(Aadhaar), lenders would be able to gain greater insight into their customers’ data, thereby increasing the accuracy
of customer assessments.

* Increasing competition with entry of new players and partnerships between them: More players in consumer-facing
businesses with a repository of data (such as e-commerce companies and payment service providers) are expected to
enter the lending business, intensifying competition. For example, Amazon India launched a platform for lenders and
sellers, wherein sellers can choose loan offers from various lenders at competitive rates. Incumbent traditional
lenders, either on their own or in partnership with newer players/ technology firms, will increasingly leverage the
digital ecosystem to cross-sell products to existing customers, tap customers of other lenders, and also cater to new-
to-credit customers.

* Reduction in TAT and increased use of technology: With the availability of multiple data points and technological
advancement, TAT for lending to MSMEs has been continuously declining.

* Government initiatives addressing structural issues in the MSME market: The Government has unveiled a number
of initiatives aimed at addressing some of the structural issues affecting MSME lending. These include the Pradhan
Mantri Mudra Yojana (“PMMY”), licenses for trade receivables, TReDS and GST. The RBI has also proposed to
introduce NBFC-account aggregators, which have the potential to transform the MSME finance sector. These account
aggregators would provide granular insights into customers’ financial assets or their borrowing history.

Government initiatives

GST to increase demand in MSME lending

It is expected that transparency in MSME operations will improve as GST compliance will compel them to record their
transactions. This will improve the quality of their books of accounts, thus increasing their creditworthiness. For financial
institutions, this will ease the credit appraisal process and lower credit risk. Due to improvement in the quality of books
of accounts, financial institutions will be able to lend to MSMEs in the unorganised sector that were previously unable to
get credit due to their books of accounts not being maintained properly or not maintained at all. This will open up
previously untapped credit demand for financial institutions, leading to a robust expansion of the MSME credit market.

Credit Guarantee Fund Scheme extended to cover NBFCs

One of the major reasons why MSMEs are short of credit is the insistence by banks or financial institutions for the
provision of collateral against loans. Collaterals are not easily available with such enterprises, leading to a high risk
perception and higher interest rates for these MSMEs. In order to address this issue, the Government launched the Credit
Guarantee Fund Scheme, in order to make collateral-free credit available to micro and small enterprises. In January 2017,
the Credit Guarantee Fund Scheme was extended to cover systemically important NBFCs as well. Key eligibility criteria
for this scheme are: (i) the NBFC should have made a profit for the three preceding Fiscals at the time of enrolment; and
(ii) it should have long-term credit rating of at least BBB. There are a few other performance-related parameters too. The
overall limit under the scheme has also been enhanced to % 20 million.

Lower tax rates to increase MSME lending

Cut in corporate tax rates for MSMEs will increase investment in the MSME segment. MSMEs and retail borrowers are
expected to witness higher credit flow as large corporates tap the bond market to meet the 25% target. The Government
support in the form of capital allocation, interest subsidies and tax rate cuts will increase credit demand from the MSME
segment.

Key reforms for MSME sectors in the Union Budget 2020

* Union budget extended one-time restructuring of MSME loan accounts without classifying these as non-performing
assets (“NPAs”) by one more year until March 31, 2021. The benefit would be available to MSME loans that were
in default but ‘standard’ as on January 1, 2019.

* — The proposal to enable banks to extend subordinate debt to MSMEs under the Credit Guarantee Fund Trust For Micro
and Small Enterprises Scheme will help MSMEs augment long-term working capital and reduce the requirement for
high-cost and scarce equity capital.

* NBFCs have not been able to penetrate the working capital finance segment, unlike banks. The Government’s move

to permit NBFCs to operate on the TReDs platform (previously restricted to NBFC factors) and engage in invoice
financing is expected to give them a major opportunity to extend working capital loans. Though NBFCs are cost

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