India’s MSME sector is the country’s second largest employer, just behind agriculture. The industry has been heavily battered amid the COVID-19 pandemic, with numerous surveys showing that the disruptions impacted revenues by 20-50% and that micro and small businesses were facing maximum heat.
A year later, however, the recovery is in the air despite the second wave of COVID-19.
Charles Darwin said: “It is not the strongest of the species that survives, nor the most intelligent; it is the one that best adapts to change. “
Sumant Rampal, Senior Executive Vice President, Business Banking and Healthcare Finance, HDFC Bank, believes that MSMEs have become clear winners in the war against COVID-19.
And this has been facilitated by their evolution – making certain changes in their existing structures, especially going digital, in order to survive and thrive.
As the country commemorates a year of nationwide lockdown, SMBStory spoke with Sumant about how MSMEs survived the lane or swim situations posed by the pandemic, what lies ahead and the role banks are playing in developing the sector.
SMBStory [SMBS]: It’s been exactly a year since the lockdown was announced. How have your MSME clients behaved?
Sumant Rampal [SR]: It’s been a year since I started working from home. I remember last year around this time we were all so worried about what was going to happen. We had started to see some signs of weakness in the MSME sector in the last quarter of the previous fiscal year, which started in January because we had started to hear about the impact in China and parts of Europe, so there was a slow down. However, we never expected it to explode like this.
Since no one knew how it would turn out, we decided to manage the situation by interacting more closely with our customers. At HDFC Bank, we created small teams and had conversations with our clients through digital and physical channels. It gave a lot more clarity: how we felt they should be saving money, what support we could offer at that time, and how we engaged with the government and the regulator.
Therefore, the moratorium and the other programs put in place by the government were very good steps. Recovery figures increased in November and December. People were returning to factories, festivals like Dussehra and Diwali pushed demand and spurred recovery.
From my reading of our clientele, most MSMEs have proven to be winners in combating COVID-19.
SMBS: How have the measures put in place by the government helped the sector?
SR: The programs of the Aatmanirbhar Bharat Stimulus Package are the best that the government can offer, especially the Emergency Line of Credit Guarantee System (ECLGS). I really thank the government for thinking about this and executing it with the help of National Credit Guarantee Trustee Company (NCGTC).
We have also seen sectors such as agriculture and sustainable consumption doing very well. Many companies in this sector have recovered by 80 to 90 percent; some even recovered 100 percent. There are others who have recovered from 65 to 70%.
We need to understand that the recovery does not happen overnight, but we are seeing the positivity.
Now, with Wave 2, the mood has eased, but the good news is that the government has realized that a lockdown is not the solution. As a country, too, we are much better prepared in terms of health infrastructure to deal with the situation.
SMBS: How is HDFC Bank becoming easily accessible to MSMEs through digital means? What efforts has the bank undertaken for this sector?
SR: We are one of the best banks to have sanctioned and disbursed loans worth Rs 23,000 crore as part of the ECLG program. We see ourselves as a beneficiary of technology and digitization, and our goal has been to ensure that our MSME clients have the same benefit. Today, any customer in the MSME segment can provide their basic documentation digitally. Our digital product ENet and our SME service portal let customers contact us directly. It also helps us provide working capital loans, overdraft facilities and meet their other financial needs.
Another product, Trade on Net platform, aid for trade (import and export) digitally. 89% of my clients use this platform. All of these products and initiatives have supported MSMEs in their daily work.
As a bank, if I’m able to help my clients collect payments and complete transactions faster, it saves them a lot of time and that’s where the biggest benefit lies.
We have seen that customers who have used these technologies generate profits and those who do not suffer from certain inefficiencies.
SMBS: What factors do you keep in mind when onboarding a client?
SR: Our aim is not only to help MSMEs with financing, but also to provide better guidance on their overall banking needs. We overestimate cash flow; this is the first thing we look at before structuring lending transactions.
We prefer clients who are able to provide financial information and records digitally. We also say never hide your balance sheets, whether they are good, bad or ugly.
SMBS: Will the pandemic change the way you assess and assess MSMEs?
SR: This is a very risky segment and can only change with better behavior from these companies. When I say this, I am relying on reports from the Reserve Bank of India and other credit rating agencies in terms of the underperforming behavior of this particular segment. Unfortunately, their track record is not the best.
But we see transparency coming in. With government initiatives like the goods and services tax (GST), the ability of a bank like ours to structure financing is improving.
COVID-19 is a challenge, but technology is the future and MSMEs need to adapt as much as possible.
SMBS: There are currently many digital financial enablers in our country – fintechs, NBFCs, etc. This appears to have overloaded the MSME lending ecosystem. What do you think?
SR: The fintechs that I have seen emerging over the past few years largely meet the very small ticket requirements of MSMEs. Additionally, I think fintechs would be forced to respond to the needs and investments that MSMEs need.
Banks, on the other hand, are very well oiled in helping MSMEs take charge of their cash flow and trade facilities.
That said, fintechs are an important tool in helping these small businesses get started and create good financial behavior.
In the times to come, I see a lot more fintechs and banks working together; there is much more the two can do together.
SMBS: Going forward, what are your plans to expand your MSME loan portfolio?
SR: Currently, we have four lakh clients in 545 districts in india. We plan to cover 630 MSME clusters in the coming times. Our goal is also to speed up our approval rates and be able to process a transaction (end-to-end) in less than a week – from the moment you meet the customer to the moment the money is disbursed.