Page 34 - Banking Finance August 2023

ARTICLE

The informal debt definitionally is not visible in the
Payments Banks Small Finance Banks
credit bureaus, lenders exercise rational apathy
other socially relevant increase coverage and
towards funding the MSME segment. In other
financial instruments financial deepening.
words, the costs of due diligence that a bank will
(e.g. insurance).
incur towards evaluating the credit risk adjusted
11 licensees applied. Only 6 11 SFBs presently licensed against the ticket-size and the yield from the loan
continue to operate. and operational make it unviable.
The RBI recently offered The RBI recently issued a The other supply side stakeholder here are the
these Payments banks an framework for "on-tap" NBFCs. NBFCs are regulated moderately relative to
up-ramp onto Small Finance regime for SFBs banks and have leveraged that autonomy to
bank license. develop distribution, underwriting and product
expertise in niche areas that are not serviced by
Even as these reforms took shape on the banking front, a banks. However, lacking the ability to take
broader Digital India revolution catalyzed by PMJDY, India deposits, they rely on funding from bank loans and
Stack, e-KYC and UPI led a paradigm shift in the way India debt capital markets themselves. This translates
interacted with and consumed financial services. In parallel, into higher cost of capital for the NBFCs.
India has also taken steps towards operationalizing its own
There is significant room to grow consumption in India
version of "Open banking" through the Account Aggregator
and promote credit usage. A data point from a recent
("AA") regulatory framework enacted by the RBI. Once CIBIL Report underscores the point; out of a total 220
commercially deployed, the AA framework is envisaged to million credit-eligible retail customers, CIBIL found that
catalyse credit deepening among groups that have hitherto banks are servicing 33% only.
been under-served. Internal working group of the RBI on digital lending
suggests, bad actors have perverse incentives to
However, while regulatory innovation has helped payment take advantage of desperate borrowers in urgent
system to become effective and reformed, but credit need of funds. The RBI Report recommends several
delivery side still lacking these innovation and wide spread supply and demand-side measures to mitigate the
reach. Credit delivery or credit dispensing is a challenge for potential risks flowing from digital lending.
innovation eco system and present setup or products could However, the fundamental drawback of the formal
not fill this void. Despite the rapid strides India has taken to and regulated retail banking space, is lack of
further its financial inclusion agenda, the lack of financial innovation, which constrains potential "thin-file"
deepening remains a challenge, partly flowing from that borrowers to look towards the unregulated and
inertia, the country still has large segments who have not gray markets for their financial needs.
befitted from this digital revolution. The median age of India is 28 years (proxying an
aspirational middle class) and it would be ideal to
A substantial fraction of MSME remain outside the
ambit of formal finance and there is continued reliance
on informal money markets like money lenders (quick
disbursal without documentation) or chit funds (delayed
disbursal but lower interest rates than money lenders)
to finance itself, even at the cost of staying
uncompetitive owing to the usurious interest burden.
As per RBI estimates the total addressable credit
gap in the MSME segment to be Rs. 25.8 trillion
and growing at a CAGR of 37% (total addressable
market demand by the MSME sector is
approximately Rs. 37 trillion, of which banks, other
institutions and NBFCs supply about Rs. 10.9
trillion).

34 | 2023 | AUGUST | BANKING FINANCE