Empowering SMEs - Mega Prospects in Microlending
The Micro and MSME segment is adopting technology to identify the right and good customers through data mining, says Sabyasachi Rath, CEO of Karvy Financial Services:
Babu Nair: How has the business of lending been to the SME and MSME sector in the last few years? What business opportunities do you see ahead?
Sabyasachi Rath: Retail lending in India has had a run for past few years. A recent report by TransUnion CIBIL and Google show that there has been around 18% CAGR growth in retail lending in India. As of December 2020, retail lending market in the country is roughly $600 billion. Retail lending, customers, fintech companies have all moved into digital. The borrowers have become much more tech savvy. While 30% of the borrowers are below the age of 30, nearly 25% of the borrowers are women and they are all tech-savvy. India is at the cusp of a digital revolution. And many lenders have adopted digital in their entire customer lifecycle.
Beginning of the pandemic was a difficult time for the lenders or the NBFCs. The collection efficiency dipped to as low as 30%. But it has steadily increased after that and by December, every lender could achieve collection efficiency in the 85-89% range. The last quarter was one of the best quarters for lenders as collection efficiency moved to the pre-pandemic levels. In the second wave, there was some impact, but the businesses have adapted to the new normal. There is clear distinction between essential and non-essential categories of business now and the essential category of business paid on time making the collection efficiency go up.
How are you improving your customers’ experience in terms of loan turnaround time and better service?
We are in the business of micro enterprises, where we give secure loans in the range of `400,000 to `1 million.
Earlier, there were a lot of touchpoints, but they are reducing now with the help of digital technology (AI & ML). A few years ago, onboarding a customer used to take 2-3 days’ time which has now reduced considerably. Cutting down time has also helped us in cost efficiency.
What kind of forward and backward integration can give you a competitive advantage and get more value for your customers?
It’s a highly competitive world and what matters is how you serve customers without compromising on quality. Let’s divide the fintech into 2 parts - one that is purely a fintech company and the second a fintech lending company. The first category is a part of our business. Our pure fintech business gets us a lot of enriched data, helping us in the entire digital journey. On the other hand, the fintech lending companies have their own product expertise and are single product companies. We are also a single product company, but if we do multiproduct, then it’s imperative that we have a VC arrangement where both organizations come together. It is much more capital efficient to be a VC or a co-lender. Regulators also encourage both banks to NBFCs or NBFCs to NBFCs co-lending. That is the flavor of the day going forward.
What is the vision for the next 5 years in your focused segment of lending?
The micro segment is a growing sector and is expected to grow, at least, by 2x. Tax compliance, statutory compliance etc have increased for most of the enterprises. They are paying more taxes, thus making data available that can be used to identify right customers. A recent study conducted by us reveals that 75% of the promotors of micro-enterprises, which are mostly proprietary firms, use some form of social media, which is a powerful tool. Going forward, MSME or the micro enterprises, will be more digitally enabled, and will get faster and better services.
Would you like to share any vision for the leaders of tomorrow in the MSME lending sector?
One should target to give the best service to the customer. Use the best technology available. India should be perceived as a country with the best MSME segment lending and a benchmark. As yet, 40-45% MSMEs are either underbanked or unserved or are dependent on the local moneylender. The ultimate aim should be to replace the moneylenders and lend to these MSMEs money at affordable costs – that should be the vision of any lender in a MSME business.