The Missing Piece in SME Lending

The biggest question is how to identify and provide funds to the SMEs and here's the answer

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Demonetization, GST implementation and more recently, big loans turning into NPAs, have all added to the challenges faced by Small and Medium Enterprises (SMEs). Following the default by IL&FS, there has been a liquidity crunch for the NBFCs affecting lending to SMEs, adding to the woes of this already stressed segment.  There is an enormous focus on this sector which is the backbone of the country’s economic progress, creating huge employment opportunities and contributing to the GDP growth. Various steps are being taken to relieve the stress on these SMEs.


Some of the Initiatives That are Expected to Help the SMEs are:

  1. Loans in 59 minutes through PSUs

  2. TReDS platform

  3. Loans through MUDRA

  4. Restructuring of loans given to MSMEs

  5. Talks of starting a Public Credit Registry for SMEs

  6. Steps to give loans digitally by leveraging Flow Data like GST, Bank Statement etc

India has around 60 million SMEs with an annual turnover of up to INR 250 crores. These SMEs often lack access to formal financing. While there is a huge addressable market for the above initiatives, SMEs are still struggling to meet their working capital needs.

The SME segment also faces challenges due to cut-throat competition, intense price wars and delays in the payments from their customers (who generally happen to be large organizations). Initiatives like GST have put an enormous compliance burden on the SMEs who, in addition to the build/manufacture/sell activity as per their core competence, must now also worry about additional overheads.

One way to address this missing piece in easing the SMEs’ struggle to access finance is to enhance and leverage the invoice level GST data available with the Government. Since GSTN has the capability to capture invoice level data between an MSME Supplier and a corporate Buyer, additional service can be started by GSTN, wherein the corporate Buyer needs to capture the payments done against these invoices.

Corporates will be bound to either approve for payment or reject the invoice of these MSMEs in a time-bound manner with details like payment date, payment amount, UTR Number. If the invoice is rejected, Supplier gets back the GST paid for the invoice back in its wallet.

Also, once the payment is received, Supplier will be able to mark a payment confirmation against these invoices, again within a given time frame or else it can be deemed as received.

This Can Help Meet the Following Objectives:

  1. Give the Government a view of the really stressed SMEs and the average delays in the payments

  2. Get early warning signals on the stress in different segments of the economy that can be evident through increased creditor ageing

  3. The 2-way invoice matching envisaged by the Government, which has not yet taken off, can easily get implemented

  4. SMEs will start looking at GSTN as their collection partner, helpful in recovering their dues, rather than just one more additional regulatory overhead to be adhered to

  5. More SMEs (even those under the exempted limits) can opt for GST registration, and those belonging to Composition scheme can become regular taxpayers. SMEs belonging to exempted categories may also wish to come under GST ambit

  6. FIs lending to SMEs can get access to invoice level payment data, calculate the actual working capital gap and give limits in a prudent manner

  7. Creditor ageing arrived at through this method, in addition to the TDS and EPFO data for a corporate/sector, can also be made available to the rating agencies and FIs to decide the rating and lend

  8. This will help the Government monitor the adherence of the corporate with MSME Act, wherein payments must be made in 45 days. FIs can keep a watch on their corporate borrowers’ dues to MSMEs to ensure payments are made on time in accordance with the act

In a nutshell, an enhancement to GSTN that enables capturing the invoice level payment data by the corporate can help achieve the below:

  1. Increase the tax revenue

  2. Formalise the economy

  3. Relieve the stress on SMEs

  4. FIs and rating agencies getting a better picture of the enterprises’ cash flows

Last but not the least, increased revenue and formalization can help rationalize the GST rate slabs and remove various classification of taxpayers like Composition, Exempted, Nil and Zero Rated, Non-GST etc.; simplifying the law and enormously improving adherence to it.