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How Can Psbs Help Msmes - vf1
How Can Psbs Help Msmes - vf1
Now that we have understood the scale of the credit gap let's move on to why there is such a
massive one from both the perspective of the lender and the borrower.
From the lender's perspective, the following reasons act as a hindrance to lending to MSMEs
1. MSMEs are viewed as having high-risk borrowing: Banks and other financial institutions
typically view lending to MSMEs as hazardous. According to the UK Sinha-led Expert
Committee on Micro, Small, and Medium Enterprises, lending to MSMEs carries a risk
because of those businesses' "inability to pay" and "unwillingness to pay." Banks will
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always view MSMEs as high-risk borrowers and be wary of adding them to their loan
books if they think that these borrowers won't be able or willing to repay their debts.
2. Inability to assess the creditworthiness of the borrowers: Information asymmetry is a
significant issue in bank-MSME transactions. Due to the fact that many Indian MSMEs
don't keep thorough financial records, such as tax return filings, P&L statements,
balance sheets, etc., institutional lenders like banks have very little or no access to
information on MSME finances. Additionally, banks lack sufficient knowledge about
MSMEs’ credit histories and ratings. Additionally, they don't spend much time
monitoring MSMEs' financial health and business strategies. Due to the significant
information gaps caused by all of this, banks are reluctant to lend to MSMEs since they
cannot evaluate their creditworthiness.
3. Lack of tangible assets and incapacity to offer security: In India, most MSMEs
frequently lack significant physical assets. Because of this, they are unable to offer
collateral when applying for loans. Because of this and the lack of credit history,
traditional lenders cannot balance the risk to their capital. As a result, they have to turn
down many loan requests from MSMEs.
4. High Cost to Serve: The expense of providing loans to MSMEs is increased by their
incompetence or unwillingness to maintain suitable accounts and collateral. Many
lenders are reluctant to establish credit connections with MSME customers because of
this "cost to serve".
5. Lack of confidence: Due to the thousands of MSMEs now functioning in India, lenders
frequently cannot distinguish between one MSME borrower and another. This
ignorance typically manifests as a lack of trust and a refusal to lend. The substantial risk
of loan default posed by MSMEs contributes to low trust. This is due to the fact that
their customers don't pay them promptly. Delay payments to MSMEs in 2021 were
worth Rs 10.7 lakh crore. Buyer payments in MSME supply chains may take 30 to 90
days to clear. Banks do not trust MSMEs since they frequently receive late payments,
making it difficult to repay loans.
Now that we have discussed why lenders are unwilling to provide credit to MSMEs let’s discuss
why borrowers are unwilling to obtain credit from formal sources of credit.
1. Poor Credit Depth: In semi-urban and rural areas of India, few lenders are prepared to
offer loans to MSMEs at reasonable rates. MSMEs have nowhere to turn because there
aren't any choices for them to get crucial finance. Additionally, the credit gap in India's
MSME sector keeps widening due to limited financing access.
2. Complicated Borrowing Procedures: A sizable share of MSMEs are found in smaller
towns and cities. Many MSME owners lack basic financial literacy and do not understand
loan possibilities, paperwork requirements, or borrowing procedures. Larger banks don't
spend the time necessary to clarify or even simplify these issues for MSME owners, who
become discouraged by the idea and decide against seeking loans.
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3. Long Disbursal Timelines: Since many MSMEs have slim profit margins, they urgently
need working capital to cover daily expenses. However, traditional financial institutions'
approval and disbursement times are excessively long, rendering them inappropriate for
the operating capital needs of MSMEs. These protracted disbursement times deter
potential MSME borrowers from completing the process.
4. Gender Bias: In India's patriarchal society, women are frequently seen as having less
entrepreneurial potential than males. Additionally, women have less collateral
registered in their names, making it more difficult to obtain bank credit. Even if they run
similar businesses and submit similar loan applications and presentations, a male MSME
borrower is more likely to be approved for a loan than a female borrower due to the
persistent and long-standing gender imbalance issue. These factors collectively account
for the 2X higher loan refusal rate for Indian women business owners, at 16%. They also
provide an explanation for why women-owned firms account for at least Rs. 12 lakh
crore of the Rs. 30 lakh crore total credit gap faced by Indian MSMEs and why 90% of
female borrowers depend on "informal" sources of funding.
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Now let us move on to what are the various initiatives PSBs can take to help MSMEs.
1. Co-Lending: This is a type of financing in which two or more financial organisations work
together to offer loans to their clients. The PSBs can use this strategy to reach borrowers
who might not have access to regular banking services, which enables them to achieve
their Reserve Bank of India-mandated priority sector lending commitments. These
commitments include lending money to MSMEs, small and marginal farmers, and
economically disadvantaged groups of the population. PSBs have partnered with NBFCs,
fintech firms, and other financial institutions to benefit from co-lending. Through this
relationship, tailored loan solutions can be provided at lower origination, underwriting,
and servicing costs, hastening and streamlining the customer's loan experience. Since
NBFCs are present in Tier 2, 3, and 4 cities throughout India, they can exploit their
understanding of the surrounding area's topography to their advantage.
2. Distribution: PSBs have expensive branches in major cities all over the nation; this
operational philosophy is inappropriate because these PSBs cannot access areas where
most micro-businesses are located. They must adopt the low-cost, more regionally
focused branch model used by NBFCs. This would result in improved underwriting
knowledge and greater pricing power.
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3. Underwriting: Unlike NBFCs, PSBs favor safer consumers and are unwilling to
comprehend and evaluate an unregulated business. One tactic PSBs can use to speed up
the underwriting process is automated scoring, which is based on a quick analytics-
based eligibility assessment. Vendor agreements to extract filings from the ITR website
come in second. The third is using technology to recognize cash flow patterns for more
accurate loan pricing.
4. Collection: In contrast to NBFCs, which have their own collection teams on the ground,
PSBs outsource the collection process to outside firms, which enables them to build
strong client relationships. Nimble NBFCs establish an internal infrastructure specifically
for collections. To achieve good collecting efficiency, all communication channels are
used, including WhatsApp, field trips, SMS, calls, etc. First Payment via QR codes, OTP-
based collections, and WhatsApp-linked collections are some tactics NBFCs might use to
improve the collecting process. Second, are documents and signatures that are entirely
digital. Third, machine learning is utilised to continuously monitor delinquencies and
spot them early.
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References:
1. Avendus. (n.d.).
https://www.avendus.com/crypted_pdf_path/msme-lending-report-formattedvf-img-
642a719b97ccc-.pdf
2. Iyer, A. (2018, May 22). How important are public sector banks to MSMEs? |
Mint. Mint. https://www.livemint.com/Money/Dr4WfrCxdSOLClQbgsQtIN/How-
important-are-public-sector-banks-to-MSMEs.html
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