CRISIL SME TRACKER: Digital push for MSE lending needs more teeth

Adoption of digital transactions in a big way by micro and small enterprises (MSEs) can help plug the information gaps that limit their access to formal credit. Traditionally, banks make lending decisions based on the borrowers’ financials and collaterals. However, since MSEs find both collaterals and credible financial information hard to furnish, their digital footprint can be an alternative for the lenders to capture more reliable information on them. 

Acknowledging this, the latest Union Budget has stated that the government will encourage SIDBI to refinance credit institutions that provide unsecured loans at reasonable interest rates to borrowers based on their transaction history.

Says Manish Jaiswal, Business Head - SME Ratings, CRISIL: “This proposal by the government is a step in the right direction. It will further the cause of financial inclusion and incentivise MSEs to go digital. Banks can then assess the cash flows and repayment capabilities of MSEs based on their digital transactions, and extend loans accordingly.”

However, the proposal requires clarity on certain key points — such as, who can be considered a credit institution, how much refinance will be made available, what will be a reasonable rate of return, and what constitutes digital transactions. Further, CRISIL believes, it would be important to ensure that the benefits flow to the intended beneficiaries and toxic assets are not loaded into the lending pool. 

An unbiased and independent credit assessment of eligible borrowers can help here. A study of over 1,500 CRISIL-rated MSEs between 2014 and 2016 shows that higher-rated MSEs had a compound annual growth rate of 19 per cent in net sales and 22 per cent in profit before tax, while lower-rated enterprises reported de-growth in both. Clearly, the higher-rated entities carry lower probability of default and can be extended loans at lower interest rates.