MSMEs: how co-lending can boost MSME credit flow

Over the past two years, MSMEs have proven to be essential to the consumer market over the course of the economy in terms of last mile delivery, community support and even encouraging the adoption of digital technology. This happened despite the challenges they faced and continue to face following the market downturn to maintain cash flow and access working capital while dealing with supply chain disruptions and of the work force. It is no surprise that MSMEs have become the backbone of global economies, especially in emerging markets like India.

However, despite the promise they hold and their importance in our economic framework, they struggle to access credit, which hampers their ability to navigate volatile market dynamics. According to a survey by SIDBI, 67% of MSMEs in India were temporarily closed for three months or more in FY21 and more than half of all MSMEs saw a drop in revenue of more than 25% .

In such a scenario, NBFCs and especially digital lenders remain the go-to driver for new credit disbursements for the underserved retail and MSME market in the country. According to a report by PWC, NBFC’s loan portfolio grew by almost 18% due to a deep understanding of target customer segments, the use of technological advancements, lean cost structures and business models. differentiated to reach segments in need of credit. However, even though NBFCs play a vital role in addressing these issues, many NBFCs are in dire straits in terms of capital availability. In order to cushion the impact of the pandemic on vulnerable sections of society, the Reserve Bank of India (RBI) has revised its 2018 framework for co-lending to a more flexible co-lending model framework. (CLM) in 2020. This was done with the intention of improving the flow of credit to underserved sectors of the economy (particularly MSMEs in small towns), taking advantage of the low cost of funds from banks and the greater reach of NBFCs.

Co-loan: a symbiotic relationship

Co-lending helps banks and NBFCs collaborate and leverage their respective strengths to deliver a holistic experience that benefits all stakeholders in the value chain. From the client’s perspective, such agreements improve access to capital and reduce loan disbursement time. Co-lending allows NBFCs to compete on the price front and banks benefit from last mile reach, access to new product lines, speed of execution and strength of collections. This symbiosis is poised to bring huge opportunities with an expectation of around Rs 300 billion to be disbursed by FY23 itself. Due to the ubiquity of NBFCs in the country, this arrangement has led to an increase in the number of new borrowers in India, which has led to an increase in liquidity and credit penetration.

Even from a regulatory perspective, the RBI has required all banks to lend a portion of their Net Bank Credit (NBC) to certain identified priority sectors of the economy. Co-lending arrangements allow banks to easily meet supply requirements for these loans, which in turn benefits the broader economy.

Future consequences

While in theory this could turn out to be the real boost the underserved MSME credit segment needs, a large population of NBFCs, i.e. digital lenders, have been left behind in The shadow. A McKinsey Global Institute report previously estimated that digital finance would add $3.7 trillion to GDP in emerging economies in the years leading up to 2025. However, most fintech lenders, given their lower vintage, are in the group. BBB rating and public sector banks do not co-lend with them. Interestingly, ratings should not be factored into these direct on-book deals since NBFC’s balance sheet does not intermediate these loans. Therefore, it would be useful for PSOs to adopt graduated criteria and a first-principles approach, especially since PSOs can exercise granular policy control over such co-lending arrangements.

Moreover, the ecosystem approach, which is gaining momentum in the MSME lending space, serves to mitigate risk and is therefore expected to further improve the flow of credit in the MSME sector. Leveraging and encouraging digital financial literacy and digital lending is key to ensuring that the flow of credit can benefit all regions and all segments of the economy. As this model evolves in this economic environment, there is also a parallel need for strong regulatory guidelines for co-lending partnerships that include digital lenders.

(The author is CEO and co-founder, Indifi Technologies)

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