THE FUTURE OF MICROENTERPRISE LENDING IN INDIA

The success of the microfinance industry is determined by its outreach and impact in serving the unbanked and unserved & underserved population of this country. The available data reveal that the industry witnessed a 40 percent increase in equity investments, with a 25 per cent increase in the number of clients at 2.5 crore, signalling that the industry is well poised for further growth. Mohammad Mustafa, the Chairman& Managing Director of the Small Industries Development Bank of India (SIDBI), the apex Bank for Micro, Small and Medium Enterprises( MS ME) and one of the pioneers in microfinance industry, explains about the current mass market banking landscape and why innovation is the need of the hour to support the microfinance industry’s growth. Excerpts.

What has been the role of microfinance institutions in India?

Micro finance ins ti tutions (MF Is) in India have played a vital role in inclusive growth. The NGO-M F Is who initially had social capital based approach transformed their developmental mandate to include financial inter mediation and became dominant players in the sector. Micro finance which started as an alternative source of finance to the bottom of the pyramid, turned out to be a tool for uplifting the social standard of the masses and working their way out of poverty. The sector has helped millions of households in the most remote areas to give wings to their dreams by providing them the means to fulfill them. The micro finance institutions have indeed facilitated the access to financial services tot heun banked segments of the society and thus have emerged as a powerful tool for economic empowerment of the people at the bottom of the pyramid.

Given the emergence of small finance banks (SFBs) and fintech companies, has there been a change in the mass market banking landscape in India?

SFBs have added a new dimension to the financial landscape in India. Microfinance have now increasingly becoming more and more mainstreamed with the formal banking. The trend shows that the sector is now dominated by banks with close to 40 per cent market share. The market share of banks and SFBs put together works out to 60 percent which indicates that there is a shift of portfolio from the MFI base to the mainstream banking base. While the SF B snow have access to low cost deposits, they will be in a better position to bringdown the overall cost of funds and lend at a competitive rate. This may create a challenge for the existing pure play MFIs to revisit their model and strategy to remain competitive. Onthe other hand, alternate forms of lending in the formal sector and the creation of a marketplace by fintech companies are gaining momentum. These companies are also exploring mobile-based lending solutions in local languages to attract customers. That’ s why I think partnerships may be the way forward for the mass market banking landscape in India.

It is understood that SIDBI has forged partnership with few not-for-profit MFIs to on-lend directly to borrowers at the bottom of the pyramid. Can you throw some light on the new initiatives of SIDBI in this regard?

It has been my vision that borrowers at the bottom of the pyramid should have access to credit at affordable cost to take their dreams forward. Further, it has also been observed that a number of micro finance borrower shaving potential to scale up their operations were not able to take it up to enterprise level on account of not having access to credit at affordable rates. SIDBI identified these critical gaps in the credit delivery mechanism of mass market banking which have been the main hindering factors in the enterprise promotion from livelihood. It is observed that if the livelihood interventions are sustainable and profitable at an interest rate of 20 per cent to 24 percent, and if the credit is made available at affordable rates to such micro finance borrowers who have already availed three to four cycles of loans from MFIs, it may help in a bigway in promoting the enterprises and scaling up their business. Against this backdrop, SIDBI has launched a programme in partnership with the Not for-Pr ofit MFIs to extend the loans between Rs50,000 toRs500,000 at affordable rates to micro entrepreneurs for promoting enterprises. The first such arrangement has been entered into with Cashpor Micro Credit, Varanasi and the assistance to ultimate micro borrower is being extended at 16.95 percent pa. Initially the programme is being implemented in the eastern Uttar Pradesh. It is envisioned to create a market for such borrowers commonly referred to as ‘missing middle’ and thereby helping them moving up the ladder. The second such arrangement has been entered into with the Shree Kshetra Dharmasthala Rural Development Project (SKDRDP), Dharmasthala wherein the assistance would be extended to the micro entrepreneurs at an interest rate of 15.40 per cent per annum. Both these organisations are not-for-profit organisations and largely driven by the social motives. The initiative has already gathered momentum and the flow of applications are continuously increasing. SKDRDP has indicated that it may deploy around Rs 500 crore in next two years under this enterprise promotion initiative of SID BI. Cashpor is equally bullish and enthusiastic in taking the initiative to the next level. It is envisioned that after the pilot phase, the programme would be taken to other parts of the country in a phased manner. I am confident that this intervention of SIDBI in the mass market banking would go a long way in enterprise promotion in the country.

What are some of the shifts that are needed to further increase the reach and relevance of mass market banking?

