 130 million people and contribute to 45% of exports. MSMEs are also the largest employment generator every year. As of Sep18, the total credit in India was Rs 105.5 Lakh crores and MSMEs had borrowed Rs 24.7 cr. Large and Mid Caps borrowed Rs 44.4 cr. Year on Year the growth of overall commercial credit was at 13.5%.

Micro loans which are less than Rs1 cr grew 22.2% year on year and SME loans between Rs1 cr – Rs 2.5 cr grew at 18.3%.The growth was faster than the overall growth. Share of NBFCs in SME credit increased from 13% in Sep 15 to 17% in Sep 18. The number of NBFCs lending more than Rs 100 cr to MSMEs stood at 77 at the end of Sep 18.

The lending to MSMEs is an attractive business since, the interest rate charged are higher, the NIM margin is higher, the NPA ratio is lower and the risk of each loan is lower compared to Large and Medium Sector lending. The pace of lending to SMEs were accelerated by digitalisation of economy.

The factors including :concepts like Cash less economy, demonetisation, data mining, higher operating efficiency, adoption of new technologies, fintech revolution, Mudra Scheme, the telecom / internet / broad band penetration and the encouragement for new start ups have created new business models for delivering credit to MSMEs.

There are companies today delivering credit in 3 minutes of application for credit by using the latest technologies to disburse credit. In the year, 2017 – 2018, Mudra loans disbursed amounted to Rs 2,46,437 cr and in 2018 – 19, so far, the loans disbursed amounted to Rs 2,02,668 cr.

The total loans disbursed under this scheme stood at Rs 7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. Apart from Mudra Loans, the concept of P2P, where person to person lending also took off and more than Rs 100 cr was disbursed through this system and the loans disbursed under P2P is likely to exceed more than Rs 25,000 cr in the next five years.

The acceleration of loans to MSMEs in the last four years was facilitated by a robust development of an eco system which was very conducive for disbursing more loans to the needy. The digitisation process has been adopted in Credit Assessment, Loan processing and Loan disbursement.

In the credit Analysis, the details of Aadhar card, Pan Card, their buying behaviour, data received from ecommerce web sites like Amazon, Flipkart, travel web sites are used to build a credit history. RBI has permitted a few Credit rating agencies to collect information from all the banks about all the borrowers and their credit history. The credit bureaus, calculate the credit scores based on the details given by banks. The credit history is available for Individuals as well as the corporates.

Today lenders are able to get this data online in a few seconds and this is one of the inputs to decide the credit worthiness of Individuals and corporates. Using their own models, they are able to decide the amount of credit which could be disbursed. All this is done, without much of human intervention and most of the processes are automated.

In the case of P2P lending, the lenders has evolved credit scoring models in their system. They connect both the lenders and borrowers and each put their own requirement. Lenders and borrowers are able to decide with whom the transaction to be executed based on the interest rate, duration and the amount of credit available.

In the last two years, India moved from a rank of 155 in data consumption in the world to No1 today. This was facilitated by fast growth of 4 G services and introduction of smart phones in the market. This has helped to deliver very small loans without much of processing and administration cost. Even credit card companies have started giving automatic credit limits to Individuals based on the credit history.

In the credit processing, the concepts like AI, Block Chain, Robotic Process Automation are being used which quickens the process of assessment and data is drawn from various sources and big data is being used, data mining techniques are being applied and the decision to give the credit is taken in minutes.

Jan Dhan, Aadhar and Mobile is making the process of digitisation in MSME lending easier. India has one of the most advanced digital infrastructure in the world today to deliver MSME credit and adoption of Digital technologies will increase the share of MSMEs in total credit, which will facilitate the GDP growth.

R kannan is head of Corporate Performance Monitoring and Research, Hinduja Group. Views are personal.