Opinion

Adopting new ways to boost MSME credit

B Yerram Raju | Updated on October 26, 2019

Funding project clusters and taking collective credit guarantees can make a difference

This month, bankers moved to shamiana camps in the districts for mass lending to entrepreneurs in MSME and retail segments, in keeping with orders from the Ministry of Finance. The MSME entrepreneurs are holding their breath going by their experience with MUDRA and 59Minute Loans!

Bankers of the current generation have no experience in loan melas of the 1980s managed by the then minister of state for finance Janardhana Poojari, who was keen to push the Integrated Rural Development Programme. Floodgates to credit indiscipline were opened at that time. That was followed by loan waivers in the farm sector. That situation can, however, be averted now.

Credit to micro and small enterprises has fallen significantly in the last five years. Can the clock be reversed now? Will the banks be able to quench the MSMEs’ demand for debt? Can they offer a bouquet of viable implementable schemes with investments ranging from Rs 5-200 lakh that have potential for growth in the districts where they hold these camps? The answer is ‘yes’.

Banks should be aware by now that the clients do not have balance sheets that are amenable to lending. Yet, it is possible to accelerate lending to MSMEs, particularly in the manufacturing sector. Here are some steps that banks should follow:

  • Understand the enterprise and environment
  • Understand the entrepreneur
  • Segment the entrepreneurial traits
  • Find out the lifestyle of the entrepreneur
  • Use data on entrepreneur and enterprise
  • Share among peers
  • Differentiate by risk-based lending rates

Cluster approach

Perverse incentives for long have prevented the horizontal growth of MSMEs. Scaling up consequently suffered. A transition from micro to small and small to medium just did not take place, save exceptions. Hence, cluster projects should be set up. By doing so, there is a reasonable chance of reducing adverse selection. They can select entrepreneurs who have an appetite for projects of small size with forward and backward linkages.

If they set up clusters, they can also cross-hold risks and enable entrepreneurs to get into sustainable ventures from the very first year. They should, however, set up monitoring instruments and get feedback on a continuing basis. Every enterprise shall be set up with a computer and customised ow-cost ERP software and the cost of it should be incorporated in the overall project cost.

Since banks do not have adequate manpower, they should plan to take the services of accredited institutions like the Industrial Health Clinics wherever established, or cost accountant and chartered accountant firms that have full knowledge and understanding of the MSMEs.

Start-ups in manufacturing are aspirational and technology savvy compared to the previous generation, and may also carry less risk. Hence, they can be offered loans at low rate of interest compared to older-generation entrepreneurs. If the old generation entrepreneurs have a vision and planned succession, they also can be offered a similar rate of interest. While interest rate has significant impact in production of goods in a competitive market, service sector entrepreneurs will be able to absorb higher interest if they are given credit on time. They recover such costs in the pricing of services.

Most enterprises come with least collateral or inadequate collateral. Banks should pool the assets and take guarantees on a portfolio basis in such situations, with the CGTSME (Credit Guarantee Fund Trust for Small and Micro Enterprises).

The advantage is that they don’t have to proceed legally against any individual failed asset in the portfolio but can still put up their claim once they notice that the asset has turned into an NPA despite their best efforts. This will reduce moral hazard. There is hope even in these adverse times for banking and the economy.

The author is an economist and risk management specialist. The views expressed are personal and are part of a presentation made at the SME SURGE event held by the Hindu Business Line on September 27, 2019

Published on October 26, 2019

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