The fast emerging small business loan (SBL) segment caters to the micro, small and medium enterprises (MSMEs) and entrepreneurs which typically find it difficult to access funds through traditional sources. Banks mainly rely on the formal documents for financial and cash-flow analysis, credit history and availability to provide collateral for borrower appraisal. This approach results in the financial exclusion of many MSMEs. Microfinance institutions strive to provide a gamut of financial services to the low income households, however the small entrepreneurs and enterprises are typically not served by the MFIs. The quantum (up to INR 20 mn) and tenure (up to seven years) of the financial products in the SBL segment differs significantly from the products offered by MFIs. Apart from quantum and tenure, the SBL asset class differs from microfinance loans in other aspects- disbursement and collection mechanism, repayment behaviour, granularity of loans in the portfolio, and security for the loan (SBL can be secured).
Sensing a large gap between the required funding for MSMEs and the available sources – IFC estimated the near term financing demand for MSME sector to be more than INR 1200 crores – a number of NBFCs have developed lending models to cater the sector. Though the SBL lending model may be generalized, a significant variation exists in the lending model from one originator to another depending on the business (dairy, textile, machine tools, etc) or the type of product (working capital, machine financing, secured or unsecured etc). Based on the in-depth knowledge of local industry and social aspects, SBL lenders have developed unique but quality origination models. However, due to high geographical and industry concentration and borrower’s vulnerability to economic and business cycles, small originators face challenges while accessing funds for origination. Structured finance, which has successfully enabled MFIs, small as well as big, to access various funding sources, can help SBL originators as well. IFMR Capital has structured and arranged three SBL securitization transactions with more than INR 50 crores of underlying loans.
Bama Balakrishnan and Vaibhav Anand recently authored a chapter in the Securitisation & Structured Finance Handbook 2013/14 (published by the Euromoney Handbooks, London) that introduces the fast emerging SBL segment and discusses how the structured finance approach can be used to bridge the gap between MSMEs and capital markets through the SBL segment originators.