At Indian Merchants Chambers’ Banking & Finance Conference, several CEOs of NBFCs spoke on the topic ‘Digital Lending – Bridging the credit gap & creating a financial landscape that includes everyone’. Edited excerpts:
Panelists:
- K.V. Srinivasan, Whole Time Director & CEO, Profectus Capital
- Shachindra Nath, Founder & Managing Director, U Gro Capital
- Sudipta Roy, MD & CEO, L&T Finance
- Govind Sankaranarayanan, Co-Founder & COO, Ecofy
- Raman Aggarwal, Director, Finance Industry Development Council (FIDC)
- Subhasri Narayanan, Director, CRISIL
- Pooja Bharwani, Executive Director, Deloitte (Moderator)
K.V. Srinivasan: MSMEs face problem of more than just money. Their challenge is how do they maintain financial discipline. Their traditional attitude is to stay out of the taxman’s eye. That is changing, especially with the newer generation taking over the business reins. There is a generational change in attitude. This has stepped forward with the prevalence of GST. Progressive people are understanding the skills of going from starting a business to scaling a business, such as raising capital. Raising equity calls for governance, which is becoming increasingly important. Gone are the days where NBFCs offered templated products. Now the products are customized for industry, customers, geography, needs, etc. Capital subsidy scheme was a reasonable success, but awareness was very low. In north east, 90% of amount was subsidized, but how many people know about this? Capabilities of banks and NBFCs are focused on lending, not on creating awareness. In my previous organization, I had done 300 seminars over 3 years for SMEs. That sort of awareness creation is so critical.
Shachindra Nath: Two decades ago, there were no lenders for TVs, ACs, etc. It was too hard for lenders to figure out repayment ability for loans for such goods. After the combination of demonetization, GST, democratization of banking data and consumer behavior bureaus, it became possible to determine customer repayment ability. The accuracy is still only 30-40%, but in 3-5 years, SME financing can reach the same level as consumer financing, offering loans on tap. U GRO Capital has financed more than 2 lakh customers in last 2 years. Term loan against collateral is no longer a good product for SMEs. In 10 years, SME credit will be as big as consumer credit. Regulators are also constraining consumer credit. There is general belief that NBFCs have poor credit quality, poor collection mechanism, etc. What is required is a level playing field and an institutional framework of providing liability to NBFCs. Our capital adequacy is higher than that of banks. There is a need for mindset change. Most credit officers fear machine underwriting because they don’t understand. They know how property can be sold but not machines – that must change.
Sudipta Roy: We are the largest in microfinance in rural areas. The penetration of online applications in rural areas is not so great; it is still mostly touch based. The SME underwriting process is driven by bank statements, P&L, BS, etc. The process is driven more by ratios and cashflow, but does not look at the nuances. A lot has happened on the payment side. Though there is a lot of data capture, the level of data use is not the same. SME underwriting is not as easy as consumer underwriting, there are so many nuances. AI might help in some of the nuances.
Govind Sankaranarayanan: Green encompasses EVs, housing, etc. Some industries like solar, wind, etc, are dark green. In some businesses, they need to make investments in green such as water treatment, energy efficiency improvement, alternate types of packaging, etc. So there is a wide range of SMEs to target. The impacts of climate change are uneven. Women in rural areas are more adversely impacted by climate change, but underwriting is largely similar. Two trends are facilitating underwriting. When you underwrite an asset that transmits data, you can pickup that data, say an IOT device attached to a fleet vehicle. Another fact is that the cost of IOT devices has dropped precipitously over the years. While you can pick up data, some amount of tech has to be put in place. That can be used for underwriting and for business monitoring. For example, a device is not being used might indicate stagnation of business. While banking and GST data is readily available, other data such as equipment utilization is something we should be able to access. There is no digital public infrastructure for this. There is data on electricity bills, etc and centralizing such data can be extremely useful to lenders. Data protection should not be too heavy handed on NBFCs.
Raman Aggarwal: Some paradigm shift is required. Why are we focused on lender specific regulation….why not a borrower specific regulation? Extreme fragility of cashflow is the big problem. Equal focus is needed on the borrower. We had a big issue about moratorium during covid. We said that moratorium is not the answer, the answer is restructuring – it is required not only during pandemics; it will be required perennially. NBFCs have mastered lending innovation. The personal comfort of borrower with lender is important and a game changer. This must be included in framework of regulation. Is the answer to over-dependence restriction or diversification. Govt schemes do not trickle down. SIDBI or some agency should take up re-financing for mid and small NBFCs. Small NBFC cannot get access to capital market and also do not have the expertise. Look at success of NBFC financing. After gold loan, NBFC are very successful in vehicle finance. NBFCs are not only about financing but also maintenance, reselling, insurance, etc.
Subhasri Narayanan: There are data sets that are exogenous to the MSME but they can help predict their repayment ability. Pre 2018, there was a benign funding environment for SME. Post pandemic, it has normalized. Bank exposure to NBFCs increased from Rs6 trillion to Rs13 trillion. Now bank exposure to NBFCs has stagnated.
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