The Economic Times, Last Updated: Feb 21, 2011
India is at the cusp of its pre-crisis 9% growth trajectory, and is extremely well-positioned for the next growth cycle. While there is broad consensus that the country must continue to grow rapidly, and will soon cross the ‘double-digit growth’ barrier, there is also an emerging focus to make this growth sustainable and inclusive.
Financial inclusion has become a national and a government imperative in the last few years, and the burning discussions towards financial inclusion have definitely reached a crescendo this year with increased focus from the government, various policymakers and some genuine progress by the private sector and financial institutions.
However, while there is a growing awareness and agreement on the importance of financial inclusion, the same consensus doesn’t seem to reflect around its ‘definition’ and the ‘execution process to achieve’ financial inclusion. It is also important to appreciate that the objective of providing affordable access of suitable financial services to the financially excluded is to ensure ‘economic development and progress of the financially excluded’ and that ‘inclusion of the excluded’ is only a means to an end and not the end in itself.
The question one needs to answer is not only ‘how to provide banking services to the financially excluded’ but ‘how to ensure economic progress of the financially excluded’. Addressing the first question, where the predominant focus and efforts are underway, it is restrictive and with a limited vision. This ‘direct intervention model of banking the unbanked’ through either branchless banking, business facilitators (BF) or business correspondents (BC), etc, model is fraught with challenges for financial institutions including high barriers to entry, long gestation period and high go-tomarket and servicing costs.
This is further aggravated with a lack of awareness and trust amongst the financially excluded regarding the benefits of the banking system. Hence, reaching out to over 700 million citizens across six lakh villages who don’t have access to the formal banking system is likely to be a Hanumanian task. In my opinion, even with the implementation of the UID and large-scale utilisation of mobile banking and other technologies, achieving financial inclusion through this mode would take the better part of the next 2-3 decades.
In my judgment, the more viable and market principles-based alternative is to address the ‘how to ensure economic development and progress of the financially excluded’. The solution is strongly predicated on unleashing the untapped potential of the micro, small and medium enterprises (MSME) and unorganised segments by improving their bankability and, thereby, the competitiveness of this large segment. This is effectively a ‘multiplier impact’ model, with focus on economic development and progress.
The MSME segment, constituting around 26 million units, contributes 45% of industrial output, 40% of exports, employs 60 million people and creates 1.3 million jobs every year, and ensures balanced regional and socially-inclusive growth. Innovative business models for MSME financing: Globally, commercial banks are the main source of finance for MSMEs.
However, considering the nature and characteristics of the industry, access to finance remains a key concern area. This has resulted in the ever-increasing financing gap for MSMEs, leading to a potential loss to the national economy. The traditional approach to MSME financing that was based on rigid credit assessment frameworks, limited delivery channels and hierarchical structure for decision-making needs to be replaced with new flexible models for MSME financing, to ensure agility and achieve cost efficiencies. New-age banks are moving to a more flatter, horizontal and functional structure, to lead to faster, time-bound and objective decision making processes, while financing MSMEs.
This should be further complemented by leveraging technology to make the application, appraisal and sanctioning process faster for the MSMEs. The issue of high cost of acquisition and servicing of MSMEs can be addressed through innovative products that are more suitable for MSMEs. The plain-vanilla standardised products are being replaced by structured products, such as receivable financing, cash flow-based lending, asset securitisation, guarantees , cash management services and advisory service to provide a comprehensive solution to MSMEs.
The cluster-based approach, through strategic partnerships with local and national trade associations, can help banks access MSMEs and developing customised propositions. Countries such as Taiwan, Hong Kong and Italy have shown that a cluster-based approach can be effective in competing in export markets. The rigid risk assessment models need to be replaced by new techniques to distinguish between high-risk and low-risk MSME borrowers.
There is a huge opportunity to bring the large number of MSME units under formal banking, through a more flexible and intelligence-based credit appraisal methodology for MSMEs with specialist relationship and credit managers. Policy frameworks and strategic initiatives: Appreciating concerns of the MSMEs, the government has taken a number of progressive steps to develop a conducive environment for development of MSMEs. Focused steps were taken by the government in response to the global crisis, including refinance facilities, special window to augment credit flow to MSMEs, directing PSUs for timely payments to MSMEs, enhanced credit guarantees, etc.
As the economy tides over the financial crisis, a healthy business ecosystem should be created for MSMEs, based on market principles. Industrial infrastructure, specifically for MSMEs, remains inadequate, and has been repeatedly highlighted through industry forums. Targeted investments are required to be made to create affordable industrial areas, industrial parks, technology incubators, with integrated infrastructure facilities, under MSME cluster programmes.
OVOP (one village one product) and OTOP (one tambon one product) programmes in Japan and Thailand, respectively, catalysed development of industries unique to their regions, and cultivated them to national and globally-accepted levels with strong geographic appellation, traceability and trustmarks evolving.
Also, suitable policy frameworks should be devised to align investors from public, private, PE funds and other institutions that approach MSMEs for financing with diverse offerings and expectations. A positive initiative towards improving the existing policy, legal and regulatory framework is the World Bank led multi-agency project on financing and development of MSMEs being implemented by Sidbi.
Knowledge-driven solutions: Most MSMEs are run by entrepreneurs who are adept in technical knowledge, but lack the financial, legal or managerial expertise, and are unaware of financing options or government schemes available to scale up their enterprises.
To address this, at Yes Bank, we have made conscious efforts towards this, and knowledge banking is one of our key pillars, through which we focus on the MSME sector, with the objective of creating a knowledge-based platform for MSMEs, that enables sharing of global best practices, analyses industry and sector trends, and applauds successes in the diverse MSME universe of India.
-By Rana Kapoor, MD & CEO, YES Bank