How TransUnion CIBIL is bridging the gap between the MSME sector and lenders

The role of the Micro, Small and Medium Enterprises (MSME) sector as the engine of India’s growth cannot be underlined enough. The sector currently employs over 40% (over 11.7 cr people) of India’s overall workforce and contributes around 29% to India’s Gross Domestic Product (GDP).

According to the RBI’s Expert Committee Report on MSMEs published in June 2019, “In the last ten years, MSME sector has shown impressive growth in terms of parameters like number of units, production, employment, and exports. Given the right set of support systems and enabling framework, this sector can contribute much more, enabling it to actualize its immense potential.”

In fact, the Government has left no stone unturned, in providing the much needed helping hand to the MSME sector. The biggest boost having come in November of 2018, when the Prime Minister himself announced a slew of over 12 measures to propel further growth in the cash-starved- sector. Some of the measures include:

  • Mandating firms with a turnover of over Rs 500cr to become a part of the Trade Receivables e-Discounting Systems (TReDS) to provide easier access to credit,
  • Allocation of Rs 975 crore for FY 2019-20 under the Interest Subvention Scheme, for 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans
  • Launching a 59-minute loan scheme to provide loans up to Rs 1 crore to MSMEs in just 59 minutes.
The Challenge is Real for MSMEs

All these efforts not with standing, problems still exist.

As per RBI’s report, there are primarily three big, all-encompassing reasons for MSMEs facing difficulty in accessing credit from financial institutions. The reasons are:

  • High risk of lending evident from the NPA data available widely, given the inability or the unwillingness to pay. This can be traced back to the supply chain constraints and other business risk factors,
  • Very poor lender coverage, with really low credit depth in large parts of India and the most important being,
  • Difficulty in assessing accurately the creditworthiness of MSMEs due to information asymmetry, “particularly with respect to financial performance of the business. In the absence of collateral, under-writing the customer often entails a “high-touch” approach which translates into higher operating cost.”

And, it is exactly this problem of assessing creditworthiness of MSMEs that TransUnion CIBIL has been able to solve when it launched—CIBIL Rank and Company Credit Report (CCR).

What is CIBIL Rank and CCR and how does it help MSMEs access credit?

One of theimportant factors considered by financial institutions before lending to MSMEs is their credit history. The CCR is a record of a business’ credit history, based on data submitted to CIBIL by lending institutions. The CIBIL Rank summarizes its CCR in a single number, measured on a scale of 10 to 1, where 1 is the best rank. The CIBIL Rank and CCR gives lenders unbiased insights about the MSMEs credit behaviour to evaluate the business more objectively, which may lead to lower interest rates and faster loan approvals.

The closer an MSME is to rank 1, the better areits chances of securing a loan. In fact, 70% of all companies that have been sanctioned loans had a CIBIL Rank between 1 and 4.

Since the CIBIL Rank is based on an algorithm, it does not contain any subjective bias and reflects an impartial opinion about the company. The CIBIL Rank, thus, helps a lender in making prudent decisions when it comes to providing faster credit to MSMEs.

As per CIBIL, more than 30 lakh companies are eligible for the Rank in India.

What factors influence the CIBIL Rank?

The CIBIL Rank is broadly influenced by parameters such as timelines of past payments, amount overdue, delinquency status, rate of utilization of funds, missed payments and the vintage of the credit relationships with any lender.

How can MSMEs get and maintain a high CIBIL Rank between 4 and 1?

Endeavouring to constantly improve an MSME’s CIBIL Rank is crucial in order to ensure faster and easier access to credit for its business, when required. Given how important timely credit is to the nature of growing MSMEs, hereare a few tips that can help businesses improve their CIBIL Ranks:

  • Ensuring timely payments within the set deadline to all lenders is a must. In this case, timely repayments and not defaulting on payments are equally crucial elements that can help in building the CIBIL Rank and CCR.
  • Also, businesses should utilise credit limits carefully.An MSME should seek only as much as it can repay. Over-stretching the credit limits can lead to a higher chance of missed payments, recurring defaults, and a low CIBIL Rank.
  • In case a business owner is settling a default, he/she should pay the full settlement amount and close the loan.
Added benefits of high CIBIL Ranks

The CIBIL Rank and CCR isfast emerging as the tool of choice for lending institutions in evaluating the creditworthiness of MSMEs, in a sector that severely lacks access to such crucial financial information of these companies.

Recently, Bank of Baroda (BOB) announced facilitating credit at lower interest rates for MSMEs with good CIBIL Ranks and CCR. As per the bank, CIBIL Rank -based pricing will help in risk control, better asset quality and drive credit penetration for many small and medium businesses. While BOB’s regular interest rate on loans is at 8.65%, it has been offering lower interest rates for loans of up to Rs 5 crore to MSMEs with a good CIBIL Rank.

Likewise, the Oriental Bank of Commerce (OBC) has been offering loans at lower interest rates to MSMEs with a better CIBIL Rank. The State-run bank is offering concessions of upto 0.25% on interest rates for businesses with CIBIL Ranks between one and three. If you are a business owner, check your CIBIL Rank and CCR on the TransUnion CIBIL website to always be loan-ready.

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