How MSME lending is fueled by digitisation and data driven decisioning?

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Harshala Chandorka
Harshala Chandorkar, COO, TU CIBIL

Micro, Small and Medium Enterprises (MSME) sector is the most vibrant and dynamic sector promising high growth potential for the Indian economy. Easy, quick and affordable access to finance for the MSMEs, therefore, becomes a priority towards strengthening this sector further.

Digitisation and data-driven decisioning has significantly helped drive profitable lending and access to finance for the MSME sector and can further help in fueling growth.

The government along with the central and state agencies have extended remarkable support to the MSME sector through various landmark initiatives like MUDRA, PMEGP, CGTMSE resulting in credit growth recovery.

The latest TransUnion CIBIL- SIDBI MSME Pulse Report shows that commercial credit growth recovery continues at 13.5 percent YOY growth in the September’18 quarter. The report further states that the total on-balance sheet credit exposure in India stood at Rs 105.5 lakh crores as of September’18 of which MSME credit accounts for Rs 24.7 lakh crores, including credit to MSME entities and credit to individuals for business purposes.

The study also shows a significant improvement in turn-around-time (TAT) on lending to MSMEs across credit institutions. TAT has continuously improved for MSME segment underwriting- from an average of 32 days in 2016 to under 26 days in 2018, while at the same time usage of credit information and digitisation has increased. This finding signals a definite positive correlation between digitisation and an increase in efficiency of the commercial lending market.

TAT is defined as the number of days between the date of enquiry and the date of loan sanctioned or renewal date. Findings reveal that NBFCs have demonstrated the lowest TAT on MSME lending at 18 days in 2018 from 24 days in 2016. While Public Sector Banks (PSBs) still have the longest TAT, they have demonstrated the maximum reduction in TAT for the MSME segment- from 41 days in 2016 to 31 days presently. Private bank TATs have also lowered from 32 days in 2016 to 29 days presently.

Data analytics and digitisation have also helped drive access to credit for MSMEs as recent market-sizing analysis indicates that commercial credit information already accounts for a very material portion of all lending in the MSME space today. Insights from TransUnion CIBIL shows that over 6.5 million businesses have taken loans from the banking sector for business. In addition over 15 million businesses have taken formal credit from the banking system in a personal capacity.

Commercial credit growth recovery continues at 13.5 percent YOY growth in the Sep’18 quarter. The report further states that the total on-balance sheet credit exposure in India stood at Rs 105.5 lakh crores as of Sep’18 of which MSME credit accounts for Rs 24.7 lakh crores, including credit to MSME entities and credit to individuals for business purposes.

A significant scope does exist to increase access to credit for MSMEs while reducing the cost of credit to the borrower and increasing profitability for the lenders. This is possible through judicious and extensive usage of data analytics not just for underwriting but also for formulating policy actions like:

Enabling access of Alternate data on the MSME sector: In order to improve and provide easy access to finance to the MSME sector, it is vital for the inclusion of alternate data to the financial institutions and credit information companies such as GST, Employees’ Provident Fund Organisation (EPFO) and utility bill payment information.

This shall provide critical underwriting as well as risk assessment inputs especially for the new to credit MSME borrowers and thus enhance overall risk assessment quality of MSMEs.

Improving MSMEs access to “Trade Receivable Electronic Discounting System: Access to finance to the MSME sector can be further improved in the form of credit opportunities by leveraging TReDS. In order to enable this regulatory approval is required for TReDS to access data from CICs and submission of trade finance data to credit information companies.

Bolstering securitisation of MSME segment exposure: For securitisation of MSME exposures with real-time risk assessment by credit bureaus, regulators need to form enabling policies.MSMEs with live credit exposures are in excess of 6.5 million, with a majority of them having exposures below 5 crores and are usually not rated by credit rating agencies.

Utilising credit information from CICs to assess the risk of the MSME portfolio for securitisation will further improve the objectivity and transparency of the risk assessment process, thereby increasing its appeal to domestic and foreign institutional investments in the MSME bonds segment.

Strong policy incentives for geographical credit expansion and inclusion: A few states like Uttar Pradesh, Bihar, Odisha, Madhya Pradesh have a substantial base of MSME entities but have significantly lagged behind in terms of credit growth and penetration. Special focus credit clusters need to be created to improve credit flow in these states along with strong policy incentives for lending in these focus clusters. This will thus provide a significant push to the economic output and employment opportunities in these states.

While we have seen significant technological and data analytics intervention on the acquisition side reflected in the usage of data and scores, such interventions are also necessary for portfolio management and early warning.

Such early warning systems need to take periodic inputs from various sources including but not limited to credit data on the portfolio, cash flows of the borrowers reflected in account statements as well as GST filings, macro industry and economy level growth and profitability trends.

(Views expressed in the article are a personal opinion of Harshala Chandorkar, COO, TU CIBIL.)

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