Page 28 - Banking Finance December 2019

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crucial. Despite their contribution to the economy, they face requirement. Banker's on the other hand remain
the challenge of inability to gain sufficient access to formal indecisive as they do not get the required papers to take
lending. As per the BCG reports, nearly 40% of the lending a call regarding the loan request.
to MSME sector are happening through informal sources like
from friends, family and relatives only. 2. Lack of Business planning: Generally, it is observed
that small borrowers do not have the ability to forecast.
Some facts regarding SME lending in They request for loan for business for their livelihood.
They do not foresee future and therefore they fail to
India: convince the lenders about the viability of their
1. As per financial reports, Outstanding bank credit to business.
SMEs/Nominal GDP in India in the year 2015 was 6.2%
only which was 2nd lowest in the world after Russia. 3. SME is costly: It is general perception among banks
2. Only 4% of the MSMEs have "Access to finance" in India that cost of acquiring a SME client is costly because of
as against around 21% in countries like China, Malayasia the small ticket size of the business. This is not always
and Philippines. true. In the present scenario, when banks are struggling
for Capital preservation, SME can be a saviour for the
The major pain points in access to formal lending includes bank. Bank loan sanctioned under CGTMSE scheme
long processing time, information asymmetry, complex carries "zero risk weight", Provisioning for SME loan is
documentation, in ability to offer collateral security and high very nominal compared to other loans. Moreover, unlike
cost of borrowing. While overall credit growth stood at corporate borrowers, SMEs don't bargain for concession
19.6% (YOY Sep 17- Sep 18) for micro and SME segments, or waiver, they accept the pricing advised by the banks.
the MSMEs portfolio of public sector banks is showing a
declining trend. The market share of PSBs in MSME lending 4. Risky: Banks consider SME as risky borrowers because
has declined to 48.1% in (Sep'18) from 58.6% in Sep'16 of the inherent limitations like lack of documentary
(55.0% in Sep'17) (Source - MSME pulse, December 2018). evidence regarding viability of business, poor financials,
no proper marketing arrangement etc. However, the
The MSME lending landscape is undergoing paradigm shift. risk can be mitigated by way of understanding the cash
Digitalisation, formalisation and new government initiative flow of the firm. It is the cash flow of the firm which
is changing the lending pattern in MSME sector. will repay the dues. If the lender make effort to
understand the cash flow of the firm and advise
Digitalisation has opened new lending avenues for MSMEs repayment schedule based on the cash flow then the
such as Peer to Peer Lending, payment banks, NBFC, etc. chances of slippage of the account to NPA will reduce
These new age lenders are leveraging technology to considerably. New age lenders have started fixing
originated SME loan in huge volumes.

New and innovative products to MSMEs, flexible repayment
period based on cash flow, simple and easy application
process, less turnaround time, easy documentation etc
provides competitive edge to the New age Fintechs over
traditional banks.

Challenges in MSME lending:
1. Information asymmetry: MSME borrowers lack the skill
of formal account maintenance, record maintenance,
data management etc. They do have the financial ability
to hire professional for record maintenance. They lack
the ability to present their business reports as per banks

28 | 2019 | DECEMBER | BANKING FINANCE