The country has a vision of building a USD 5 trillion economy. What role do you see for the MSME in realising that goal?
The Micro, Small, and Medium Enterprises (MSMEs) sector is a significant stakeholder in the Prime minister’s vision of Atmanirbhar Bharat and building a $5 Trillion economy. Accounting to over 30% of the Indian GDP, MSMEs contribute significantly along the five pillars of self-reliant India movement – Economy, Infrastructure, System, Vibrant Demography and Demand. The sector has grown in prominence in India as a result of its continuously rising contribution to the country’s GDP and exports as well as India’s entrepreneurship development, notably in semi-urban and rural areas.
Under the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006, Micro, Small, and Medium Enterprises (MSME) includes both the Manufacturing Enterprises as well as the Service Enterprises.
What contribution do you believe will the manufacturing sector play in realisation of the vision of ‘Make in India? Has the pandemic disruption made any impact on the role it sees for itself in making contribution to that vision?
The manufacturing sector currently accounts for nearly 17% of India’s GDP. There has been a deterrent effect of pandemic on the sector. It employed over 5 crore Indians in 2016-17, but that number has fallen by 46% to 2.73 crore in 2020-21. Severely affected by the pandemic, manufacturing fell 36 percent in April-June last year.
However, with the economy’s revival and government’s proactive efforts, it bounced back to grow by 49.6 percent this year. The country has huge untapped potential to become a global manufacturing hub. It is hence at the core of the Prime Minister’s Vision for ‘Make in India’ to increase the contribution of manufacturing to GDP to 25%, by 2022. However, the growth in manufacturing has been relatively slower, despite the availability of cheap labour and other resources.
What is the contribution of MSMEs in Indian manufacturing, what is its state particularly in the context of the pandemic disruption?
A significant portion of manufacturing output is contributed by the corresponding MSME sector. It accounts for 45% of total industrial production and 40% of total exports. Manufacturing segment within the MSME contributes to 7.09% of GDP. Furthermore, COVID-19 has had unexpected effects on the global economy, with SMEs being particularly vulnerable. According to a recent EY survey of 1000 MSME entrepreneurs, more than 70% of respondents were impacted by COVID-19 due to lower orders, loss of business, raw material unavailability, and liquidity concerns.
To unlock the sector’s growth, credit access to MSMEs is a crucial element. However, within the MSME sector, only 40% have access to formal credit. This is largely due to information asymmetry, lack of prior credit history, formal documentation, and other factors rendering traditional lenders reluctant to lend to these consumers. However, with the advent of digitization, data availability and digital lenders, this scenario is witnessing a change.
Lack of access to credit has been the bane for the MSMEs. What is your opinion on enhancing credit access to MSMEs to play its rightful role?
The pandemic has resulted in increasing significance of digitalization and automation. This has presented a promising potential to unlock the blockages faced by MSMEs in terms of credit access. MSMEs have historically had a poor rate of adoption of technology, such as the usage of online channels for sales, digital accounting, payment transactions over multiple online channels, and even business communication.
The government of India’s quest for digitalization has aided the development of digital infrastructure significantly. With the pandemic induced digitization, MSMEs are establishing a vast digital footprint of financial and non-financial data, in addition to delivering greater ease and convenience for their customers, improving reconciliation, and reaching new markets. This in turn has allowed the MSMEs to formalise their operations, which then enhances their ability to access financing.
India’s digital lenders, on the other hand, continue to expand and push established boundaries to improve transaction efficiency and decentralise loan distribution. Fintech and traditional lending institutions working together can help build world-class infrastructure and capabilities to aid the MSMEs revive and grow.
Your company U GRO Capital is earning a reputation for being the fintech start-up focussed on the SME credit gap in India. Can you please shed some light on U Gro’s approach to MSME lending?
The major credit gap faced by the manufacturing sector MSMEs exists in the supply chain, which amounts to over $100 billion. This is caused due to financiers’ inadequate understanding of the relatively extended working capital cycle unique to the specific manufacturers. To address the credit need, U GRO follows a sector focussed approach towards MSME lending and lends specifically to the 9 shortlisted sectors. On the manufacturing side, U GRO lends to Light Engineering, FMCG, Electrical Goods, Auto Component sectors etc. It has curated products to serve the needs of the MSMEs. It offers term loans, working capital loans and Machinery Finance Loans. To better underwrite the customers, U GRO uses sectoral scorecards and combines them with a tripod of Banking, GST and Bureau data to underwrite the cases.
The company has developed Technology Infrastructure to ease the access of credit for the MSMEs. It is the host to the GeM Sahay Portal and is one of the first lenders to exist on the portal.
It has also developed products like Purchase and Sale Invoice Discounting that enable easy access to working capital finance in an end-to-end digital manner for all the NBFCs.
Further, to support machine buyers, U GRO accepts machines as collateral. This helps new entrepreneurs that do not have LAP collateral to avail loans.
U GRO’s innovative product structures are supported by its omnichannel distribution coupled with a deep partnership with all the ecosystem players to tap into their ecosystem to close the funding gap.
How do you think the government can ensure financial inclusion for MSMEs?
Government has been very proactive in ensuring convenient financing for MSMEs. To further increase the credit access towards unlocking growth for the sector, it is essential that the government encourages the involved stakeholders.
Leveraging digitization is an important component for the same. If the government provides an increasing guarantee, say in the range of 75% to 100%, to the MSME financers, it will solve the purpose.
The extent of guarantee can then be a function of the current and future cash-flows of the MSME borrower, evaluated on the basis of the trend of GST compliance, employment history, and digital banking.
This Credit through digitally enhanced guaranteed structure will positively work towards boosting financial inclusion of the MSMEs.