Budget 2022: Focus on ensuring fund allocation to fintech NBFCs

By Alok Mittal

The pandemic triggered an unprecedented change in the economic landscape. The MSME sector in India realised its vulnerability and is yet to return to normalcy. Businesses that are still reeling from the impact of Covid-19 hold high expectations from the Union Budget 2022.

A major challenge facing small businesses is cash-crunch and credit accessibility. The high cost of capital for NBFCs servicing this sector translates to a higher cost for MSME borrowers. Most new-age fintech NBFCs continue to borrow at rates higher than 14-15%, which eventually makes it difficult to participate in the already announced government schemes, and also translates into high costs — over 20% paid by MSMEs. This high rate of interest constrains the growth of these businesses, which form the backbone of the Indian economy, forming 30% of India’s GDP and 45% of our manufacturing exports.

In response to the economic hardship created by Covid-19, several liquidity measures to support the SMEs (like TLTRO, PCGS, ECLGS, revised MSME definition) were announced. While the headline schemes were attractive, the fine print made it very difficult for the new-age fintech NBFCs to take advantage of the schemes. For instance, the Emergency Credit Line Guarantee Scheme (ECLGS) caps the interest rate at 9.25% for banks and 14% for NBFCs. When the cost of borrowing for fintechs/ small NBFCs exceeds 14%, the benefit of such a scheme could not transmit to the bottom of the pyramid MSMEs. Among the cushion schemes to support MSMSEs, the Fund of Funds scheme is yet to be operationalised. Therefore, this budget must be in pursuit of better implementation and transmission of the schemes already in place.

SIDBI introduced special liquidity support for MSMEs through fintech NBFCs. Such a scheme ensured operational continuity and liquidity support to MSMEs to tide over the impact of the second wave of Covid-19. We expect the budget to come up with similar schemes like the SLS II-NBFC 2021 to quickly rejuvenate the economy with aid of MSME and emerging fintech ecosystem.

When it comes to lending to the MSME sector, public sector banks (PSBs) seem to be ceding ground to private banks and NBFCs. With the drastic decline in PSBs’ share in lending to the MSME sector, small businesses often fail to get loans on time, mainly due to lack of digital footprint and sufficient documentation, years of operation and turnover. However, fintech players are changing this by making easy and affordable loans available to these underserved businesses and using data-driven models to calibrate credit risk. The budget should announce measures to incentivise and strengthen support from SIDBI-like institutions and PSBs towards lending to smaller NBFCs to ensure credit to SMEs at lower cost of capital. In the rebuilding phase of the economy, it is imperative that access to capital is easy, feasible and seamless.

The financial services domain is being continually disrupted by digital lending institutions, which can potentially ensure better credit penetration. As the country is amidst a boom in digital technology adoption, this year’s Union Budget needs to make way for relevant measures to ensure that the right amount of thrust is given to fund allocation towards new-age fintech NBFCs to meet financial inclusion of underserved enterprises in its true sense.

The writes is the co-founder & CEO of Indifi Technologies. Views expressed are personal.