January 25, 2019
The MSME Ministry places the figure of non-agricultural MSMEs in the country at 63.38 million based on the definition under the MSMED Act, 2016 and the 73rd round of National Sample Survey. It is well-understood that access to formal finance is one of the main obstacles in the development of MSMEs. As the recently released Inclusive India Finance Report, 2018 observes, barriers to accessing finance from formal institutions include the requirement for collateral or guarantee, inflexible policies, and high rates of lending among other things.
In terms of unsecured credit, the CGTMSE was launched by Government of India and the SIDBI with the view of facilitating lending without the need for underlying collateral and guarantees to support first-generation micro and small entrepreneurs. The other facilitative framework is the Goods and Services Network (GSTN) that emerged with the enactment of Central Goods and Services Tax Act (GST) in 2017 and serves as the technological backbone for GST. Being applicable to enterprises with a turnover of INR 2 million and above, GST catalyzed a formalization wave among the erstwhile micro and small enterprises by compelling them to file returns on the basis of their sales and trade data on the GSTN database. Till date, the GSTN has a database of 20.79 crore returns and 511 SIDBI crores invoices. According to an Omidyar-BCG Report, 92 lakh MSMEs are now GST-registered. However, both these policy tools remain significantly under-leveraged hitherto owing to constraints in the policy framework applicable to them.
In the light of the above, this article will make two actionable recommendations to facilitate/support the creation of unsecured (flow-based) credit to micro and small enterprises. The first concerns competitive access to the Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) scheme for lenders other than commercial banks, viz., SFBs and NBFCs. The second argues for access to the GSTN database for entities in the credit chain including credit bureau/banks and non-bank lenders.
The CGTMSE was launched with the view of facilitating credit without the need for underlying collateral and guarantees to support first-generation micro and small entrepreneurs. However, at present, out of potential 62.74 million micro-entrepreneurs, a mere 2.9 million are presently covered under the CGTMSE. This under-coverage may potentially be remedied by relaxing the access restrictions that confront new bank lenders like SFBs and NBFCs under the scheme. The scheme imposes restrictive eligibility conditions on both these types of entities. At present, only commercial banks can avail of the CGTMSE guarantee on-tap. Small finance banks qualify as Member Lending Institutions (MLI) under the scheme, among other things, if:
Such legacy restrictions that look-back appear to impose a high barrier for small finance banks with only three of the presently operational 10 SFBs being registered as MLI under the CGTMSE. Similarly, NBFCs qualify as MLI under the scheme, among other things, if:
the NBFC is in profit for the last three years
the NBFC has an MSE portfolio of INR 1 billion
the NBFC has a three-to-five-year track record of lending to MSEs
Only eight NBFCs are listed as MLI under the scheme presently. The criteria are privilege vintage and size of the book over lean business models; thus there is a case for relaxing vintage, profit, and the quantitative portfolio threshold criteria from the above conditions. This will enable freshly licensed, lean, and verticalized NBFCs to be eligible to avail the guarantee. Gradually, the endeavor should be to make the CGTMSE window access available to all types of lenders including platforms on an on-tap basis.
As mentioned earlier, the GSTN is currently a repository of 20.79 crore returns. These are GSTR-1 returns that contain information about outward supplies of goods and services of a given enterprise, aggregate turnover of the previous financial year, and HSN-wise summary of outward supplies (among other things). These data points could be an important source of credit appraisal for unsecured lending, especially to those borrowers that have a thin credit bureau footprint and irregular bank account transactions. However, at present, the benefits of formalization remain to be fully extracted as this data cannot be availed of by entities in the credit value chain including credit bureaus, banks, and NBFCs. There are two ways this constraint may be relaxed; either through open GSTN APIs or through enabling service providers to partner with GSPs to leverage GST data.
Making the GSTN APIs openly available is a policy option. Credit bureaus, banks, and other lenders can then simply plug into the GSTN to verify the authenticity of invoices and utilize the flow data points to inform other credit proxies their proprietary models may be hitherto utilizing.
A more moderate alternative to opening up GSTN APIs to third parties is to permit accessing the database through partnering with GSPs. At present, the relevant legal framework applicable to GSPs prevents it from offering its services for any activities beyond those required by the applicable GST Act. Also, the GSP is barred from using or sharing taxpayer data for any monetary considerations or for reasons not permitted by the agreement. Both these clauses cumulatively read suggest that credit bureaus, banks or non-bank lenders would be unable to partner with GSPs to leverage GST data of compliant businesses for determining their creditworthiness.
If policymakers aren’t willing to go as far exposing GSTN APIs to third parties directly, they should remove these restrictive covenants on GSPs so that third-party entities like credit bureaus/banks and NBFCs may partner with the former to leverage trade data deposited at the GSTN.
The widespread inability to access formal finance is a common pain-point of India’s heterogeneous MSE landscape. The lack of proper documentation, bankable collateral, and non-standard financials constrain them to access informal credit at interest rates twice as much as those in the formal credit markets. Both the CGTMSE and the GSTN hold promise for enabling lenders to create a viable credit proposition for small and micro enterprises. Policymakers should enable these catalysts.
About RupeePower: **RupeePower is a leading CreditTech company based in India. RupeePower’s platform Crediton is a comprehensive digital-first product suite that enables banks & lending companies to transform themselves into state-of-the-art digital lending enterprises at scale. CreditOn provides lenders with flexibility & scale to manage in real-time their credit decisioning criteria, sourcing channels, customer onboarding journey, underwriting workflows, and digital partner ecosystem – across the whole range of SME/retail credit. The product suite enables seamless online & offline origination with its acquisition platform, Loan CRM, customizable BRE with instant decisioning & Loan Origination System. Smart AI/ML-powered tools like KYC Box, Address Match & decisioning based on non-traditional sources of data enable paperless loan origination within a robust credit assessment framework. The CreditOn suite has consistently demonstrated a multifold increase in origination throughput for banks & lending companies while preserving (if not enhancing) portfolio quality. CreditOn has created client success across banks & lending companies with names like State Bank of India, Kotak Mahindra Bank, Standard Chartered, RBL Bank, YES BANK, Mahindra Finance, Fullerton India, AU Small Finance Bank, Edelweiss & Ujjivan Financial Services. The platform has enabled these lenders to disburse over USD 4 billion in retail and SME credit to roughly 2 million customers over the last four years.*\ \ ***Source:\ 1. P. 92 of the Report\ 2. https://www.gstn.org\ 3. https://cbec-gst.gov.in/pdf/03062017-return-formats.pdf\ 4. See Clause 1.1.6 of the GST Suvidha Provider Agreement\ 5. See Clause 4 (ix) of the GST Suvidha Provider Agreement