Despite their importance to the Indian economy, MSMEs suffer institutional neglect with access to financing at a reasonable cost being one of the key pain points for small businesses. However, a combination of realisation of the importance of this segment, improved risk appetite, and innovations in the channels linking borrowers with lenders is slowly but surely changing things for the better.
Ignore SMEs at the economy’s peril
According to a recent report by the Ministry of Micro, Small and Medium Enterprises, SMEs contribute around 8% to India’s GDP, account for as much as 40% of India’s total exports and 45% of the country’s manufacturing output. The sheer scale of this growth engine is also reflected in the number of people employed by it – as per the Ministry, the SME sector employs over 100 million people. The contribution of this vital segment is only going to grow. According to a CII report, SME contribution to India’s GDP is expected to grow to 50% by the year 2024.
SMEs need active support
Despite this segments importance, small businesses have not received the kind of support they need and deserve. Poor infrastructure, uncertainty over government regulations, corruption, poor access to latest affordable technology, power cuts, absence of exclusive marketing platforms and distribution networks, labour issues, and general lack of institutional support have combined to hold back growth.
Solving the financing puzzle
It is rightly said that finance is the lifeblood of a business. Unsurprisingly, financing remains the biggest deterrent to the growth of SMEs in India. Banks find SME exposures cost ineffective and too risky. To be fair, the businesses themselves are to blame for this, albeit only partly – poor quality of record-keeping and high dependence on/preference for cash transactions make many of these businesses poor credit exposures.
NBFCs and MFIs focused on the SME segment do offer specific credit solutions but their collective scale is not sufficient to satiate all the demand for regular credit.
There is change blowing in the wind
Lately, government initiatives to solve the financing problem for SMEs have gathered pace. The Government rolled out numerous SME-focussed initiatives including the re-implementation of Public Procurement Policy, Pradhan Mantri MUDRA Yojana, Make in India, Startup India, and Skill India. The government also has plans to make financial and technical support more accessible to the SMEs.
Apart from targeted policy initiatives, two other developments are aiding the belated mainstreaming of SMEs. The recent ‘Demonetisation’ move has forced businesses to reduce dependence on cash and move towards a more robust audit trail in their dealings. This helps lenders to make more objective and realistic assessments of credit-worthiness. The other major change is technology. Everything from access to business records, to verification of documents, to reporting to financials has been disrupted in a positive manner, thus improving the risk profile of SMEs.
Loan Frame’s Value Proposition
Loan Frame is a lending marketplace that helps SMEs to grow by solving their access to and cost of financing problems through an easy and friendly credit experience. We are committed to change the way loans are availed in India and utilise cutting edge technology and innovation to minimise turnaround times in the borrowing process to get the best possible proposition for our clients.
The several advantages we offer to our customers include – 24×7 access, simple and fast process for application of loans, right assessment of needs, numerous options to choose from-choose the lender you would want to associate with, and transparency at every stage.
Our tie-ups ensure that instead of multiple visits to numerous lenders, once our client enters the details of its requirements with us, our partners reach out with the best credit lines that they can offer. This is facilitated by our large network of partnerships with leading banks and NBFCs.
Apart from obtaining fresh funding, one of the significant ways in which we offer tangible value to our customers is in helping them restructure their existing loan book. This is done primarily in one of two ways: refinancing existing loans to obtain better terms or debt consolidation. Refinancing proves useful because the structured and disciplined approach we introduce to the loan application leads to lower rates. Other than this, debt consolidation – wherein a lender (bank or NBFC) consolidates all facilities, loans, and borrowings into a single arrangement – helps to enhance credibility of borrowers, reduces administrative costs, lowers cost of borrowing, and increases borrowing headroom.
We are in the process of expanding our reach beyond the large cities and into smaller towns and cities where there is limited access to funds. We aim to overcome the lack of penetration of credit institutions be leveraging technology and our partner network.
Loan Frame wants to be the catalyst for SME growth, thereby empowering this segment to script India’s growth story.
The article was authored by Shailesh Jacob for Iamwire on February 6, 2017.