SME lending ................................................
NBFCs are venturing to finance MSMEs and SMEs even as banks fear to foray into this sector:
The MSME and SME sectors are regarded as engines for economic growth and for promoting equitable development. These sectors help the economy by promoting a balanced development of industries across all regions of the country.
When Indian banks faced the rising NPAs, they became reluctant to lend to MSMEs and SMEs considering the risky nature of their businesses. While banks could cope with the problem of NPAs to some extent, some NBFCs got struck with the liquidity crisis and became wary of doing business with SMEs. The new age NBFCs have taken advantage of the situation and they saw this as an opportunity to scale up their business with MSMEs and SMEs.
NBFCs in India also face the challenge of doing correct credit risk assessment of MSMEs and SMEs on account of lack of financial information, historical cash flow details etc. This has deprived many MSMEs and SMEs of institutional credit.
MANUFACTURING SECTOR
India’s MSME segment is significantly contributing to the GDP and playing a vital role in employment generation. Estimates indicate that the current credit flow to this sector is approximately `13 trillion.
Mehernosh Tata, head - SME Lending, Edelweiss Finance, says Edelweiss recognizes the crucial role that MSMEs play and understands the importance of financing this segment and supporting its growth. “Our SME loan disbursals have been growing at a CAGR of more than 20% in the last 3 years. We have a well-diversified and balanced portfolio spread across industry sectors. Our deep understanding of customer aspirations, innovative product suite, digital adoption, singular focus on on-boarding high quality clients and due diligence in credit assessment, help us to provide the required support to the
MSMEs in their growth journey. Our aim is to provide timely credit to the micro and small enterprises in India.”
Edelweiss Finance has collaborated with State Bank of India, Bank of Baroda, Punjab National Bank and Central Bank of India under a co-origination model with an aim to ensure timely disbursal of credit to MSMEs. It is the only NBFC to do so.
NeoGrowth is a leading NBFC that provides easy and quick business loans to MSMEs in the retailer segment, which are primarily service based industries. The company has seen maximum increase in disbursals in the manufacturing segment, especially to engineering and capital goods manufacturers.
The SME lending business of Capital Float, a digital finance company that provides collateral free unsecured business loans online, is not concentrated on any specific vertical. Ankit Satsangi, CRO of the company, says if there is a slowdown in an industry, the company excludes firms from that industry from its sourcing list. “We work on an exclusion basis rather than on an inclusion basis. In the manufacturing side, those engaged in electronic parts, machinery parts, etc are the ones that are bullish,” he says.
Capri Global Capital is not facing any slowdown in SME business. In fact, the company sees a huge scope to grow in this segment. It is growing at 40% every year and this is expected to continue for the next 5 years. Rajesh Sharma, MD, says the company is funded by 20 lenders, including private and public sector banks and foreign banks. It has a strong liability profile, offering small ticket size loans.
He adds: “We are serving the underserved customer – those who are not served by the formal institutions. SME lending business is only 16% of the `60 trillion credit demand and there is a huge gap. We are not targeting any specific sector since we are serving the underserved customers.”
SERVICES SECTOR
Food & beverages, restaurants, IT, transport and logistics are the segments that most of the NBFCs receive their business from. NeoGrowth has seen a steady growth in disbursals to food and beverages, apparels and groceries segments. IT, transport and logistics and facility management services are the top 3 services sectors that Incred Finance targets. For Capital Float it is restaurants, manpower and business consultancy.
LOWEST & HIGHEST NPA
Manufacturing sector has higher NPAs compared to services sector, especially because of the recent slowdown in the
economy. Saurabh Jhalaria, head, SME Lending, Incred Finance, says in the manufacturing sector, the highest NPA is in the textiles segment, mainly because of competition from Bangladesh, China and Taiwan and also the impact of GST on the industry. The lowest NPA is seen in the chemical industry. In the service sector, the highest NPA is in the advertising sector, because this segment borrows more for working capital. The lowest NPA is in the IT industry, he says.
According to Piyush Khaitan, founder, NeoGrowth, his company has seen lowest NPAs in petrol pump segment and higher NPAs in auto dealer segment.
Capri Global Capital is serving SMEs with business turnover of `500,000 to `5 million. The company’s NPAs are mainly on account of family problems and illnesses of its borrowers. It is targeting small customers who needs funds to grow.
FINTECH PARTNERSHIPS
NBFCs explore new technologies depending on whether such technologies can enhance their clients’ experience or help them bring about better operational efficiencies. Edelweiss has been one of the early adopters of technology in the lending space. The company believes that technology will transform MSME operations in India and provide solutions to address financing needs of this segment. Says Mehernosh Tata: “We have been at the forefront of testing and adopting several digital initiatives, which span customer acquisition, credit decision architecture, on-boarding and customer life cycle management, helping us stay ahead of the curve, while anticipating the future needs of our MSME clients.”
Capital Float is a fintech NBFC and it has banks as lending partners, contributing 35%-40% of the business. Piyush Khaitan says the company has partnerships with a number of platforms for customer ori gi nati on, i nf ormation, a nalyt i c s , collections and risk management.
Capri Global Capital uses inhouse technology and it has migrated to the new age cloud lending platform to get mobility for the sales and production team. Piyush Khaitan says he does not feel the need to tie up with fintechs to cater its customer segment.
E-COMMERCE PARTNERS
Most of the NBFCs do not have ecommerce partnerships for SME lending. They believe that the ecommerce platform is overcrowded after the entry of banks and hence they are staying away from such partnerships.
Piyush Khaitan says at NeoGrowth the sourcing is primarily driven through a distribution network of direct selling agents. The company has also partnered with certain aggregators for customized offerings.
Capital Float has relationship with Amazon for B2B and B2C business.
NEW DATA SOURCES
NBFCs are using different data sources to get customer data like credit card swipes, GST returns, bank data, customer rating, customer lifestyle, etc. At NeoGrowth, datapoints like card swipes over PoS machines, card settlements, sales from online aggregators, etc apart from a host of other demographical, behavioural, transactional, compliance, and financial variables are used.
Capital Float is using customer GST as surrogate to customer turnover, because it is the data which is digitally available. Ankit Satsangi says the company is also running a program in which it makes use of credit card swipes to underwrite the customer and give him loans while EMI payments are made through POS machines.
Capri Global Capital uses customer underwriting models based on the c us t o mers’ busi nes s ; the company representatives visit the customers at their homes to get an idea about their lifestyle. Says Rajesh Sharma: “We talk to the customer’s suppliers, lenders, vendors, neighbours, shops, etc. We also check their profit and loss accounts to get an idea about their creditworthiness and intent to repay.”
DIGITAL TRANSFORMATION
NBFCs have introduced different products for MSMEs and SMEs as per the target customer segments and their requirements. In the last 12 months NeoGrowth has launched Vendor Finance and Purchase Finance, which are essentially short-term working capital loans. Saurabh Jhalaria says there are products for the hospitality sector where working capital, business expansion loans are offered.
Ankit Satsangi says Capital Float is targeting B2C segment as it is less impacted by the slowdown. The company is also planning to automate its underwriting process using bank statements and GST returns.
Capri Global Capital has plans to introduce special products for women entrepreneurs. Rajesh Sharma says women entrepreneurs struggle more than male entrepreneur for funding and they are always considered to be dependent on their male partners.