The Reserve Bank of India is working towards a formal co-origination model to give a boost to the flow of credit to the micro, small and medium enterprises (MSME) sector, SS Mundra, Deputy Governor, said.
A co-origination model is not about a bank financing a micro-finance institution (MFI) or non-banking finance company (NBFC) for on-lending to the ultimate borrowers. Rather, both of them (bank and the MFI/NBFC) join at each underwriting and loan level and share the loan amount at an agreed percentage with all other structures put in place.
“The advantage is that it can bring the strengths of the two sectors together MFIs have better understanding of the ground level and last mile reach and banks can supplement the resources,” Mundra said at a Bankers-Borrowers Business meet organised by Assocham.
“In my mind, rather than simply going in for refinancing or on-lending, this co-origination can become an important way of catering to the MSME sector,” he added. Mundra’s remarks are significant as it comes at a time when the MSME sector is faced with challenges of non-availability of adequate, cheap and timely institutional credit.
For the Indian economy, the MSME sector is the backbone. The contribution of this sector to the overall GDP is more than 30 per cent and accounts for nearly 45 per cent of the industrial output.
However, the rate of growth of outstanding credit to MSMEs extended by all scheduled commercial banks over the last four years declined from 28.51 per cent in 2012-13 to 19.66 per cent in 2013-14 to 12.62 per cent in 2014-15 and further to 3.83 per cent in 2015-16.
Further, the outstanding credit to the MSME sector as a share of adjusted net bank credit has remained at 17-18 per cent levels during the last four years 2012 to 2016. According to RBI data, outstanding credit to MSMEs extended by all scheduled commercial banks rose to ₹12.16 lakh crore as on end-March 2016 from ₹11.71 lakh crore on March 31, 2015.
Mundra said it is very important for lenders to understand the life-cycle of MSMEs. “Putting MSMEs in one bracket is a misnomer as micro-enterprises and SMEs are like comparing chalk and cheese,” he said.
He underscored the need for products that meet the life-cycle needs of MSMEs and for a strong oversight mechanism in banks to see that MSME-related policies are implemented at the operating level. In respect of supporting faltering MSMEs, he said: “Let us recognise that when we are talking about MSMEs, we are talking about entrepreneurship.
“Let us recognise that failure is an integral part of entrepreneurship anywhere in the world. Unfortunately, failure in our system is still a stigma.” For borrowers, Mundra said that they need to understand the changing economic dynamics and impact on businesses. For micro-enterprises, lenders have to be imaginative and think about other ways of assessing their creditworthiness, he said. “If banks continue to feel that the traditional rating model they do for micro units would be their guiding principle, then it is never going to work,” Mundra said.
On their part, SME borrowers have been raising the issue that bankers are, in general, not sensitive to their needs. They feel that the non-performing asset (NPA) guideline of 90 days is too stringent and does not take cognisance of the life-cycle of SMEs.