Budget 2023: Supporting last-mile fintechs can bolster democratisation of access to credit

Every year, the nation looks to the Union Budget for policies and reforms that will ease procedural issues and facilitate growth across the board. The Micro, Small, and-Medium Enterprises (MSME) sector, said to be the backbone of India’s economy, can pave the way for the country to hit the ambitious $5 trillion economy goal in the next five years, if supported by the right proposals in the Budget this year, and going forward.

By adopting tech-enabled processes, agile non-banking financial companies (NBFCs) have proved they have the chops to serve the niche credit needs of underserved consumers and businesses with tailored products, broader flexibility, and last-mile reach. NBFCs are poised to see their assets under management (AUM) grow by up to 14% in FY24. In fact, unsecured lending, mostly to the MSME sector, is growing rapidly and is expected to increase by over 20% in the next financial year, according to CRISIL.

The upcoming Union Budget 2023 is the right time to make a significant shift towards energising fintech NBFCs and last-mile MSME lending by making changes in these three areas:

Strengthening relationship between banks, last-mile fintech NBFCs

The co-lending model between banks and NBFCs is meant to be a win-win-win for priority sector lending (PSL). However, a lot of banks limit their co-lender selection to larger NBFCs. There needs to be an improved distinction between NBFCs engaged in last-mile lending and larger NBFCs. This should be based not only on ratings and AUM, but also on the overall transparency and reporting of the business.

Changing regulations and budgetary relaxations is necessary, given the complexities involved in last-mile financial distribution. Banks partnering more effectively with mid-sized and smaller NBFCs will enable fast access to PSL financing, which benefits both lenders and borrowers.

On a similar note, NBFCs have to rely on debt capital that mostly comes from banks. Incremental borrowings of NBFCs have already risen by 100-150 basis points (bps) and may rise by another 50 bps. Most of the borrowings of NBFC are from banks and therefore regulating banks by placing a cap on the cost of capital will ensure affordable last-mile lending.

Extending government schemes

Last year, the government's decisions to revamp the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and extend the Emergency Credit Line Guarantee Scheme (ECLGS) until March 2023 were a welcome relief to credit-starved MSMEs.

ECLGS proved to be a great support to MSMEs in the dire financial crunch that followed the pandemic, and according to news reports, the government is planning to extend the scheme till March 2024. While the scheme is beneficial in intent, it is challenged with implementation woes. Upon extension, streamlining the application process and reducing processing time can reduce stress on businesses and the scheme. Providing clear communication and flexible repayment terms can also improve efficiency and reduce loan defaults under the scheme.

The CGTMSE scheme has helped small businesses access unsecured loans, but as the scope of the scheme has expanded, certain aspects need to be revisited for the scheme to be effective. Removing the interest rate cap of 18% and extending the scheme to all last-mile lenders serving the financially excluded MSME sector would increase access to credit and improve loan terms for MSMEs.

Standardising asset classification

There is a need to change non-performing asset (NPA) norms to smaller ticket size loans, wherein the recognition of NPA is not done day-wise and standardisation of assets need not wait till dues are settled in full. This is a very practical issue that MSMEs face when they take a loan, as clearing dues in one go can be very difficult given the amount of liquidity these businesses have.

Standardising the asset classification process would mean borrowers would face less pressure to meet repayment deadlines or to pay off their loans in full. This would help reduce the burden of debt on these borrowers and make it easier for them to manage their finances. This move can also boost lending and increase access to credit for last-mile borrowers.

In Budget 2023, the government can implement new initiatives and revamp existing schemes, enabling them to effectively facilitate credit access for MSMEs and provide adequate and appropriate support to last-mile fintechs.

Last-mile financial services’ providers are looking forward to the extension of schemes conducive to growth, simplification of compliance, smoothing over of business barriers, and a continued push for the growth of the sector as a whole. These moves hold the key to bolstering MSME growth and accelerating India’s journey to becoming a $5 trillion economy. 

Hardika Shah is the Founder and CEO of Kinara Capital, a finance company that offers flexible, collateral-free loans to small business entrepreneurs.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)