Cash-flow lending can help close credit gap for MSMEs and create jobs on ground

Indian Express
June 26, 2019

According to the report, while cash-flow loans are short-tenure, they don’t need borrower assessments or project assessments and are tied to future cash-flows.

Making A pitch for cash-flow based lending to ease the credit gap faced by MSMEs, the report of the Expert Committee on Micro, Small and Medium Enterprises under the chairmanship of UK Sinha said that while the availability of digital public infrastructure such as GST and India Stack make it a possible, such form of lending will not only power the growth of MSMEs but also help create “jobs on the ground”.

“A combination of Digital Public Infrastructure, progressive regulation and new market forces has the potential to energise the MSME Lending Sector. Emergence of a digital lending value chain will provide fast turnaround and easy accessibility for MSME borrowers and use new data and credit scoring algorithms to provide new types of risk-adjusted lending products. This infrastructure can operate at a scale, break access barriers, and provide MSMEs with the ability to access finance and scale to reach their potential,” the committee said in its report.

According to the report, while cash-flow loans are short-tenure, they don’t need borrower assessments or project assessments and are tied to future cash-flows. While MSME’s have been facing problems of credit availability, the committee pointed that there were structural barriers such as customer acquisition costs for lenders and lack of inter-connected borrowers, among others.

It said that these structural barriers can be addressed by bringing greater innovation in how small business loans are evaluated, underwritten, and managed and further added that paperless applications, rapid loan underwriting, and a greater emphasis on customer service can redefine the MSME lending sector.

The committee recommended that the Reserve Bank of India should create a new category of Loan Service Providers — who will be agent of the borrowers and act with more transparency, disclosing their conflicts that compromise their impartiality, such as incentives from lenders to “market higher-priced loans”. It also recommended that the RBI should facilitate the creation of a Self-Regulatory Organisation to organise and provide light-touch regulation for this category of players.

Stating that cash-flow lending is possible only in a digital lending and payments value chain as it needs visibility to past and future cash-flows, it said that the Account Aggregator system provides this information on a consented basis. While the lender can be assured of repayment through a lien on future cash flows, the committee pointed that this is now possible due to a set of interlocking Digital Public Infrastructure, as E-Liens.

The committee thereby recommended that industry deployment of E-Liens should be accelerated so that future incoming cash-flows can be locked down for better loan repayment rates. It said that GST Council should require buyers to pay only to the payment address mentioned in the GST Invoice. Cash-flow based lending to open new funding channels.

While the MSME sector faces constraint on funding, the committee’s recommendation to push cash-flow based lending on the back of publicly available digital infrastructure will not only open a new form of funding for the sector but will also help in generation of new jobs in the economy. Further, it said that TReDS window should be created for reverse factoring so that supplier financing can be provided easily. It also said that Enterprise ID using PAN should be introduced on a mission mode basis to ensure the availability of credit to MSMEs.

It also recommended to connect GSTN to Account Aggregators and upgrade E-Way Bill system to include Proof-of-Delivery. Making GST invoices available to lender is essential for cash-flow lending to take off. For this, GSTN system needs to be connected to the AA system. Dematerialising of POD is essential for inventory financing for MSMEs to grow. The design is already in place. Only an implementation project needs to be created, the committee said.

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