Lakshmi Vilas Bank's MD Shares Why Bankers Should Take Lessons from New Age Fintech Lenders MSME credit gap in the country is estimated to be around USD 60b and banks cannot afford to ignore it

Across the globe, both big and small banks are closely looking at various technology disruptions to improve customer experience. However apart from the digital initiatives, in Asia and specifically in India, SME is credit is a problem which the banks cannot afford to ignore.

According to industry estimates, the MSME credit gap in the country is estimated to be around USD 60 billion. With financial services startups or alternative lenders leading the game, banks have also started to roll their selves up.

In a conversation with Entrepreneur India, P. Mukherjee, MD and CEO of Lakshmi Vilas Bank (LVB) shares the bank's plan to increase its exposure to MSMEs borrowers while being a part of the digital disruption.

Increasing its Share in the Pie

Presently, the MSME segment contributes 23 per cent of LVB total loan book. While the bank plans to improve this to 25 per cent in the near term and take this share to around 30 per cent of total advances by March 2020, the road isn't easy.

Mukherjee says many of the MSME entities, especially the smaller ones, do not route their entire business transactions through their bank account, which makes it difficult for the lenders to assess the cash flows from business and decide on the quantum of finance.

"MSMEs often face issues like the delayed realization of book-debts, inability to realize higher value on sales on the back of an increase in input costs. The external credit rating of MSMEs is by and large in the "BB' category, which has a negative impact on the risk-weighted assets for a bank," he added.

Hence, the banks find it difficult to charge higher pricing to compensate for the higher risk weight, in a competitive business environment. On asking him, how the bank is planning to hedge itself against this issue, he promptly says, "LVB has proposed a co-lending arrangement with major NBFC players in SME space. This will play a major role in supplementing our efforts in improving the book."

The Rise of New Age Lenders

While talking about SME credit and NBFC, one cannot ignore the developments within the alternative lending space. With an estimated credit gap of USD 60 billion with the sector, there is room for every player to thrive.

Mukherjee opines that alternate lending startups like fintech enterprises and aggregators have come out with disruptive business models but these are not scalable without strong financial support from the market.

"Alternative lending startups are aimed at capturing the large customer base in the segment but given the nature of enterprises with a low level of formalization and digital penetration, the collection will pose a major challenge. Physical touch with an SME customer cannot be substituted with any digital alternative at least in the near future, hence banks are not likely to be affected through this disintermediation," he explained.

Having said that, the banker also feels banks should learn from these entities and bundle it with the time tested loan processing and monitoring tools and roll out a customer friendly credit delivery business model.

"We cannot rule out entering into a partnership arrangement with a fintech entity within the existing regulatory framework," he added.

Up for a Disruption

Just like other banks across the globe, LVB is all set to hike the road to digitalisation with a core focus on improving customer experience. Mukherjee says the bank is concentrating on digitalization to adopt an agile, iterative way of working to remain competitive and extend tailor made product to suit customer requirements.

He shares, "Towards handling the same, LVB has invested on a private cloud, API banking, CRM, operational and business analytics with a focus on upgrading channel while bringing in omnichannel experience to customers. The bank wants to be more intelligent by understanding customer requirements without their direct feedback, but through their behaviour analysis."

Apart from the above initiatives, the MD adds that the bank is also looking at Artificial Intelligence in the area of customer service, helpdesk operation through chatbots combined with natural language processors (NLP).

"LVB is also in the process of moving various rules based applications/software to AI application in order to improve the accuracy and reduce the turn around time. The bank is identifying the mundane tasks handled at various locations using Robotic Process Automation and is also evaluating Blockchain in the area of Trade Finance as a pilot project," he concluded.