New Delhi: Micro, small and medium enterprises (MSMEs), which account for nearly one-third of the country’s GDP, have witnessed back-to-back economic shocks. From demonetisation and GST to Covid MSMEs were among the worst hit. In the Union Budget 2024-25 the central government announced some measures to support small businesses. However, financing remains among the biggest challenges facing the sector, Shachindra Nath, Founder & MD, UGRO Capital, tells DH’s Gyanendra Keshri. In a free-wheeling conversation he also highlights the challenges and opportunities in MSME financing. Edited excerpts:
There have been many shocks to the MSME sector in the past one decade like Covid and demonetisation. How do you see the government’s approach to the MSMEs?
In the last 10 years, either the upper layer of the economy or the bottom of the economy has got the support. The middle has not got the focus that it requires. By the middle, I mean the middle of the business, which are small and medium enterprises. The MSMEs, which generate the largest number of employment outside agriculture, have not been incentivised. In the recent budget, some good initiatives have been announced for the MSME sector. Employment is a big problem and it has been recognised in the Union Budget. But where will the jobs be generated? It has to be in the MSMEs.
What is the biggest challenge facing the MSME sector?
Financing remains among the biggest challenges. The MSMEs need funds for economic progression. In the coming 10 years, the MSMEs' contribution to India’s GDP should increase to 40 per cent from the current around 30 per cent. Because of this the need for credit will rise exponentially. For India there is a need for a large scale MSME financing firm.
What is UGRO Capital’s focus in financing?
We finance only the MSMEs. Our loan size ranges from Rs 5 lakh to Rs 3 crore. We have developed a strong technology architecture and data analytics. We have developed a credit scoring model GRO score. It is based on a statistical framework using AI and machine learning.
How are your company’s lending processes different from those of banks?
If you approach a bank for a business loan it will ask you to show your balance sheet, profit and loss account, ITRs and business projections etc. We ask for none of these. Our lending process is purely based on cash flow. We rely mostly on GST and turnover data. There are three important things in lending – intent of the customer, eligibility and ability to pay. In the intent, the MSME customers are among the best, much better than the large corporate. Eligibility is determined by the documents that prove the existence of the business and you also see if there is any fraud done by the business etc. Ability to pay is determined by the cash flow.
How is the asset quality?
Our asset quality is very strong. In our Rs 10,000-crore odd business, gross NPA (non-performing assets) is roughly around 2 per cent and net NPA is 1 per cent. This is against the general perception that MSME financing is risky. It has been risky for public sector banks. It is not risky for us just because our method of giving credit is different from the traditional bank.
RBI has flagged concern over the NBFCs fund raising and some other issues. How do you see this?
In my understanding the RBI’s concern is mostly related to consumer lending. Large NBFCs are doing consumer financing through FinTech. Some are doing a Rs 50,000 loan at 40 per cent interest. This is not sustainable. Our demand is that the NBFCs financing MSMEs should be treated differently.