A Vyapar Credit Card for MSMEs

The MSME sector is indisputably the backbone of the Indian economy. This sector, according to MSME ministry data, consists of an estimated 6.34 crore enterprises, contributing about 45 per cent to manufacturing output, more than 40 per cent of exports, about 30 per cent of gross domestic product (GDP) while creating employment for about 110 million people, which is next only to the agriculture sector. In contrast, the corporate sector employs 60-70 million people.

Government data indicates that less than 40 per cent of MSMEs borrow from the formal financial system. The rest are borrowing from the informal financing system, which is extortionary as well as unreliable.

Furthermore, MSMEs are not able to borrow at globally competitive rates since sufficient and affordable financing is not available to financial institutions that target the MSME sector. MSMEs must also contend with delayed and erratic payments from their customers, which make working capital management and financing very difficult. Since few MSMEs have sufficiently predictable cash flows, it becomes difficult for them to access affordable financing.

MSMEs have indicated that they find it difficult to fund working capital requirements as well as capital expenditure. Consider the plight of a saree shop that is neither able to fund its inventory of attractive wedding sarees in anticipation of the wedding season nor improve the shopping experience by putting in attractive lighting, air conditioning, comfortable chairs, and other shopping conveniences.

To enhance affordable credit flows to the MSME sector, the Standing Committee has proposed a multi-year action plan, which includes: (1) using the VCC to bring MSMEs into a digital ecosystem; (2) linking together the goods and services tax (GST) network with trade financing platforms to improve payment integrity; (3) massively increasing wholesale financing of non-banking financial companies or NBFCs that target MSMEs; (4) developing targeted credit subvention and guarantee programmes; and (5) scaling up SIDBI to anchor the integrated MSME digital financing ecosystem.

The VCC, a revolving line of credit, would serve as a powerful incentive to bring every MSME into the digital ecosystem. MSMEs could sign up on the Udyam portal run by the MSME ministry to get a VCC. The portal would be linked to the PAN, GSTIN, Aadhaar, and the Ministry of Corporate Affairs databases. Once an MSME is registered with a universal digital KYC, the account aggregator framework would collect financial information, including invoicing data for each MSME. Over time, this data could be used by financial institutions to fully digitise and massively scale up their underwriting function.

The GST Council is already working to make GST invoicing data available (with full privacy safeguards) for various trade financing platforms. With MSMEs sending their GST invoices through a trade financing platform and providing information on when they actually got paid, it will be possible to identify which companies pay on time and which companies habitually delay payments. A payment score, akin to a credit score can then be prepared for each enterprise. Sophisticated trade financing products can be developed using this data.

Currently, NBFCs serving the MSME sector have to raise their wholesale financing from banks and the capital markets. As a result, after factoring in their intermediation costs and default risks, they find it difficult to offer competitive rates to MSMEs. Just like NABARD is able to provide affordable financing to NBFCs serving the agricultural sector, SIDBI should be able to provide low-cost financing to NBFCs serving the MSME sector. By bringing down borrowing rates, we should be able to provide much more affordable rates to MSMEs and wean them away from informal lenders.

Once MSMEs have been digitised and classified by location and industry, it becomes much easier for the central and state governments to provide them targeted credit guarantees and interest subvention. The central government is now running various programmes to encourage the dairy and animal husbandry industries through NABARD; similar such targeted initiatives could be created for the labour-intensive MSME industries such as shoe-making and textiles. State governments could also use this digital infrastructure to provide additional support programmes such as urban employment guarantees and capital subsidies.

SIDBI must drive this MSME financing ecosystem, just like NABARD drives agricultural financing. NABARD’s loan portfolio was Rs 6.03 trillion in FY21 and it caters to 18-20 per cent of India’s GDP. SIDBI’s loan portfolio was only about Rs 1.56 trillion in FY21 and it supports about 30 per cent of India’s GDP. SIDBI needs to grow its balance sheet over the next few years, which will require annual equity contributions of Rs 5,000 crore to 10,000 crore.

Along with expanding financing to NBFCs, SIDBI also needs to build up its organisational capabilities. SIDBI should have adequate, competent staff in every district. Major industry clusters, such as Morbi or Moradabad, could have larger SIDBI offices. These field offices will also provide on-the-ground feedback to SIDBI on how various MSME financing programmes are actually working. SIDBI staff should participate in district-level meetings on credit delivery and industry promotion along with other financial institutions and NABARD. SIDBI should also work closely with the MSME departments of various state governments.

Better financing to the MSME sector is key to unlocking employment-generating growth. Large corporations are able to tap the formal financing system easily, but they tend to pursue capital-driven growth. By providing accessible and affordable credit to the MSME sector, we can ensure much faster job growth in India’s smaller towns and cities.

The writer is the Chairman of the Standing Committee on Finance in Parliament and a Lok Sabha MP from Hazaribagh, Jharkhand. The views are personal

The Standing Committee on Finance has prepared a multi-year road map to strengthen credit flows to the micro, small and medium enterprises or the MSME sector. Currently, more than 60 per cent of India’s 6 crore-plus MSMEs are not borrowing from the formal financial sector, leading to a credit gap of Rs 20-25 trillion. Moreover, MSMEs are borrowing at high rates and have access to only limited financial products. We need to roll out a Vyapar Credit Card (VCC) that can deliver cash-flow based lending to every MSME —from the footpath hawker to the saree weaver. Just like the Kisan Credit Card drives the agricultural financing system, the VCC can drive the MSME financing system.