MSMEs have taken to it, but poor loan disbursements indicate the need for its deeper integration with bank processes
One of the biggest announcements for the MSME sector in 2018 was the ‘59 minute’ loan scheme, which promises loans of up to ₹1 crore from public sector banks (PSBs) through an online lending marketplace called ‘psbloanin59minutes’. This portal approves a loan in 59 minutes and connects the borrower to the bank branch for sanction and disbursal.
According to ‘MSME Pulse’, a SIDBI and CIBIL publication, the MSME loan market (under ₹25 crore) is estimated to be around ₹25 lakh crore, of which, PSBs hold almost 50 per cent share. Further, PSBs have a dominant share of over 75 per cent for loans under ₹10 lakh, highlighting their critical role in financial inclusion.
The biggest advantage of a PSB loan is its low cost, which could be 5-7 per cent lower than that of NBFCs. For a small borrower looking for a collateral-free loan under ₹1 crore, PSB loans are critical, as both private banks and NBFCs mostly lend against security. PSB loans are also an important source of funding for the manufacturing sectors such as food processing, textile, chemicals, and auto components.
As such, this policy measure may be a sincere attempt to reduce the time and effort required to secure credit from PSBs, thus easing the life of an entrepreneur.
The demand for such a portal is validated by both the large number of applications (around 1.31 lakh) received within two months of its launch, and their total loan value.
To substantiate, assuming an average loan size of ₹30 lakh, these applications translate into loan requirement of ₹40,000 crore, almost 5 per cent of the total MSME credit for loans below ₹1 crore. (Assuming SMEs’ loan outstandings of ₹25 lakh crore, and loans under ₹1 crore at 30 per cent of the total loan, total SME loan under ₹1 crore is ₹7.6 lakh crore.)
However, unless these applications translate into loan disbursals, the portal would remain just another channel for PSBs to generate qualified leads. The difficulties in getting a loan from PSBs stem from unwillingness of the ground-level staff to even accept the loan application.
Even after a loan is approved, the high turnaround around time for the disbursal remains a challenge. Therefore, the portal is a good first step to at least reduce the number of branches to be visited. In addition, the MIS behind the portal would make it easier for the banks to monitor loan rejections.
The scheme’s success depends on the ability of PSBs to quickly disburse the loans that are approved by the portal.
According to official data, the portal received 1.31 lakh applications during the first 50 days of its launch, of which, around 1.12 lakh applications were approved, with a strike rate of 85 per cent. However, of these 1.12 lakh applications, sanctions were accorded for just 40,669 cases, indicating that just over a third of the approved loans were sanctioned.
The above performance indicates the following: a) high approval ratio suggests that either most of the SMEs that are applying through the portal have good credit quality or the portal’s credit approval norms are not strict enough; and b) low loan sanction ratio indicates that the turnaround time for loan sanction is more than two to three weeks and a number of applications are still undergoing due diligence and, therefore, do not reflect in the sanction data.
Addressing these issues would require deeper integration of the portal with banks’ processes. The credit approval processshould capture the existing liabilities of the borrower so that there are no disputes on quantum of credit to be sanctioned.
Also, it should assess the availability of other resources such as land/technology with the borrower before sanctioning term loan for a new asset.
On the policy front, the norms for takeover of loans among lenders should be relaxed. For example, under the current set-up, obtaining additional working capital loan from a different lender would be difficult, as banks would not be inclined to share security on pari passu basis for such small exposures.
In the absence of these measures, the web portal would just be a superfluous channel for generating qualified leads.
The writers are Partner and Head of SME Advisory, respectively, at FineTrain. The views are personal.