InnovationsinMSMEFinancing:CreatingCreditHistory,aPathway?AnishaSinghandRupikaSingh,IFMRLEAD

OverviewTheMicro,SmallandMediumEnterprises(MSME)sectoriscrucialtotheIndianeconomy.AsperthelatestMSMEannualreportbytheMinistryofMSME,thesizeofthesectoris361.76lakhunits,ofwhich55.34%unitsarebasedinrural India1. IndianMSMEsprovide employment to 805.24 lakhpeople, and contributed 37.54%1 to GD in 2012-2013.Moreover,theMSMEsectorhasshownconsistentgrowthoverthelastfewyearsasshownbelow:

ChallengesforMSMEstoBorrowThe financingneedsof the sectordependon thebusinesssize,customersegment,andindustryandhowestablished the business is.MSME’s tend torelyheavilyondebtfinancingduringtheirstartingand growth phases. Though there are manyinstitutionsand schemes inplace in India tohelppromoteMSME growth, financial institutions stillperceive MSME’s as high-risk borrowers. As of2012-2013, there is a total financial requirementof INR 32.5 trillion in the MSME sector. Formalsources cater to less than one fourth of totalMSME debt financing. Of the overall financedemandofINR32.5trillion;78%iseitherself-financedorfrominformalsources.Formalsourcescatertoonly22%ofthetotalMSMEdebtfinancing.Thesector’sdemandforcreditishighlightedintheflowchart.2

Oneof themain reasons formal lending institutionsperceiveMSME’s as high-risk is their lack of credit history andidentification documents. One of the schemes implementedby the Indian government in 2005 provides financialassistance to fund a proportion of fees by credit ratingagencies that scoreMSME’s on their credit worthiness. Thebenefits of this scheme are two-fold – it aims to createawareness amongst MSME’s on their strengths andweaknessesand thusenable themtoassess theirposition inthe market, secondly, it helps assess credit worthiness and

1MSMEAnnualReport2015-20162IntellecapMSMEReport2012-20133PerformanceandCreditRatingSchemeforMicro&SmallEnterprises,MinistryofMSMEReport

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14.312.44

17.1818.74

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YearonYearGrowth%oftheMSMESector1

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No.ofUnitsRated3

recognize how to improve on this. This facilitates them to access credit at cheaper rates and on easier terms byincreasingtheiracceptabilitywith banks, financial institutions,customers/buyersandvendors. In theperiod from2005-2015, over 1.10 lakh MSME units3 have been rated under this scheme. As for the lack of identificationdocuments,therehasbeenapushbythegovernmentforMSME’storegisterthemselvesundertheUdyogAadhaarscheme.AsofDecember2016,over57lakhunitMSME’shaveregistered4. TechnologyInnovationsinMSMEFinancing

TheuseofmobileInternetandsmartphoneshasseentremendousyearonyeargrowthinthepastcoupleofyears.Yet,thelevelofpenetrationislow,especiallyinruralareas.Itisestimatedthatonlyabout9%oftheruralpopulationhas access tomobile Internet, whereas, 53% of the urban population does5. TheMSME report indicates 45% ofMSMEunitsareinurbanareas.Thisprovidealargenumberofcustomerswhocanbetargetedintheshort-runbydigitalwallets,datacapturedviasmartphones,technologyinnovationsinMSMEfinancingwhichresultfromtie-upsbetweenlendinginstitutionsandtechnologyproviders.

Whileborrowers inurbanareasmaybemore favourablyplaced toaccess these innovations in theshort run, it isprojectedthatby2020,315millionindividualsinruralIndiawillhaveaccesstomobileInternetascomparedtothecurrent 120million6. Thus, as smart-phone andmobile Internet penetration increases, rural Indiawill be able togreatlybenefitfromtheseinnovations.

3PerformanceandCreditRatingSchemeforMicro&SmallEnterprises,MinistryofMSMEReport

4http://udyogaadhaar.gov.in/UA/UdyogAadhar-New.aspx5MobileInternetinIndia,20156InternetusagepicksupinruralIndia,LiveMint,Aug2016

Digitalfootprintbasedlending• Lenddo,acreditassessmentfinancialtechnologycompanythatusessmartphonetrackingisexpandingitsrafngservicestoincludemicrofinanceinsftufons(MFIs)inIndia.ThiswillcoverindividualMFIcustomerswholiveinurbanareasandhaveanandroidphone.AsanMFIofficeruploadsthecustomer’sinformafon,thecustomerreceivesatextwithaloanapplicafonlink.Oncethecustomerdownloadstheapplicafonandagreestosharedata,Lenndoanalysesthecustomerscontacts,SMS’s,callhistory,andbrowsingbehaviourtogivethecustomeracreditrafngwhichisthensharedwiththeMFI.

AlternateDatatoevalulatecreditworthiness• AsinIndiaorganizedlendingisavailableonlytoaluckyfewmainlythosewithhighCIBILscores,IndiaLendspromisestochangethisbyusingvariousrelevantdatapointssuchasbanktransacfons,uflitypayments,etc.tobuildacomprehensivecreditscore,evenforthosewhohavenopreviouslendingorcreditcardhistory.Thishelpsborrowerswithnopreviousaccesstoformallendingtoaccesstheformalsystem.

OvercominglackofKYCdocuments• SwadhaarFinAccesshasfacilitatedthelinkbetweenAxisBankandAirtelMoneywhereincustomerscanperformavarietyoffinancialtransacfons–deposits,withdrawals,andloanrepaymentsthroughtheAirtelMoneywalletontheirsmartphone.TheKYCnormsonthisproductaremorelaxthanthosewithcommercialbanks.ThisisespeciallyusefulforMSME’sintheunorganizedsectorthatdonothaveproperKYCdocumentafon.

Flexiblerepaymentterms• NeoGrowthfocusesonMSME’s,specificallymerchantsandretailers.ItusesaMerchantCashAdvance(MCA)modeltotargetMSME’swhereinitprovidescredittomerchantsinexchangeforanagreeduponpercentageoffuturesalesmadeviacreditcard/debitcard.TherepaymentoftheloandependsontheturnoveroftheMSME’sdailycredit/debitcardsales.Accordingtotheirreport,21.4%clientswereintroducedtotheformalcreditsystemforthefirstfme.