We aim to serve every financing need of a MSME up to Rs 250 crore of turnover, says Amitabh Saraff of IndusInd Bank at ET MSME Talks

The importance of the micro, small and medium enterprises (MSMEs) sector for the Indian economy cannot be overstressed. Accounting for nearly 30% of the country’s exports, it is a critical generator of foreign exchange and jobs. However, the MSME sector has historically faced a chronic mismatch between credit demand and credit supply. As the sector faces a credit gap of Rs 25 trillion, the time is only ripe for banks, non-banking financial companies (NBFCs) and fintech firms to seize this opportunity by leveraging big data, policy initiatives and strategic partnerships, said Amitabh Saraff, Head – Financial Services, SME Business, and Supply Chain Finance, IndusInd Bank.

Saraff was speaking on the theme of ‘How can banks act as a catalyst to bridge the financial gap when it comes to MSME lending?’ as part of a fireside chat with Miloni Bhatt, Editor – Digital Broadcast,, at the ET MSME talks – a series of conversations under the ET’s flagship initiative, the ET MSME Awards 2022.

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During the chat, he elaborated on how the IndusInd Bank is helping bridge the financial gap in the MSME lending sector by providing a solution for every segment of the MSME sector and paving the way for inclusive growth. From merchants who require short-term, unsecured, collateral-free loans, to cash-flow based financing and long-term financing, whether it is IndusInd banks’ proprietary digital lending platform IndusEasyCredit or their robust merchant-based QR code lending system, they are providing targeted solutions through digital acceleration.Traditionally, opacity has been endemic to the MSME sector leading to information asymmetry. However, the Government of India’s policy initiatives such as Goods and Services (GST) and Make in India, are helping in reducing the information asymmetry, making the credit flow a more streamlined process. Saraff said the MSME sector will further see an uptake as more and more institutions will join the ecosystem further penetrating hitherto untapped sections.

Here are some edited excerpts from the interview with Amitabh Saraff, Head – Financial Services, SME Business, and Supply Chain Finance, IndusInd Bank. Given the importance of the MSME sector for the Indian economy, how important is this sector for your bank and what kind of products are you offering?

IndusInd Bank: The MSME sector is a critical part of our economy. It contributes towards almost 50% of the production and 30% of the exports from the country and yet only 11 to 12% of this sector’s credit needs are met by banks and NBFCs. To counter this, we have tried to build a very granular order book where we focus on sustainability and inclusive growth keeping in mind the policy directives put forth by government initiatives like Make in India, which seeks to bolster the manufacturing sector.

The MSME sector fits very well into our long-term strategy and we expect to grow our order book by 2-2.5 times in the next two to three years. Our products are also diversified to meet the wide-ranging needs of this sector. For example, we offer small-ticket merchant banking solutions as well as digital GST-based and long-term cash flow based financing. As a bank, we aim to serve every financing need of a MSME up to Rs 250 crore of turnover. The credit gap in the Indian MSME sector is Rs 25 trillion, and the opportunity is massive for banks and NBFCs. How are you capitalising on this opportunity?

IndusInd Bank: We offer financing solutions to the various segments of the MSME sector. We have more than 15,000 people working across 2,500 branches and locations to service more than 5 lakh merchants through small-ticket, unsecured, collateral-free loans.

We also have a robust merchant-based QR code lending system through IndusInd banks’ proprietary digital lending platform IndusEasyCredit. Under this, we provide collateral-free loans up to Rs 20 lakh to merchants. Beyond this, we also have GST-based lending, which targets micro enterprises and provides financing up to Rs 2 crore.

For small and medium enterprises, we have a full-stack solution ranging from cash-flow based financing to long-term financing. We are also developing a comprehensive ecosystem-based lending through our supply chain offering. We have digitised the entire stack and branded it Early Credit.

We have also plugged into the start-up ecosystem as startups play a critical role in leveraging technology to bring more and more MSMEs into the formal economy. Government measures like the introduction of GST have already gone a long way in formalising the sector and providing banks access to critical information points about MSMEs that are allowing them to move beyond traditional balance sheet analysis for lending. With even more initiatives like Open Network for Digital Commerce (ONDC) and Open Credit Enablement Network (OCEN) in the works, the formalisation of the MSME sector will only increase giving us even more information to leverage thereby allowing us to scale up much faster than was earlier possible. What is your outlook for credit demand of the MSME sector for FY ’24?

IndusInd Bank: The overall outlook for the sector is positive. Over the last two years, the growth seen by the small and medium enterprises has outpaced the growth of the large cap companies, while micro enterprises have lagged behind as far as lending is concerned. The need for credit will increase over the next year as people are now beyond the economic shocks caused by the pandemic. One indicator of growth is that non-performing assets (NPA) for the sector have come down from a high of 12.8 % to a much more comforting sub 10%.

Government initiatives like Make in India and performance-linked incentives (PLI) coupled with the increasing focus on infrastructure spending, are all positives making the sector more attractive. The focus on developing a startup-friendly ecosystem will also pay dividends, as startups will attract equity flows, which will boost the MSME sector.

However, increasing inflation, repo rate hikes and a global economy facing a slowdown will negatively affect the sector. Increasing inflationary pressures will increase input costs, while a slowing global economy will hit exports. But, overall, the positives will outweigh the negatives especially considering that currently we serve only 11-12 % of the MSME sector and a lot of growth will come from this unserved portion of the sector. There is high inflation not just in India but across the world. How long do you see this period of rate hikes and generalised slowdown going to last?

IndusInd Bank: It is very difficult to predict the timeline of events with certainty and whether any random black swan event is going to wreak havoc. Having said that, if we look at India, we saw that the repo rate went down to a historic low of 4% during the pandemic and now it’s 6.5%. Historically speaking, the repo rate has hovered between the 6-6.5% range, and I think we are approaching the end of the rate hike cycle and over the next six to nine months inflation will come down. The story is similar when speaking about the global economic situation. MSMEs are still a high-risk sector for banks because of the low credit rating. Banks have also been sceptical about the ability of MSMEs to repay loans, therefore what challenges do you perceive banks facing in the MSME lending space?

IndusInd Bank: The returns you make today by lending to the MSME sector is superior to the returns on large-ticket corporate loans and are comparable to retail consumer loans. The perceived risk of the MSME sector was high because it was so massively underserved with very few participants lending. Nobody had really lent to this sector, built a book or tested the sector.

However, over the last five-10 years many specialised NBFCs and banks have lent to the MSME sector and armed with this cache of data we can say that robust underwriting standards, collection mechanisms and governance structure can make lending activities profitable and generate returns which more than make up for risks associated with the sector.

The problems that banks used to have with scale and distribution are countered now by strategic partnerships with NBFCs and fintech companies. While banks bring robust balance sheets and governance structures, fintech companies use technology to reduce compliance and regulatory pressures and penetrate unserved portions of the market. NBFCs use a wider array of information to underwrite credit as compared to using just financial statements, which the banks are adept at. These strategic partnerships will go a long way to reduce the risks in the MSME sector.

Watch the full interview with Amitabh Saraff, Head – Financial Services, SME Business, and Supply Chain Finance, IndusInd Bank here:

To know more about the ET MSME Awards and ET MSME Talks visit: MSME Awards

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