MSME Week 2020: Structurally-strong SMBs can survive any crisis says Harshala Chandorkar of TransUnion CIBIL

In the last few years, India’s credit industry has witnessed various events like demonetisation, the implementation of GST, strong credit growth in 2018, PCA framework for PSBs, NBFC liquidity crisis, followed by the economic slowdown and present COVID-19 pandemic situation. As the government and other bodies look to support the ecosystem, it is important to identify and fund the good borrowers – MSMEs that have consistently shown a strong structural position. These MSMEs deserve to be provided financial assistance in the current situation.

Banks and credit institutions of India have played a significant role in strengthening India’s MSME sector. In the last two years, the on-balance sheet credit exposure of the MSME sector has increased over Rs 2 lakh crore. The Micro segment (aggregate credit exposure under Rs 1 crore) has been the biggest beneficiary, with fresh credit disbursals of Rs 92,262 crore in 2019.

Every lender has played a unique role, be it Rajasthan for NBFCs, Tamil Nadu for private banks or largest market share of public sector banks. And in the challenging times, due to the outbreak of the COVID-19 pandemic, banks and credit institutions look for opportunities to strengthen their relationship with the MSME sector.

Harshala Chandorkar, Chief Operating Officer of TransUnion CIBIL, in her keynote conversation on SME Week 2020, shed light on the importance of MSMEs being structurally strong to ensure business continuity.

Harshala, who leads the Business and Consumer Operations and also spearheads Government and Regulatory Affairs, Industry Relations, Public Relations and Communications at TransUnion CIBIL, is also a member of the pioneering team that established its credit information infrastructure in India. Her experiences over two decades have enabled her to contribute to the development of India’s credit information and financial data infrastructure, making her one of the most trusted experts in this domain.

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Common financial behaviour patterns of structurally strong MSMEs

While structural strength might appear aspirational, the ground reality, as Harshala revealed, was that most of India’s MSMEs were in fact structurally strong. A recent study by TransUnion CIBIL found out that nearly two out of every three MSMEs in India have a structurally sound credit position. “As of January 2020, 63 percent of the active MSMEs are in the structurally strong risk segment, while 37 percent fall in the weaker segment,” says Harshala. If these MSMEs reach out to the banks, they would be able to get access to credit that could help power their business continuity.

“The impact of lockdown on any entity will depend on multiple factors; two of the most critical factors being credit leverage and the liquidity position of the entity. Deeper insights can be gained on these two factors at an entity level by studying the CIBIL Rank and utilisation rates of these entities. By simulating these two elements on past events like GST implementation, IL&FS crisis, and rise in NPA rates, we have observed and concluded that entities with low leverage and higher liquidity had the lowest default rates during and post these events,” says Harshala.

Talking about financial behaviour patterns common to structurally strong MSMEs, Harshala says, “Firstly, they will have low leverage levels and because of lower leverage, an MSME borrower will have lesser dues to clear. Even though the RBI has recently provided a moratorium that will help all kinds of borrowers, it’s vital to note that a highly leveraged borrower entering into the lockdown situation would have passed through some stress, which in-turn would have impacted its business model in some shape and form. The CIBIL Rank factors in an MSME’s leverage position and can be used as a defining indicator for leverage.”

Talking about how high liquidity was also a key quality of a structurally strong MSME, she adds, “Supply chains are virtually at a standstill, which is causing the working capital gap to widen. Borrowers with high liquidity will be in a better position to service the stretched working capital cycles. Utilisation rates can point towards a borrower’s liquidity position as highly liquid borrowers tend to utilise their limits less.”

Your CIBIL Rank, and how to improve it

CIBIL Rank is TransUnion CIBIL’s credit risk rank for MSMEs that predicts the probability of an MSME becoming a non-performing asset (NPA) in the next 12 months. It assigns a rank to the MSME based on its credit history data on a scale of one to ten, rank 1 being the best possible rank for the least risky MSMEs and rank 10 being the riskiest rank for MSMEs.

“The lower the CIBIL Rank, the lower the risk of NPA associated with the MSME. By adopting risk-based pricing of MSME loans based on CIBIL Rank, banks and Non-Banking Financial Companies (NBFCs) will now be able to make access to credit cheaper for well-performing MSMEs in the country,” says Harshala.

Maximising the impact of government schemes for business continuity

To maximise the impact of the schemes for MSMEs recently announced by the government under the Atma Nirbhar Bharat package, Harshala advised MSME business heads to consult their financial advisors and look into leveraging collateral-free loans that would best suit their business model and approach their banks or their financial institution, while adding that banks themselves were also reaching out to MSMEs that are eligible for these loans, as they’ve a Rs 3 lakh crore disbursal target to meet by October 2020. “There is a lot of liquidity being made available to MSMEs and we are also working with the banks and financial institutions by leveraging our data to help point them in the direction of the right MSMEs,” says Harshala.

Rethinking strategy for the new normal

“Everyone needs to go back to the drawing board to see how they could tweak their business models to do things differently,” says Harshala about business continuity in the new normal. She also advocates leveraging technology and being a digitally-powered business. Harshala also advises business leaders to re-strategise their cash flow management with the help of financial advisors and curb discretionary spends, while keeping an eye on their credit profile. Above all, she advises businesses to stay on the pulse of the market and keep themselves informed.

“Our mission is to create information solutions that enable businesses to grow and give consumers faster, cheaper access to credit and other services. Through the power of information, TransUnion CIBIL is working to support our members drive credit penetration and financial inclusion for building a stronger economy. We call this, information for good.” she says, signing off.