India’s MSME sector is the second largest employer in the country, second only to agriculture. The sector took a massive beating amidst the COVID-19 pandemic, with numerous surveys showing that the disruptions had impacted earnings by 20-50 percent and that micro and small enterprises faced the maximum heat.
A year later, however, recovery is in the air despite the second COVID-19 wave.
Charles Darwin famously said, “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.”
Sumant Rampal, Senior Executive Vice President, Business Banking and Healthcare Finance, HDFC Bank, believes that MSMEs have come out as clear winners in the COVID-19 war.
And this has been facilitated by their evolution – by bringing about certain changes in their existing structures, particularly going digital, in order to survive and thrive.
As the country commemorates one year of the nation-wide imposed lockdown, SMBStory spoke to Sumant on how MSMEs survived the sink-or-swim situations posed by the pandemic, what lies ahead, and the role banks play in uplifting the sector.
SMBStory [SMBS]: It has been exactly one year since the lockdown was announced. How have your MSME customers fared?
Sumant Rampal [SR]: It has been one year ever since I started working from home. I recall, last year, at this time we were all so worried about what would happen. We had started seeing a few signs of the weakness in the MSME sector in the last quarter of the last financial year, which started in January because we had started hearing about the impact in China and in some parts of Europe, so there was a general slowdown. However, we never anticipated that it would blow up like this.
Since nobody knew how this would play out we decided to deal with the situation by interacting more closely with our customers. At HDFC Bank, we created small teams and would have conversations with our customers through digital and physical channels. That gave a lot more clarity: how we felt they should conserve cash, what is the support that we could provide at that point of time, and how we were engaging with the government and the regulator.
Consequently, the moratorium and other schemes rolled out by the government were very good steps. November and December saw the recovery numbers going up. People were going back to the factories, festivals like Dussehra and Diwali pushed demand and boosted recovery.
From my reading of our customer base, most MSMEs have come out as winners while fighting COVID-19.
SMBS: How did the schemes rolled out by the government help the sector?
SR: The schemes under the Aatmanirbhar Bharat Stimulus Package are the best the government could offer, especially the Emergency Credit Line Guarantee Scheme (ECLGS). I really thank the government for having thought through this and executing it with the help of National Credit Guarantee Trustee Company (NCGTC).
We have also seen sectors like agriculture and consumer durable do very well. Many enterprises in this sector have recovered by 80-90 percent; some have even recovered by 100 percent. There are others who have recovered by 65-70 percent.
We need to understand that recovery doesn’t happen overnight, but we are seeing positivity.
Now, with the second wave, the mood has been dampened but the good news is that the government has realised that a lockdown is not the answer. As a country also, we are much better prepared in terms of health infrastructure to handle the situation.
SMBS: How is HDFC Bank becoming easily accessible to MSMEs through digital means? What endeavours has the bank undertaken for this sector?
SR: We are one of the top banks to have sanctioned and disbursed loans worth Rs 23,000 crore under the ECLG Scheme. We see ourselves as a beneficiary of technology and digitisation, and our focus has been to ensure that our MSME customers reap the same benefit. Today, any customer in the MSME segment can provide his basic documentation digitally. Our digital product ENet and our SME services portal let customers directly reach out to us. This also helps us in providing working capital loans, overdraft facilities, and fulfilling their other financial needs.
Another product, Trade on Net platform, helps in trading (import and export) digitally. As many 89 percent of my customers are on this platform. All these products and initiatives have supported MSMEs in their day-to-day working.
As a bank, if I am able to help my customers collect payment and transact faster, it saves a lot of time for them and that is where the biggest advantage is.
We have seen that customers who have used these technologies are generating profits and those who have not are suffering from certain inefficiencies.
SMBS: What are the factors you keep in mind while onboarding a customer?
SR: Our aim is to not just help MSMEs in financing, but also provide better guidance on their overall banking needs. We overemphasise cash flows; that is the first thing we look at before structuring loan transactions.
We prefer customers who are able to furnish information and financial records digitally. We also say that never hide your balance sheets – no matter how good, bad, or ugly they are.
SMBS: Will the pandemic change the way in which you assess and evaluate MSMEs?
SR: This is a very risky segment and can only change with better behaviour by these businesses. When I say this I am going by reports by the Reserve Bank of India and others by various credit rating agencies in terms of the non-performing behaviour of this particular segment. Unfortunately, their past track record has not been the best.
But we are seeing transparency coming in. With government’s initiatives like the Goods and Services Tax (GST), the ability of a bank like ours to structure financing becomes better.
COVID-19 is a challenge but technology is the future, and MSMEs need to adapt as much as possible.
SMBS: There are numerous digital financial enablers in our country now – fintechs, NBFCs etc. This seems to have made the MSME lending ecosystem crowded. What do you think?
SR: The fintechs that I have seen emerge in the last few years are largely catering to very small ticket requirements of MSMEs. Additionally, I believe fintechs would be constrained in providing that the kind of needs and investments that MSMEs require.
Banks, on the other hand, are very well oiled in terms of helping MSMEs take care of their movement of money and trade facilities.
That said, fintechs are an important tool to help these small enterprises start up and create good financial behaviour.
In times to come, I see a lot more fintechs and banks working together; there is a lot more that the two can do together.
SMBS: Going forward, what are your plans for expanding your portfolio in MSME lending?
SR: Currently, we have four lakh customers in 545 districts in India. We plan to cover 630 MSME clusters in the coming times. Our goal is also to hasten our approval rates and be able to process a transaction (end to end) in less than a week – from the time you meet the customer to the time the money is disbursed.