Loans to MSME in 59 minutes — A radical reform or just an eyewash?
One of the biggest announcements for MSME sector in 2018, was the 59 minute loan scheme, which promises loans of up to INR 1 crore to MSMEs from public sector banks (PSBs) through a seamless online lending market place called PSBLOANIN59MINUTES. This web portal approves a loan in 59 minutes and connects the borrower to the bank branch for sanction and disbursal.
The process is as follows: on submission of the information online, the portal does an analysis of the data and approves or rejects a loan. For loans that are approved in-principle, the portal provides information on banks that offer required product, loan amount, rate of Interest etc. The applicant has to choose the branch of the bank through which the loan shall be processed and disbursed and make payment of a convenience fee of INR 1000. The “in-principle” approval is valid for a period of 15 days from the date of approval. The Bank receives a preliminary report from the portal, where a set of 22 parameters are checked along with profile of the promoters, business activity, analysis of past financial statements, risk scoring, assessment of limits, fraud analysis and verification from GSTIN and MCA. Then, the applicant has to approach the bank branch along with the system generated approval letter and list of indicative documents. The bank would do required due diligence and sanction/disburse the loan.
As per MSME PULSE , the size of loans to MSME (under INR 25 crore) is estimated to be around INR 25 lakh crore, of which the share of public sector banks is large (around 48%). While the share of PSBs in MSME lending has been declining, they still retain a dominant share of over 75% for loans under Rs. 10 lakh, highlighting their critical role in financial inclusion. The biggest advantage of a PSB loan is its low cost, which could be 5-7 % lower than that of NBFCs and fintech portals. For a small borrower looking to borrow a collateral free loan under INR 1 crore, PSB loans are the most accessible loans, as both private banks and NBFCs mostly lend against a security. PSB loans are also an important source of funding for the manufacturing sectors such as food processing, textile, chemicals, and auto components.
As such, this policy measure may be a sincere attempt to reduce the time and effort required to secure credit from PSBs, thus easing the life of an entrepreneur. The demand for such a portal is validated by both the large number of applications (around 1.31 lakh) received within 2 months of its launch, and their total loan value. To substantiate, assuming an average loan size of INR 30 lakhs, these applications translate into loan requirement of INR 40,000 crore, which is almost 5% of the total MSME credit for loans below INR 1 crore . However, unless these applications translate into loan disbursals, the portal would remain just another channel for the PSBs to generate qualified leads
Advantages of the portal
The difficulties in getting a loan from PSBs stems from unwillingness of the ground level staff to even acknowledge/accept the loan application. Even after a loan is approved, the high turnaround around time for the disbursal of the loan remains a challenge. Therefore, the portal is a good first step to ateast reduce the number of branches to be visited. In addition, the MIS behind the portal would make it easier for the banks to closely monitor reasons for rejection of a loan.
While the intent of the scheme is good, its success depends on the ability of PSBs to quickly disburse the loans that have been approved by the portal. According to official data, the portal received 1.31 lakh applications during the first 50 days of its launch, of which around 1.12 lakh applications were approved, with a strike rate of 85%. However of these 1.12 lakh applications, sanctions were accorded for just 40,669 cases, which translates into a loan sanction ratio of around 36%. This loan sanction ratio could actually be overstated as the applications through the portal may include those for loan renewals from existing clients of banks, which are likely to have higher approval to disbursal ratio vis-a-vis that of a new client. Even if we assume that these applications are all new, the conversion ratio does seem low, as just over a third of the approved loans seem to have been sanctioned. The above performance indicates the following gaps:
1) High approval ratio of the portal suggests one of two things: either most of SMEs that are applying through the portal have good credit quality or the portal’s credit sanction norms are relaxed. Low loan sanction ratio suggests that there are differences in the credit assessment methods of banks vis-a-vis that of the portal;
2) Takeover of loans among banks is not easy, and banks are finding it difficult to extend loans under multiple banking arrangements
3) Lack of resources at bank branches to follow up with the SME and carry out due diligence
4) Unwillingness at branch level staff to lend under CGTMSE
To address the above issues, some of the following steps may be needed to improve the credit evaluation process of the portal along with related policy measures to facilitate loans by banks and improve their loan disbursals:
Process improvements that may be needed to improve loan disbursal
systems to increase the likelihood of the sanction of approved loans. Specific areas that require attention are:
- The portal should be able to capture the existing liabilities of the borrower correctly so that rejection from the banker does not take place on account of inaccurate information on the existing debt levels. Moreover, the risk rating parameters of the portal have to be similar to that of the banks so that there are no disputes in the quantum of credit sanction.
- For borrowers seeking term loans for a new asset, the portal needs to assess viability of new projects and the availability of other resources such as required land/technology with the entrepreneur.
Policy measures to support easy lending
- Relaxation of takeover norms would be required to facilitate easy takeover of loans among lenders. For example, for borrowers who already have a secured loan, a new lender may not be willing to provide a collateral free loan and may want to take over the existing loans as well. Similarly obtaining any enhancement on working capital loan from a different lender would be difficult, as banks would not be inclined to share security on pari passu basis for such small exposures.
- Since MSME sector credit seekers also require assistance in filing the application, consultants enrolled with SIDBI could be incentivised to take up the work related to filling application forms
- Many small enterprises do not have GST registration and may not want to obtain the same as the threshold turnover for GST registration has been revised. The portal may want to waive GST registration as a mandatory requirement for companies with turnover of INR 40 lakhs. The credit assessment parameter for such companies could be based on bank account statements and alternate data points such as profile of their customers, industry profitability, and track record of the utility bill payments.
In the absence of the above measures, this web portal would just be a superfluous channel for generating qualified leads for the PSBs alongside their websites and tie ups with online e-commerce platforms; what would be really enterprising is converting these leads into qualified loans for disbursal.