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Solving the credit squeeze for India’s MSMEs in the wake of the IL&FS and NPA issues

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As India’s policies and finance sector races to close funding gap for micro, small, and midsized businesses (MSMEs), alternative finance through non-bank finance companies (NBFC) offered hope for the over 40 percent of 60-65 million MSMEs who relied on private lending.

Then, in August, IL&FS, one of India’s largest NBFCs, defaulted, putting the promise of this new path to funding on hold and constricting access for small businesses with no other options. Overall, bank credit to MSMEs has dropped 2.5 percent in 2018 to date adding to a credit gap of Rs 45 lakh crore credit gap, even amidst the launch of the government’s rapid loan program for these businesses.


One issue with the government’s “59-minute approval” on loans of up to Rs 1 crore to MSMEs is that the program, while commendable, is so new that it has not been stabilized yet. An added challenge is that 17 of the 21 public sector banks that would issue these loans are still under the prompt corrective action framework mandated by the Reserve Bank of India, which constricts their lending ability.

According to the Economic Times, the IL&FS default has resulted in NBFCs focusing their lending on larger businesses with a proven history on their tax returns, much like the traditional banking sector. MSMEs in India face two additional hurdles, the RBI’s new 90-day rule in which loan defaults of 90 days are labeled non-performing assets (NPAs), and a 94.7 percent rate of late payment by customers, the highest rate of late payment in the APAC region, according to the 2018 Payment Practices Barometer published by trade credit insurer, Atradius. When MSMEs cannot receive payment in a timely manner, they are forced to rely on lending, or debt, for the cash flow to run their business.

Corporates and MSMEs can close the finance gap together

The primary reason access to lending for cash flow is limited is tied to risk. In other words, banks and most other financial institutions base lending decisions on a business’ ability to pay back the loan. Even for alternatives such as factoring or receivables finance where invoices are sold, the financial entity has to evaluate risks such as if the invoice is legitimate, if there could be returns of the goods, and the ability of the customer to pay the invoice.

Assessing this risk requires significant effort and documentation. If the risk can be eliminated, however, so can barriers to funding. One financial tool can do just that; early payment programs such as C2FO. In this model, a business can request payment in as little as two days, on an approved invoice in exchange for a discount they determine.

The cost of this discount can be far less than rates from a bank or NBFC. Because the customer has approved the invoice, there is no risk, they are simply paying less for the goods to provide payment on an earlier date.

Making cash flow convenient and affordable

For MSMEs who can access lending, there are still barriers to overcome. Cash flow needs can occur quickly, for example if a customer doesn’t pay on time, or there is an opportunity to purchase inventory before costs increase, or a need to scale up to meet a new customer demand. Yet bank-led lending requires a lengthy process. Convenience is one reason MSMEs looked to NBFCs like IL&FS. And, it is a reason vendors find early payment programs useful.

With C2FO, a business can choose which approved invoices they want to be paid early when they need cash flow. It takes minutes to request early payment, and payment is received in as little as two days. Another benefit is that early payment with C2FO is affordable. Vendors can access cash flow easily and often at rates well below their cost of capital through a bank or a NBFC.

A mutually beneficial arrangement

The funding gap for MSMEs impacts corporates as well as the smaller businesses within their supply chains. When vendors cannot access cash flow, it impacts their ability to meet their obligations, improve their products and services, and deliver without disruption.

Corporates who are concerned about financial supply chain risk should be monitoring the current IL&FS and banking issues closely and considering the value of an early payment program for risk prevention as much as the no-risk yield such programs offer.

“We’ve added real bottom line impact through the use of C2FO. No other solution has provided the risk-free performance advertised, complemented by the customer support needed to manage our geographically diverse suppliers. We’re proud to have a financial solution that benefits not only our business, but the livelihoods of our suppliers,” says CFO of Crompton Greaves Consumer Electricals Limited, Sandeep Batra.