How Cash Loans Can Ease MSME’s Pain in Increasing Balance Sheet Based Credit
Credit and finance for MSMEs: Discussions about improving cash flow-based loans to MSMEs have been circulating in the lending ecosystem for at least four or five years. The model can reduce the time and hassle of increasing instant credit for borrowers, even though its share of the overall lending space remains tiny, experts say speaking on day one of the PME event. Artha from Financial Express Online.
âMSMEs need timely working capital. Typical processes take months for credit assessment as it is all based on balance sheet based loans. The majority or 70 percent of MSMEs would never qualify for balance sheet loans. However, they work with some of the largest companies in the country, have a strong performance track record, and have healthy cash flow. I don’t think why this data can’t be leveraged to provide them with innovative working capital products. This would provide MSMEs with instant access to working capital, within 24 hours. This is the problem that we are trying to solve at CredAble, âsaid Nirav Choksi, co-founder and CEO of CredAble.
The Reserve Bank of India (RBI) had also urged lenders to adopt loans based on cash flow rather than balance sheet. In December last year, Governor Shaktikanta Das told a webinar that âto improve the credit-to-gross domestic product ratio, access to credit and the cost of credit must be addressed with less reliance on collateral guarantees and increasing cash flow based lending. âAlso in 2019, the UK Sinha Committee Report on MSMEs stated that the introduction of cash lending is key to reducing the credit gap faced by MSMEs.
However, âthere are structural barriers to cash lending to MSMEs. Customer acquisition costs (CAC) for lenders are high because lenders and qualified borrowers are not tied to each other. Loan operating costs (LOC) for loan application processing, disbursement and continued repayments are also very high. Some of these costs are fixed and therefore small business loans, especially those under Rs 10 lakhs, are considerably less profitable than large business loans and are therefore less attractive to banks, âhe says. report.
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However, according to the report, unlike other forms of lending (project finance, lines of credit, microcredit from MFIs), cash lending is only possible in a digital value chain of lending and payment. For example, cash loans require at a minimum visibility into past and future cash flows. âBeyond visibility, this form of credit benefits from automated checks on cash flows. For example, the lender can be assured of repayment with a lien on future cash flows. This is now possible thanks to a set of nested Digital Public Infrastructures, such as E-Links.
The cash flow model allows banks and other lenders to extend credit to borrowers based on real-time cash flow data such as underwriting, loan product setup, and repayment. The process does not have to factor in collateral as the lending basis in the asset-based model. Existing cash flow allows providing credit products with the right amount of loans with shorter term, better turnaround time and flexibility in repayment periods. However, the share of cash loans in the overall credit market remains low.
âCash flow-based loans are a very small part of the total loans that banks and NBFCs make together. The reason for the lower share is that cash flow based loans normally require much more discipline on the part of the lender, while even closer monitoring of unit cash flow is required for loans. , which means proportionately that the operating expenses (OpEx) at least initially as the business establishes itself on the top side. We have started to take small steps, but in the context of global loans, which are coming to MSMEs, I would say it is a very tiny portion, âAjay Srinivasan, director of Crisil Research.
Chandrakant Salunkhe, who heads the SME Chamber of India, however, noted that NBFCs should rework interest rates for affordable financing for MSMEs, while MSMEs also need to develop an understanding of the procedures and compliances involved in the model. traditional loan.
âThere are almost 7 million MSMEs in India and over 4.5 million of them are independent units dependent on traditional funding which is expensive. The need now is to fully understand the demand for financing from the MSME sector. In addition, most MSMEs do not understand the procedural work, compliances etc. involved in the processâ¦ NBFCs should think of a lower interest rate instead of 20% or up to 30% â, a said Salunkhe.
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However, the higher interest rate would remain an issue unless banks increase their support, as the lending rate continues to stay higher, at 12% or more for several NBFCs. âBanks sit on money and invest in AAA rated NBFCs while NBFCs like ours provide last mile distribution to micro-businesses without any liquidity reaching us at a reasonable cost. We also provided loans under ECLGS without the benefits of ECLGS coming to us from the banks. The bond that exists where bankers sit on capital and fail to release BBB grade NBFCs should be severed, âsaid Hardika Shah, Founder and CEO of Kinara Capital.
Srinivasan added that although the interest rate is an issue, but an equally important issue is the availability of funds in a timely manner. âThanks to fintechs, the turnaround time (for access to credit) has decreased, but the rate remains an issue. In addition, the last three years have been very difficult because there has been the IL&FS crisis, the Covid problem, etc. Thus, banks have become extremely risk-averse. “