Indian MSMEs need a unified credit market to bridge the Rs 25 lakh crore credit gap

In February 1991, Shrihari Balakrishnan flew down from New York to see his ailing father. With his father not able to handle the family textile business in Coimbatore, he quickly had to take charge. At the time, the business was floundering because of India’s recession. They were making no profits and were on the brink of shutting down. Taking on the challenge, he quickly got work and turned the company around from making no profits to making profits of around ₹30-50 lakhs every month in just a year. Today, his company is the largest and the most sustainable denim manufacturer in India but he is aiming for more. This year he wants to take his business from Rs 500 crore business to a Rs 1,000 crore business but to do that he needs to face the second biggest challenge, access to timely credit. 

Over 50 million enterprises in India have little to no access to formal credit today and less than 5 per cent of rated entities hold close to 70 per cent of corporate debt in India. While financial institutions are amping up their lending to enterprises, they are still suffering from a major problem: low quantum of capital. 

The problem with India’s debt market 

The current Indian debt market suffers from three major problems which impact enterprises significantly: high cost of capital, high cost of servicing, and lack of choice for the borrower.  

According to the FICCI Manufacturing Industry Survey, the average interest rate paid by manufacturers has increased to 9.38 per cent from 8.37 per cent in the last quarter. The highest rate at which loan has been raised is 15 per cent. Moreover, over 71 per cent of the respondents have reported that increase in repo rates in the last few months has led to a consequential increase in the lending rate by their banks, thereby increasing their cost of borrowing. The constant rate hikes by the RBI and international macroeconomic dynamics have spiked the interest rates for enterprises which has significantly increased the cost of capital. 

The cost of servicing a debt also adds on to the cost of capital. A public sector bank needs 1640 touchpoints to disburse a loan while a private sector bank needs around 840. Which means, they have to involve and engage those many employees and systems. High touch points also lead to high turnaround time for loans which is a very expensive affair for enterprises. According to the same FICCI survey 47 per cent of the manufacturing firms are reporting plans for investment and expansion in the coming 6 months but at the same time the cost of production as a percentage of sales for manufacturing has risen for 73 per cent of them. The only way enterprises can now overcome this challenge is by getting the quantum of capital they need at the right speed.  

Credit shopping to create a free market for credit 

For over 5,000 years, marketplaces have been an instrument of economic development and access. The model has been replicated in multiple industries from stock markets in the 17th century to the modern e-commerce marketplaces. They have the tendency to create a free market environment where competitive pressures result in optimal pricing.  

However, the same model has not been used in the credit space. Borrowers still rely on bank relationships and manual models to acquire credit which is the reason why the penetration of credit in India is still very low. What is needed is a model of credit shopping for enterprises. 

Credit shopping solves the problem of cost of capital and cost of servicing, by giving the borrowers the choice. Since borrowers can access multiple financial institutions in the marketplace they would have the choice to choose the interest rate and repayment terms as per their needs and raise capital quickly since everything from underwriting to collection is automated. Moreover, the aspect of choice would also unleash free market-like incentive among the creditors which would motivate financial institutions to give competitive pricing to the borrowers to increase their credit portfolio. 

Lastly, since the platform is tech enabled, the touchpoints are crunched from 1640 to just 1 which not only significantly cuts down the cost of servicing but also increases the speed. 

In January 2022, Shrihari Balakrishnan was able to raise a debt of Rs 57 crores within 45 days. Last financial year, he recorded a revenue of Rs 1,025 crores and he could do that because he explored a credit marketplace. But, he is not the only one. Since the pandemic, more than 5,000 enterprises have taken credit shopping and this trend is catching on. The free market model has disrupted economies towards thriving growth in multiple nations. It is time to unleash the power of the free market in the credit ecosystem through a marketplace and the time is now.

Views are personal. The author is founder and CEO, Yubi