With the greater integration of MSMEs into the formal economy and greater Government support for the sector, the availability of funds for MSMEs should become easier. MSME-focused NBFC, Profectus Capital is hands-on with regard to financing MSMEs is concerned. In an exclusive conversation between Dr Faiz Askari, Founder Editor of SMEStreet and Mr K.V Srinivasan, Executive Director and CEO of Profectus Capital it was discussed MSME lending issues and opportunities. Here are the excerpts:
FA: How is the MSME focus of Profectus Capital expected to do in 2023 and 2024?
KVS: The MSME sector has been a driving force behind the Indian economy’s growth and will likely play a pivotal role in India’s journey towards a $ 5 trillion GDP mark. As a result, credit to MSMEs is likely to increase from 16% to 18% in FY 2023 and 2024. With the greater integration of MSMEs into the formal economy and greater Government support for the sector, the availability of funds for MSMEs should become easier. As an MSME-focused NBFC, Profectus Capital would be vital in financing MSMEs in the coming years.
FA: Challenges faced by MSMEs in Accessing Affordable Credit support? What are these/How can they be managed?
KVS: Affordable credit is the most common issue that all small businesses have experienced and continue to face. MSMEs struggle to acquire financial assistance owing to various hurdles, such as a lack of collateral, extensive paperwork, and a lack of confidence among banks in their ability to repay loans. Despite the government’s concerted efforts to provide MSMEs with simple credit lines, these impediments persist. Because of the current confidence crisis, banks typically utilise stringent qualifying and approval criteria when making MSME loans. MSMEs are also deemed high-risk since they may lack credit history, and their inability to obtain and maintain high credit ratings hurts their ability to obtain loans. Requirements of providing collateral or third-party guarantee force business owners to borrow unsecured business loans at a much higher cost and, in many cases, from informal sources.
Many MSMEs also need to maintain proper books of account or pay taxes and other statutory liabilities properly. This tendency hurts their ability to expand and grow faster and to obtain growth capital. Lenders must look beyond the obvious financial statements to assess an entity’s viability.
While implementing GST, Aadhar, and the explosion of digital transactions post-demonetisation have brought MSMEs into the formal economy, efforts are still required to educate MSMEs about the advantages of better organisation and governance. The younger generation of entrepreneurs is better aware of this, and transparency in dealings by MSMEs is improving. This should make fund availability easier going forward.
FA: According to you, what are the opportunities through alternative finance for MSMEs?
KVS: MSMEs increasingly turn to non-bank financing sources as bank credit needs to be improved. Since many MSME borrowers tend to be classified as “thin file” borrowers as their financial documents may be inadequate, creative approaches to assessing the creditworthiness of MSMEs and other thin-file borrowers, such as using alternative data in credit reporting, have emerged. NBFCs have created several such assessment models.
As MSME finance is more digitally enabled, fintech innovations have enabled unbanked MSMEs to access funding. Smart data and mobile money technology have eliminated the need for intermediaries to facilitate capital exchange. AI has significantly enhanced the identification of high-potential MSME enterprises.
In recent years, many fintech and NBFCs have launched new-age models of alternative lending that are faster, easier, more cost-effective, and significantly more transparent. Fintech lenders have begun verifying their creditworthiness, analysing risk, and issuing loans faster than ever by employing advanced analytics platforms and AI to assess transactional and alternative data. MSMEs can now obtain formal loans through an alternative channel by revealing part of their purchasing patterns and data history.
FA: Please share Profectus Capital’s vision towards MSME Lending in India?
KVS: Profectus Capital’s vision is to be a “Partner in Progress” for MSMEs in India. This requires forging a long-term relationship with the MSMEs and providing assistance and support at every stage of growth of the MSME. We believe that innovative and tailor-made financial offering is critical to fulfilling the immense demand for MSME loans. We have evolved a unique cluster-oriented approach that considers industry prospects, local micro-market dynamics, and local credit culture to create flexible and meaningful solutions for customers. We believe this approach will enable faster growth of our portfolios while ensuring higher credit quality and profitability.
FA: What are your business objectives and expansion plans?
KVS: Profectus Capital focuses on financing MSMEs engaged in high-growth sectors such as education, health care, pharmaceuticals, automobile components, food processing, and chemicals and plastics. These industries are expected to be the growth drivers for our economy, yet they are also highly underserved. Our “cluster-oriented” credit policies allow for providing cash flow-based loans rather than asset-based loans. This enables the MSMEs to conserve their precious cash resources and helps them build a strong credit track record through timely repayment of loans.
Profectus Capital offers loans for purchasing machinery and equipment for the modernisation and expansion of capacity, acquisition of industrial and commercial property, enhancement of working capital, and expanding or modernising capacity in schools, hospitals, and similar critical services. We also have a very strong supply chain finance programme with tie-ups with marquee names in sectors such as electronics, IT equipment, contracting, etc.
Over the past five years, we have extended secured loans to manufacturing entities, service sector units, schools, and hospitals, exceeding Rs 4000 crs. At present, our loan book size stands at over Rs 2200 crs. With a very low NPA level of just over 1.25%, we follow an efficient yet conservative credit policy with very strong monitoring of the end use of our loans. This has helped us to focus on customers with the right skills and positive attitudes.
We have invested heavily in state-of-the-art technology, fintech, and digital tools to provide a smooth customer experience and effective risk management. Our net worth is over Rs 900 crs at present. We have very strong banking relationships with the private and public sector banks. With such financial strength and management expertise in serving the MSME sector, we plan to emerge as a significant MSME lender over the next 3-4 years and grow the loan book to Rs 8000-9000 crs with excellent quality, profitability, and reputation.
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