Total financing gap in SME space is Rs. 2.93 trillion: Rakesh Singh

CEO of Aditya Birla Finance Ltd, Rakesh Singh has said that Small and Medium Enterprises (SMEs) demonstrate high demand for finance, particularly debt, but of their total financial requirement, over three fourth is either self-financed or comes from informal sources. A report by International Finance Corporation (IFC) analysed that the total financing gap in the SME space is Rs. 2.93 trillion, Singh told SME Times in an email interview recently.

"It is this financing gap which formal financial institutions can viably tap in the near term. With appropriate policy interventions and support to the MSME sector, a considerable part of the currently excluded demand can be made financially viable for the formal financial sector," he added.

He said, "Most lenders prefer traditional-collateral based lending. Formal sources cater to less than one fourth of the total SME debt financing."

Aditya Birla Finance Limited (ABFL) is one of India's most reputed non-banking financial companies, which provides financing solutions to customers which completes the ABFS bouquet of financial services. ABFL offers customised solutions in areas of capital markets, corporate finance, commercial real estate &; mortgages, retail business and personal loans and infrastructure project &; structured finance.

Excerpts from the interview...

Tell us briefly about the Aditya Birla Financial Services (ABFS) Group and where does Aditya Birla Finance Limited (ABFL) fit in?
The Aditya Birla Financial Services Group (ABFSG) is an umbrella brand for all the financial services businesses of the USD 41 billion Aditya Birla Group. We are a significant player in the non-banking financial services space and rank among the top 5 fund managers in India (excl. LIC). Our presence extends across many sectors, including life insurance, asset management, private equity, general insurance broking, wealth management, broking, online personal finance, housing finance, pension fund management and NBFC.

Across our 10 lines of business, ABFSG enjoys the trust of over 7.4 million customers, manage assets worth over Rs. 1,85,515 Crores and prides itself for having a talent pool of over 11,500 committed employees. ABFSG's wings are spread across more than 500 cities in India through 1,350 points of presence and over 1,12,000 agents/ channel partners. With approximately Rs. 6,270 Crores in consolidated revenues and profits of about Rs. 743 Crores, we have fast emerged to be recognised as a significant non-bank player. ABFSG is a part of Aditya Birla Nuvo Limited (ABNL), a USD 4.4 billion conglomerate having a leadership position across its manufacturing as well as services sector businesses.

As the lending arm of ABFSG, Aditya Birla Finance Limited (ABFL) is one of India's most reputed non-banking financial companies, which provides financing solutions to customers which completes the ABFS bouquet of financial services. ABFL offers customised solutions in areas of capital markets, corporate finance, commercial real estate &; mortgages, retail business and personal loans and infrastructure project &; structured finance.

How did ABFL continue to grow through the slowdown in industry? What specific steps were taken to grow the book? Was it organic or through acquisition or a combination?
The entire process of growth has been organic in nature which has come about through strategic design on chosen product space, expansion of geographies and increased manpower productivity. Prudent customer s;election is crucial to our growth story.

What are the advantages or constraints that an NBFC like ABFL has over a bank?
One of our biggest strengths is a faster turn-around, and a hassle-free process for customers. ABFL has some of the best approval turn-around-time (TAT) in industry. We have a dedicated business credit team to evaluate all the proposals in terms of borrower financials, credentials, security analysis and it provides suggestions to make the same workable. Generally, in the BFSI industry, the evaluation is done only by the risk team. At ABFL, the credit process works as an additional check point and helps faster approvals.

We take a solution-oriented approach and structure the deals based on the requirement of our customers. Customised solutions, hassle-free financing, standardised processes and risk management are the strongest pillars of our business.

How you see the growth potential in SME (Small and Medium enterprise) financing?
The small and medium enterprises are the spine of economic development in any country and more so in India with a huge population to be served. Small and Medium Enterprises (SMEs) in India have seen exponential growth over the last decade.

There are approximately 50 million SMEs in India, exercising frugal management skills and using local resources to c;reate innovative products and services which cater to India’s growing needs. These SMEs contribute more than 45 per cent of India’s industrial output, 40 per cent of the country’s total exports and c;reate 1.3 million jobs every year. SMEs demonstrate high demand for finance, particularly, debt, to finance their growth. Most lenders prefer traditional-collateral based lending. Formal sources cater to less than one fourth of the total SME debt financing.

The formal financial sector comprises of scheduled commercial banks, NBFCs and smaller banks such as Regional Rural Banks (RRBs) and Urban Co-operative Banks (UCBs). Of the total financial requirement of SMEs, over three fourth is either self- financed or comes from informal sources. The informal sources can be segmented into two categories namely non institutional sources of funding which include family, friends and family business while institutional sources comprises of money lenders and chit funds. A report by International Finance Corporation (IFC) analysed that the total financing gap in the SME space is Rs. 2.93 trillion.

It is this financing gap which formal financial institutions can viably tap in the near term. With appropriate policy interventions and support to the MSME sector, a considerable part of the currently excluded demand can be made financially viable for the formal financial sector.

What are the key offerings that ABFL has for the SMEs?
SMEs have always been a focus area for ABFL. We are a well-diversified NBFC which offers one of the widest range of financing solutions to the SME sector such as SME and Business Loans, Term Loans, Working Capital Demand Loan, Supply Chain Financing, Loan Against Property, Commercial Property Purchase Loan and more. Our aim is to offer different solutions to serve working capital finance needs as well as business expansion and growth needs.