Firstly, organizations will need to innovate using data to minimize credit risk. For example, the extensive use of analytics is the need of the hour to determine whether predictions, harvest patterns, construction growth rates and other important aspects, enabling financial institutions to predict the future economic conditions of such businesses. Secondly, a strong monitoring architecture needs to be setup to an alyse sudden changes in the behaviour of customers with regard to repayment delays and increasing Portfolios at Risk (PAR). Floating rapid response teams could also help to address such issues dynamically. Third ly, financial institutions need to distribute portfolios across states in India, expand to new geographies to avoid region specific shock sand to increase their reach across the country. Fourthly, MFIs should work out ways of reaching the missing middle (with loan requirements within Rs50,000 to say Rs500,000), i.e,unorganized MS M Es for the next wave of growth.The ‘Missing Middle’ segment has a big influence on kindling entrepreneurship, but lack of adequate and affordable funding to the segment continues to be a challenge. Last ly, the increased reach and relevance of mass market banking, will largely depend on howwell the players can blend technology and human interface in providing financial solutions to the clients. Leveraging technology to bring down operational costs and enhancing penetration and training employees to offer customized solutions to the clients will shape the future.

Financing to micro-entrepreneurs and MSME enterprises has been limited, inhibiting the growth of these organizations. What are the reasons for this?

Three major factors have prevented financial institutions from extensively lending to micro-entrepreneurs and MS ME enterprises. First, reliable data/ information from these organizations are often unavailable, creating unforeseen lending risks. Banks are mostly unable to gauge the creditworthiness of SMEs and thus charge higher interest rates from such institutions to mitigate their risk, thereby making financing difficult. Second, there is a lack of access to collateral/ quality collateral from most micro entrepreneurs and MS ME enterprises. Third, there is a need for the local presence of banks for sourcing and collections. This may not necessarily be optimal for banks to do from a cost perspective.

How are regulators and SIDBI trying to address this credit gap, given the thrust by the government and the importance of the micro enterprise sector?

The sustainable development of the MSME sector is a big part of SIDBI’s vision. SIDBI provide funding support to MSMEs through NBFCs, MFIs, SFBs, scheduled commercial banks and select financial institutions. Under it’s direct lending window, SIDBI inter alia offers soft loan/quasi equity under it’s SMILE Scheme to MSMEs at an attractive interest rate. In order to facilitate credit flow to micro and small enterprises without collateral and third party guarantee, guarantee cover is provided for loans to MSMEs up to Rs 2 crore through CGTMSE. As explained earlier SIDBI has taken initiatives in the recent past to facilitate the access of cost effective credit to the aspirants at the bottom of the pyramid to take their dreams forward by helping them in establishing their own ventures/micro enterprises through partnerships with MFIs.My vision is to bring down the cost of lending to this segment to 12-13 per cent i.e. at par with other MSME lending and to evolve a market for scaling up the livelihood initiatives under microfinance to enterprise building.

What are some of the non-financial structural interventions that SIDBI has taken to resolve the problem of lending to MSMEs in the long term?

Often, the data on MSMEs comes with a significant lag. The missing information could potentially provide a comprehensive and concise report on the ground-level sentiment, serving as a crucial tool for policymakers, lenders, trade bodies, economists, rating agencies and MSMEs themselves. We launched the CriSidEx, i.e., the quarterly CRISIL-SIDBI MSME Sentiment Index—to address this gap. Also, structured data on MSMEs is not available during the year, preventing early decision making, as required, by bankers or policy makers. Hence, we launched the MSME Pulse Report in partnership with CIBIL to provide quarterly information on credit exposure, credit growth, NPA levels, market share, etc., on such organizations, giving the credit industry much-needed trends and insights to make information oriented business decisions. To improve accessibility of credit and handholding services to MSMEs, SIDBI earlier launched a universal enterprise portal www.udyamimitra.in through which entrepreneurs can apply for loan from more than 150 lenders without physically visiting bank branches as also seek various kind of handholding support from around 17,000 plus handholding agencies and credit advisors registered therein. Samridhhi- the virtual assistant on banks loan portal has recently been added which would answer standard queries of aspirants 24*7. In order to make the process of obtaining credit easier, SIDBI recently introduced "Contactless Loan Platform”, a transformative initiative in MSME credit space.The web portal www.psbloansin59minutes.com will enable in principle approval for MSME loans up to Rs. 1 crore within 59 minutes. The portal whichwas formally launched by the Union Minister of Finance and Corporate Affairs, Arun Jaitley sets a new benchmark in loan processing and reduces the turnaround time from 20-25 days to 59 minutes. To promote the culture of entrepreneurship in the country, SIDBI in partnership with Common Service Center Special Purpose Vehicle( C SC-S P V) viz. CSC e-Governance Services India Limited, has launched “Udyam Abhilasha” campaign in 115 aspirational districts of the country on entrepreneurship awareness, to motivate and inspire the youth for selecting entrepreneurship as preferred occupational choice and to promote the culture of selfemployment, which will reinforce the importance of micro and small enterprises as an instrument for economic growth and employment generation. Aspart of the capacity building of the microfinance sector, SIDBI in collaboration with IIM, Ahmedabad conducted two high impact training programme son“Challenges of Managing Inclusive Finance in India”. The Programme was targeted to enhance competence in the field of inclusive finance amongthe stakeholder institutions such as MFIs, Small Finance Banks, Commercial Banks, including the Regulator. On success of the programme and taking the encouraging feedback from the participants, SIDBI now intends to institutionalize the programme in collaboration with a leading Business School of the country.