These financing solutions primarily adhere to a two pronged strategy to serve the financing needs of SME through a scorecard based parameterized lending and supply chain financing.

Scorecard based schematic lending is a template product offering to simplify the assessment of financial requirement of SMEs with a tailor made product and faster turnaround time.

Supply Chain Financing is another route to facilitate SMEs’ access to enhanced and unsecured working capital financing. This mode of financing enables SME suppliers and distributors of large OEMs to receive short term credit against the volume supplied or procured during the payment receivable period.

What are your plans to tap into the micro and SME space where it sees tremendous growth potential?
We have been present in the MSME space since our inception through our Supply Chain Financing vertical and subsequently expanded our horizon through LAP. We have recently forayed into the unsecured lending segment for MSMEs through our Business Instalment Loans offerings. We have also set up a dedicated MSME vertical within our corporate finance business group to lead our efforts to tap the growth through MSME segment. The Micro and SME space will be a significant contributor in the next phase of our growth.

The government is also encouraging the MUDRA scheme. How you see this opportunity for growth?
MUDRA is another key initiative in the direction of financial inclusion with the sole intention of upliftment of the bottom of pyramid individuals and entities. The government with its theme of banking the unbanked have come up with MUDRA. The fact that 9 out of 10 jobs in India and half of its GDP originated from the non-formal sector including the 57.7 million micro businesses presents a strong case for provide formal finance to enable its transition to organised sector.

This is a tremendous growth opportunity for the lenders to establish their presence in the micro segment enabling the last mile credit delivery. The fact that it has the backing of govt. under credit guarantee fund makes it even more robust. We will continue to partner with last mile financiers to reach out to these small and micro business segments outside the service area of regular banks.

How you see the central government's 'Make in India' and 'Start-up India' movement shaping up?
Make in India is a plan long overdue and is critical to propel growth in the manufacturing sector and make India a global manufacturing hub. Start-up India as an initiative compliments to the Make in India plan. The central government has ensured that these do not remain as just another coined terms and there is an underlying mission to this vision. The central government has taken a series of steps to c;reate an enabling environment by increasing the ease of doing business. The focus is on 25 sectors of the economy with easing of FDI norms as proactive measure. The Make in India campaign has already started showing early signals of its success in terms of India receiving US$63 billion FDI in 2015. There have been a flurry of proposals with US$18 billion seeking to be pumped in from companies interested in manufacturing electronics in India. Start-up India is a boost to the entrepreneurial culture and spirit of Indians willing to take risks and innovate and provides some cushion if they fail. Some of the key measures leading to its success are single window start up hub, tax sops and a dedicated Rs. 10,000 crs start up fund. These campaigns are equally well supported by Skill India and Digital India campaigns. The drive has been launched and the path shown but it will certainly take some more time to yield the desired results.

What are your plans to stand-up for these movements and how?
We have in our own way aligned our offerings to match the govt. initiatives of Make in India and Start-up India and various other campaigns. Over the last year or so, we have taken several initiatives to contribute to the fundamentals of inclusive growth. The launch of dedicated SME vertical and foray into unsecured business loans are part of the plan to align to the philosophy inclusive growth and be a core part of the Make in India drive.

On account of all these various policy changes and initiatives by the government to make the environment conducive for growth of small and medium businesses, SME finance presents huge opportunities.

Would you like to advise something to SMEs while going for financing options?
It is important to evaluate the feasibility of any financing option and the choice of financing mode should be made based on the growth stage of the enterprise, the quantum of funds required and the credit environment in financial markets.

I would like to go a step back and advise them to evaluate the ease of access to financing before even considering financing options. It may be to an extent true that SMEs do not find easy access to finance but is available with some concerted effort. The major reasons for this financing gap include information asymmetries, higher risks, sizeable transaction costs and lack of adequate collateral. It is important for the enterprise to introspect the obstacles of financing and accordingly address these.

One of the preferred modes of financing options could be trade credit or supply chain financing. This addresses the need of collateral and also mitigates the risk to a large extent by making it transaction backed lending wherein the origination to end of cash flows can be easily sighted and tracked by the lender. Other a;lternative finance options such as securitisation of SME credit, factoring, accessing equity capital from SME Exchange, Venture Capital, cash flow based financing, etc. can also be looked at and evaluated from a feasibility perspective.

What does the future look like for ABFL?
The performance of the economy in FY 16 suggests that the way ahead is going to be trickier than anticipated, at least in the short term. Nevertheless, the green shoots are clearly visible. I believe that while the pace of recovery has been negatively surprising, once the building blocks are in place, we will be surprised again – but positively. The key challenges remain in engendering business confidence, reviving sentiment and ensuring business predictability.

Our medium to long term story is still intact. In 5 years, we will have the youngest population amongst large economies and with the way things are going, more and more individuals will become entrepreneurs. The challenge is how we can ensure we maximize our potential.

NBFCs are and will be critical to the financial sector. Due to the nature of the financial system, there will be customers and segments of the economy that banks cannot adequately cater to and where NBFCs can add significant value for the financial system as a whole. We expect the growth momentum NBFCs have shown in the past decade to continue for the next. And Aditya Birla Finance will be at the forefront of this growth path.